Category: KYC/KYB

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Customer Due Diligence: Moving from KYC to KYB

KYC to KYB Compliance

Banking is one sector that is always profitable but is also constantly surrounded by fraudsters. Frauds, as well as compliance risks, are often complicated and intricate. To combat the fraud, banks and financial institutions are spending a huge amount to keep up with KYC compliance. The average cost of KYC compliance yearly is close to $100 billion globally. Even after investing such huge amounts, banks all over the globe still have to suffer losses at the hands of fraud.

That’s not all, banks have been fined more than $300 billion since 2008. To make things even worse, financial crimes such as money laundering, terrorist funding, and cyber frauds are increasing, that’s why banks and FIs need to buckle up and focus on customer due diligence.

Regulatory bodies all over the world are working round the clock to enforce KYC and KYB regulations all over the globe. One of the first regulations that were enforced was amid the Vietnam War all the way back in the 1970s.

The aim of this regulation was to counter money laundering activities from growing illegal drug trafficking. Under the BSA act, banks are legally obligated to report any suspicious consumer activity and transaction for more than $10,000.

The regulations made it almost impossible for drug dealers, terrorists and other criminals to launder money as every huge and suspicious transaction was constantly under monitoring.

Introduction of KYC to the Financial Sector

The Banking Act of 1970 later became the foundation for the Anti-Money Laundering (AML) regulation. AML regulation came to fruition in 2001 under the US Patriot Act after the incident of 9/11. Customer Due Diligence was declared necessary for all financial institutions. The term for doing CDD is more commonly known as KYC or Know Your Customer.

The KYC regulations became strict over time to reduce the flow of illegal money as much as possible. KYC asks financial institutions to verify the customer and to ensure who they are. Verifying customer identity gave birth to a series of steps and approaches to comply with the CDD and KYC laws. As the US regulatory changes tend to affect the global financial industry, the KYC and CDD laws were soon followed by the banking sector globally.

The financial sector derived several ID verification methods to successfully comply with the laws. These ID verification controls include:

  • Maintaining a thorough Customer Identification Program (CIP)
  • Cross verifying customers against the list of suspicious people released by Law enforcement agencies. 
  • Predicting and analyzing customer behavior and customer risks associated with a particular person. 
  • Constant screening and monitoring of transactions to look for suspicious activities and hints of money laundering. 

KYC is the primary and the biggest line of defense for the financial sector against financial crimes with minor changes. For a regular customer, the KYC laws seem robust and efficient, however, in 2016, a loophole was identified in the KYC compliance regulations. 

 Banks were unable to identify the identity of stakeholders and UBOs of a business they provide services to. The Panama Papers Scandal was the tipping point in the KYC regulations. The scandal brought to light that legit businesses can hide the identities of bad actors and perform money laundering and financial crime. Thus, a new regulation was created known as “Know Your Business (KYB).”

How KYB Improved the KYC Regulations?

Regulatory bodies made some improvements to the KYC regulations and included Customer Due Diligence for financial institutions. Under the new law, Financial Institutions are now required to perform strong verification checks. KYB regulations are built to identify shell corporations that are involved in money laundering, tax evasion, terrorist funding, and so on.

Organizations are legally obligated to verify the person who owns the business legally and also verify the identity of stakeholders holding a minimum of 25% share in the business. The same law was passed by the EU in the fourth AML directive (AMLD4). With the release of AMLD5 and AMLD6, the process was improved to make the business entity’s due diligence more transparent. 

However, KYB compliance isn’t as easy to achieve as KYC regulations. The biggest challenge in complying with KYB laws is verifying the identities of the stakeholders. In a majority of cases, no record of these entities is available. Also, different jurisdiction laws vary which makes verifying identities even tougher. These challenges sometimes make it almost impossible to verify the identities of stakeholders of a business. For firms that want complete compliance, not being able to verify identity can make them susceptible to huge fines by regulatory bodies.

Choosing Technologies as a Solution Provider

Since the financial crisis of 2008, various unique and helpful technologies are rising up to help in reducing the burden of compliance and assist in making the process easier. At its core, new technological solutions can help in strengthening the KYC & KYB programs for better compliance. 

