Know Your Business (KYB)

Whether in Banking & Insurance, FinTech, Travel, Mobility & Entertainment: In today’s largely digitalized business world, companies face increasingly strict legal regulations and compliance requirements that are continuously updated, including Anti-Money Laundering Directives (AMLD). Know Your Business (KYB) is a key component of compliance measures that help companies, especially in the Banking & Insurance sector, to better assess their business partners and prevent risks such as money laundering, fraud, or sanctions violations.

This article takes a closer look at what KYB means, why it is such an important part of compliance measures, and how businesses can effectively implement it.

What Is the Difference Between Know Your Business (KYB) and Know Your Customer (KYC)?

KYB refers to the process of verifying a company during the onboarding or re-evaluation process concerning its economic, legal, tax, and financial conditions. A KYB process ensures that business partners and their Ultimate Beneficial Owners (UBOs) are identified and authenticated in accordance with legal and regulatory requirements.

In contrast, Know Your Customer (KYC) processes focus on verifying private individuals.

What Needs to Be Verified During a KYB Process?

A KYB process primarily involves identifying all relevant information and data regarding the legal entities and ultimate beneficial owners of a company with which a business relationship is to be established. These details can often be obtained from official registers such as the German Bundesanzeiger, published by the Federal Ministry of Justice.

The next step involves verifying the identity of the UBOs. For an individual, this would typically include verifying their full name, place of birth, date of birth, nationality, and postal address. However, a proper KYB check requires more—UBOs must also undergo a Customer Due Diligence (CDD) check.

Risk Classification in KYC Checks

To comply with KYB requirements, banks and other financial institutions are generally obliged to identify and manage potential risks associated with their business relationships. They must regularly review their customers and classify them into risk categories. This practice is a central part of European Anti-Money Laundering Directives (AMLD) and Counter Financing of Terrorism (CFT) regulations.

Factors considered in risk classification include:

• Industry of the company: Certain industries, such as real estate, the arms industry, or financial services, are considered higher risk due to their susceptibility to money laundering.
• Geographical location of the company: Companies based in countries with weak legal systems, financial crime, and/or high corruption levels (often referred to as high-risk regions) are also classified as higher risk.
• Corporate structure: Companies with complex or opaque ownership structures, offshore holdings, or non-transparent shareholders are also considered riskier.
• Nature of transactions: Companies that conduct large, unusual, or unexplained financial transactions may also be classified as high-risk.

KYB Checks Must Be Conducted Regularly

The ownership structures of a company and the status of its UBOs may change over time. For instance, if a UBO assumes a political office and becomes a Politically Exposed Person (PEP), it can impact their risk classification. For this reason, regular Customer Due Diligence (CDD) checks must be carried out.

Regular checks ensure that information remains accurate and relevant while identifying and addressing any potential risk factors. Companies classified as high-risk due to their industry or geographic location may require more frequent reviews.

Why KYB Is Important

KYB Ensures Regulatory Compliance

In the EU, many industries are subject to strict anti-money laundering (AMLD) regulations. KYB helps companies meet these requirements, avoiding severe penalties or reputational damage.

KYB Supports Fraud Prevention

Verifying business partners’ identities reduces the risk of companies inadvertently facilitating money laundering—not only during the onboarding process but also after the business relationship has been established. Insufficient verification could lead to businesses unknowingly engaging in illegal activities.

The KYB Process

1. Company Documents
   First, all relevant information and data about the legal entities of a company and its UBOs must be collected. Documents such as commercial register excerpts, legal form, and ownership structure are fundamental for identification and can be retrieved from sources like the Bundesanzeiger.
2. Identification of UBOs
   The KYB process includes identifying UBOs—those individuals who have economic control over the company or benefit from its activities.
3. Data Verification
   Employees at financial institutions must verify the provided information using official databases, commercial registers, and sanctions lists. Automated tools can help reduce errors and speed up the process.
4. Risk Assessment
   Compliance officers assess potential risks based on collected data and information. Factors such as the company’s location, industry, or past behavior play a crucial role.
5. Documentation
   Every step of the KYB process must be documented and stored securely to demonstrate compliance with regulatory and AMLD requirements in case of an audit.

Challenges in Implementing KYB

KYB processes are subject to strict regulatory compliance requirements, and businesses establishing these processes face constant regulatory and legal updates to AMLD laws.

Additional challenges include:

• Keeping Data Up to Date: Ownership structures can change, making regular data reviews essential. Efficient data management is necessary to track and document changes.
• Complexity of International Business: Companies operating internationally must comply with different legal and regulatory frameworks regarding UBO identification, making verification complex and time-consuming.
• Access to Relevant Business Data: Some countries have limited or costly access to commercial register data.
• Process Efficiency: Many businesses still rely on manual processes, which are prone to errors and inefficiencies. Automated solutions can help streamline KYB processes.

How Businesses Can Implement Effective KYB

• Automated Solutions:
  The AML-compliant WebID product CorporateID enables automated and efficient identification of businesses and their UBOs. Once data on legal entities and UBOs is available, automated WebID identification procedures, such as VideoID, eID, AccountID, or TrueID, can verify compliance with AML laws.
• Regular Review:
  An AML-compliant KYB check is not a one-time process during onboarding. Businesses must ensure their information remains current, with review intervals depending on risk classification.
• Employee Training:
  Compliance staff should receive regular, comprehensive training on KYB requirements and any regulatory updates to prevent errors.