The Bank Secrecy Act

Know Your Business-Pillar of Strength To AML Regulations

Moving in the world of technology, where every industry is going digital, there has been very less transparency among the businesses. Collaborating with businesses and entities online leaves room for some suspicious activities – means you will have no idea about the identity of the person on the other end. For example, the business you are onboarding may be a shell company or funding the terrorist.

Know your business (KYB) – these three words always seem to pop up everywhere in the industrial sectors, especially in financial institutions. KYB has successfully evolved from Know your customer (KYC) process and has eventually become an important part of today’s regulatory firms. It plays a vital role in low-friction regtech platforms to serve all types of customers without getting involved in illegal activities and entities.

The Bank Secrecy Act (BSA) of 1979:

Back in 1970, when the Vietnam war was on the full swing, a deadly confrontation erupted regarding drug trafficking. As a result, the administration laid a strong foundation against the War of Drug. The Bank Secrecy Act of 1979 (BSA) was introduced as a part of this policy agenda to deter illegal fundings. The BSA requires all U.S. financial institutions to report certain types of customer activities to the regulatory firm – FinCEN, the federal Financial Crimes Enforcement Network. For instance, financial firms need to report about the transactions totaling $10,000 or above.

The intentions of these regulations were to hinder the cartels, drug smugglers and other productive criminal enterprises from moving money through the US. The BSA makes the transactions more visible to the federal law enforcement hence starving the actors from their profits.

From KYC to KYB

The BSA is itself a foundation for the anti-money laundering (AML) regulations also known as Know your customer (KYC) compliance. It was enumerated in the 2001 USA Patriot Act as a result of the 9/11 incident and came into effect in 2003 – adopted by a joint resolution of federal financial agencies. These regulations intend to curb the flow of money to terrorist factions and other money laundering crimes. To meet these regulations, the institutes are required to maintain a record of personally verifiable information of every customer.

It won’t be an understatement to say KYC was built upon the BSA, which enforces the financial firms to ensure the identity of their customers that they are who they claim to be. However, the BSA rules were somehow vague that were covered by KYC regulations with the introduction of the Customer Identification Program (CIP) and Customer Due Diligence (CDD).

While KYC compliance ensures the identity of the customers and keeps an eye on the risk factors associated with them, but unfortunately there is still a major loophole unsolved. That is the financial institutes weren’t required to identify or verify the stakeholders and beneficiaries of the businesses and entities they are serving. This means that legitimate firms could unknowingly shelter bad entities or shell companies while performing illegal and high-value transactions on their behalf. Doing so makes the financial firms equally responsible for the illicit transactions taking place right under their nose. 

This issue came into light through the scandal of Panama papers back in 2016 and as a result, KYB services were introduced for business verification.

Dive Deep into KYB

 

The officially titled “Customer Due Diligence Requirements for Financial Institutions” is what we consider as know your business checks or KYB. It can be taken as an extensive form of knowing your customer since it doesn’t only verify the name of the person to whom the business is registered. It also enforces the institutions to verify the identities of the chief executives and any other person who owns 25 percent or more of the business. 

KYB compliance covers an entire industry of consultants who facilitate various firms to ensure that their business customers are properly investigated and none of them are involved in illegal activities. Every financial institution, merchant acquirer or payment companies who deal with money transfers and transactions, is enforced to perform KYB check of the businesses with whom it does business.

The checks for KYB solutions include the verification of company registration, business license, identification of a business, and other executives of the business. The KYB compliance requirements may vary from address and date of birth to driving license, passports and bank statements. Moreover, these checks are also performed against sanction lists, PEPs, Adverse media, and disqualified directors. 

These authentication checks are carried out by the KYB solution providers depending on the nature of the business, transaction value, suspicious reports, and more importantly the country legislations.

The Role of 5th AML Directive

 

The regulatory regimes around the world are continuously changing with every passing day. Last year, two major regulatory directives were updated, the 2nd Payment Services Directive (PSD2) and the Fifth Anti-Money Laundering Directive (AMLD5). The PSD2 requires financial institutions to make certain data available to other institutions through the use of APIs (Application Programming Interfaces). Whereas, AMLD5 compels the financial businesses to keep tight reins on the personal information online.

