The risk is coming from all the stakeholders of a company and proactive risk prevention is inevitable.
The stakeholders of businesses include customers, merchants, investors, employees, shareholders, partners, etc. All these entities affect businesses in one way or the other.
So it is significant to perform due diligence on all the stakeholders to differentiate between an opportunity and risk.
Performing due diligence on customers and businesses is also a regulatory obligation of the business entities. The regulatory authorities such as FATF, FinCEN, and FINTRAC have implemented KYC, AML and KYB regulations on the businesses to reduce the risk of crimes.
The crimes that are controlled with compliance are identity fraud, money laundering, terrorist financing, fake merchant fraud, shell companies, etc.
Due to this remarkable significance of KYC and KYB compliance, the identity verification industry is gaining hype, and it is expected to grow at a growth rate of 16% during the period of 2019 to 2024. The demand for KYC and KYB screening solutions is increasing as it shares the compliance burden of the businesses.
These solutions deliver highly accurate results at that too within seconds. So businesses prefer these cost-effective solutions instead of hefty manual verification solutions for KYC and KYB.
In the beginning, the KYC regulations were implemented under the Banking Secrecy Act (BSA) in 1970. The purpose of this law was to counter money laundering activities emerging from illicit drug trafficking. Under this provision, banks are obliged to report any customer activity that seems suspicious such as transaction above $10,000 to the Federal Financial Crimes Enforcement Network (FinCEN).
The KYC verification require the reporting entities to identify their customers before on-boarding them or accepting payments from them. The businesses need to have a compliance department or a compliance officer in their organization.
The confidential data collected from the customers need to be handled in accordance with data protection regulations.
The financial institutions and Fintech solutions should report the transactions that are above the maximum transaction threshold (which is set at $ 10000 in most of the KYC regimes).
The reporting entities in the KYC regulations include almost every industry. It includes financial institutions, Fintech, virtual asset dealers, e-commerce, medical industry, non-profit organizations, the legal sector, etc.
The KYB regulations are the extension of KYC regulations. It requires the businesses in B2B relations to screen their prospects. AML screening and blacklist screening is performed on the businesses and merchants before initiating business relations with them.
The main purpose of KYB regulation is the complete elimination of any loopholes in global financial infrastructure that are exploited by criminal entities. The KYB regulations are introduced to extend the scope of AML regulations.
The recent recommendations of FATF issued in 2019, now require the reporting entities to perform AML and KYC screening on their prospects.
The EU’s Fifth Anti Money Laundering Directive (AMLD5) also requires the businesses to perform AML screening on the UBOs (Ultimate Beneficial Owners) of a business under the KYB compliance practices.
KYB regulations are implemented to eliminate money laundering and terrorist financing at a global level. Crime is evolving with the changes in technology and the criminal entities are fully utilizing the loopholes in the financial infrastructure.
KYC regulations help businesses onboard a secure transparent clientele devoid of any fake identities and criminals. Other than fraud prevention and regulatory compliance it helps businesses gain useful insights about their customers to pitch better next time.
The major difference is the entities that need to be verified under these two regulations. The customers (individuals) of business are verified under KYC screening. On the other hand, the business entities and merchants are verified under the KYB regulations.
KYC regulations are implemented on every industry and KYB regulations are implemented on some of the businesses including, financial institutions, legal sector, virtual asset dealers, precious metal dealers, etc.
To wrap up, the businesses around the globe are thriving in a digital era and efficient fraud prevention along with KYC and KYB compliance is crucial to counter the evolving and increasing crime.