The businesses from financial institutes to merchants, everyone is facing regulatory pressure to meet stringent verification requirements. To do so they deliberately need to adjust the processes to conduct due diligence. The 5th AML directive along with PSD2 and GDPR regulates organizations to verify the businesses – the KYB compliance.

AMLD5, in particular, holds liability for the EU states to collect all the legal documentation regarding the company in a central registry. Moreover, it is mandatory that this central registry must be available and accessible to all the obliged entities that are required to perform business verification. 

Enhanced Due Diligence

 

After the Panama Paper Scandal, verifying the business entities and the mainstream business structure is an integral part of AML compliance requirements, compelling enhanced due diligence (EDD). It obliges securing additional information about the business client, for instance, the nature of the business relationship, source of funds, transaction history and the enhanced monitoring of the business relationship.

KYB in Europe

 

In Europe, the 4th AML Directive is already in effect and by January 2020, AMLD5 will also be in action. The AML 4 requires the businesses to identify the obliged entities and take prudent measures to verify their identities. It facilitates the businesses to know about the UBOs in regards to trust, foundations, and legality of the entities to better understand the structure of the business and customers.

According to defined rules, the beneficial proprietor in the EU is any person who owns 25% of the corporate business. However, in the upcoming AMLD5, the proposal is lowered to 10%. 

KYB in the US

 

The Customer Due Diligence (CDD) Final Rule has been in effect since May 2018, in the US. This rule states as: 

“Beginning on the Applicability Date, covered financial institutions must identify and verify the identity of the beneficial proprietors of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted)”

As per the regulations, the financial institutes include banks, dealers and brokers, mutual funds and futures commission merchants. However, different jurisdictions constitute different requirements. In fact, even one region may have different regulations to be applicable to the state members. For example, the US financial institutes, in addition to the Bank Secrecy Act (BSA), they are liable to OFAC (Office of Foreign Assets Control), FACTA (Foreign Account Tax Compliance Act) and SEC disclosure rules.

KYB Process –  From Weeks to Seconds 

 

Performing Business verification is quite difficult, time-consuming and costly. Most of the companies hide their true identities in order to surpass the money trial. Also, the shell company can obscure their true information in filling and different jurisdictions. The percentage of possession is mostly disguised through different paper trials which makes it difficult to identify. In fact, in some countries, there is no proper paper trial – means no documentation is required for setting up a business, hence no source to investigate for shareholders’ information – which is against the FATF, AML and CTF regulations.

Some of the companies are overcoming this problem by implementing KYB solutions just like KYC. However, manual verification is quite slow, error-prone and costly. To incorporate this con, the KYB solution providers are actively adopting automated ways to verify the businesses in real-time.

In this era of high competition and complex compliance requirements, there is a need for electronic ID verification of business. By automating the KYB process, the financial institutes can securely access the UBOs identifying information from the central registry and verify it. Moreover, meeting the KYB compliance can paramount the complex regulatory environment.

KYB know your Business

Know Your Business: The Next Step in Identity Verification

The complex regulatory environment and increased exposure to illegal activities indicate that business verification is in the best interest of regulated companies eyeing long term stability. According to the UNDOC, money laundering is estimated at 2-5% of global GDP, amounting to almost $2 trillion. Digital data breaches have also increased substantially over the recent past, with rising threats of virtual ID theft.  

In order to counter this, banks are spending more than $48 million on due diligence and KYB processes, with rising onboarding costs, as reported by the Thomsons Reuters’ survey. 

With the advancement in digital technologies and virtual data sets, KYB compliance and verification tools can help mark businesses that are involved in undercover activities and transactions. International requirements of both KYB and AML are increasingly reflecting the need to secure business transactions and prevent illicit financial flows from entering the formal sector. 

The Regulatory Approach to KYB

Businesses face strict regulations that require them to identity and verify customers before onboarding them. The 4th AML Directive, in particular, puts emphasis on stringent audit trails that help prevent fraud and financial crime. For this purpose, Digital Verification Services such as KYC and AML screening have proven to be significantly effective in improving compliance procedures. 

In a similar tune, regulatory requirements, such as the AMLD5 directive, now demand strict evaluation of both individual clients and commercial entities before carrying out business with them. This is to ensure that financial institutions and other businesses can avoid being connected to illegal transactions conducted by their clients. 

Money launderers often get under the cover of businesses and the EU is rolling our stricter regulations for customer due diligence to stamp out aggressors. For regulated companies, this translates into a legal compliance requirement for which the adoption of a duplicate screening process for suppliers, vendors and traders becomes important. Other regulations such as the GDPR, PSD2, and FinCEN also require companies to be aware of the Ultimate Beneficiary Owners (UBOs) of entities before beginning a relationship. 

According to new registration demands of the AML directive, all EU states are required to maintain national registers of beneficial ownership information on corporations and other legal entities. All companies and their owners now have to get their details registered, making it all the more easy to identify individuals involved in illegal activities through a business. Information of such regulated businesses will be made available to companies with a legal interest in business relationships.

KYB Process 

Similar to KYC, Know Your Business (KYB) is a Verification Solution that cross-checks business identity by extracting official commercial register data using APIs. Using a business’ registration number and jurisdiction code, an efficient digital KYB service can collect verifiable information for the business. 

Access to automated commercial registers through a data-powered business verification service make the due diligence process swift and free of errors, while saving valuable time and manpower. 

Business Search 

 

This includes background data on the company: registered address, current status, company type, UBOs, previous name, trademark registration. A financial summary of the company’s operational accounts is also provided by the authentication service, in order to better validate its authenticity. 

Business FIlings

 

In addition, business filings offer instant, verifiable information about company financials; access to financial statements, sources and links to downloadable reports (such as register reports, annual accounts and shareholder lists). 

Business Statements 

 

Business statements can help companies stay on top of changes in management and organisation of connecting businesses. A change in directors or beneficiary owners can also reflect an evolving business environment, indicating the need for followup information on business matters. 

Business Networks

 

Detailed information on corporate structure also provides insights into parent entities and lists of company subsidiaries (child, sister companies). Key factors under consideration are also based on the country in which the business is registered, the nature of business activities and the value of transactions it carries out. 

Find more resoures on business technology

Challenges in KYB

 

By far, one of the foremost challenges in KYB compliance lies in accessing beneficial ownership information, especially in jurisdictions that do not require companies to submit relevant documentation. A lack of shareholder information can make it harder to investigate money trails and business authenticity, leading to potential non-compliance costs. 

Timely availability of data, in the right format, is also another hindrance, especially as company structures and management change over time. Storage and interpretation of data is also subject to a number of factors, mainly centering on companies adopting a manual approach to due diligence processes. 

Moreover, companies that are currently implementing KYC processes have ample room for improvement in process efficiency, costing banks millions of dollars in lost time. It follows that digitization of KYB verification solutions will also be a tedious process of hit-and-trial before firms can grab its full potential. 

Business Verification: Moving Forward

 

When it comes to risky transactions, regulatory authorities are not ready to bend their rules. The 6th AML Directive is also ready to be implemented soon, which indicates little or no leniency for financial institutions or businesses in the coming future. Therefore, KYB is central to the efficiency and transparency of firms doing business. 

Data analytics software that aggregate and updates information about businesses assists stakeholders in keeping tabs on their operations and practices, as well as fulfilling due diligence requirements of KYB.

As a one-stop solution for business verification, Shufti Pro offers a cost-effective solution of due diligence review of companies. With an electronic identity verification (eIDV) service, the authentication process for business entities is made easier and more accurate. The integration of APIs and data-driven systems now allow easier extraction of data, as well as smoother coordination mechanisms for compliance review. 

Transparent B2B Relations 

 

As a pre-emptive measure, businesses can use KYB solutions as fraud covers in case of a breach. Using the right mix of technology and support, full coverage of business financials and organizational structure can be accessed in order to trace business activities. This also allows firms to maintain updated company databases for better workflows. 

Business reputation is also incumbent upon due diligence processes that are reliable and foolproof. As a consequence, identification and verification of the beneficial ownership of connecting entities is vital to solving verification challenges.

Effortless Regulatory Compliance

 

A user-friendly interface allows businesses to fulfill regulatory compliance needs without any friction. Potential losses and non-compliance penalties diminish productivity for firms willing to extend their business networks. Reputational damage is also a leading cause of business failure when it comes to carrying out business with suspicious entities. 

With a comprehensive approach to risk mitigation, online KYB authentication services provide strong risk-shields against such losses, securing long term benefits for all concerned parties.