DIRO is also helping countless organizations worldwide to make their KYC and KYB compliance programs easier. DIRO online document verification tool provides instantaneous online document verification for frictionless KYC and KYB verification. DIRO’s online document verification software verifies over 7000 document types from around the globe, it also verifies document data from an original web source, thus eliminating the use of stolen and forged documents by 100%. By incorporating DIRO’s online document verification software, banks and financial institutions can fortify their compliance programs.

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What is KYB Compliance and How Is It Related to KYC?

difference between kyc and kyb

Due to the increase in money laundering activities and other forms of financial fraud, countless reforms in regulatory guidelines are being made. More and more businesses understand the need for having strong regulations in place to reduce the risk of fraud and improve the customer onboarding experience. However, most individuals and organizations fail to recognize the key difference between KYC and KYB compliance. To make things clear, KYB (Know Your Business) compliance shares each major requirement of KYC (Know Your Customer) compliance. Both the KYC and KYB compliance shares the same goal which is to follow AML/CTF regulations to make sure all the financial transactions are done safely and are protected.

Both the KYC and KYB compliance are strict and they follow a certain set of rules and guidelines. They do have a key difference, and the difference between both the compliance is the target that is being analyzed. In KYC a certain person is being analyzed, in KYB a business operation is analyzed.

What Is KYB Compliance?

KYB or Know Your Business is compliance that checks to identify the transparency of the business, companies, or organizations apart from due diligence, KYB compliance also requires constant monitoring of financial transactions. These strict checks are made to verify a business’s features, ownership, and other information to make sure a business doesn’t fall prey to any type of financial fraud. KYB compliance is focused on business verification which is done by submitting document data and some types of monitoring that is similar to KYC compliance due diligence checks. The information provided by businesses is checked and verified against public and government databases and other AML databases.

These constant checks and verification of business information help businesses stay safe from financial fraud such as money laundering, money embezzlement, etc. Following with KYB compliance also allows a firm to stay transparent to their customers and also ensures the customer data is secure. 

What is KYC Compliance?

Know Your Customer compliance focuses on individuals who apply to open bank accounts or try to sign up for new services like financial services or cryptocurrency. KYC is important to verify customer financial backgrounds and financial histories to find out any illegal activities in the past, it helps in assessing how big of a risk a customer can pose to an organization. The risk score and risk profiles are vital for banks and financial institutions to assess how big of a risk a customer is.

The compliance and identity verification industries focused on building solutions that helped in KYC compliance, but as the industry patterns changed, the industry also started using KYB as a method of detecting and preventing fraud. The digitization of KYC compliance is much more crucial as almost all the customers are demanding digital methods. As technology improved, KYC with the help of cloud computing turned into eKYC. This ultimately led to fewer compliance costs, fewer chances of human error, and a positive customer experience.

KYC to KYB: How They Came Into Existence?

Before either KYC or KYB compliance came into existence or before they were digitized, the amount of financial fraud reached a certain proportion of actual crime. According to the UN’s office, the global rate of money laundering was 2-5% of all types of crime. There was no perfect way to detect high-risk levels or to control individual and business illegal transactions. 

To regulate and control the rampant crime, the Bank Secrecy Act of 1970 introduced new Anti-Money Laundering guidelines. These guidelines were later incorporated into the 2001 USA Patriot Act. Some changes were made in the guidelines and then they were tuned into KYC in 2003. These guidelines were built to check the financial health and monitor the transactions of the individuals. KYC Compliance required financial institutions and banks to constantly monitor all their customers and follow specific regulations. Soon after, KYC compliance became incredibly useful in reducing and preventing fraud, but it had a major loophole. 

The loophole helped businesses ’ UBOs and corporate owners as banks weren’t required to check and verify the partners and representatives of a business. This left a huge loophole for fraud and illegal financial activities. This made sure that the businesses could partake in illegal financial activities and go unnoticed by banks and other regulatory bodies. Certain large-scale scams under KYC compliance led to the birth of mandatory KYB compliance in 2016.

Both the KYC and KYB compliance follow the same rules and they make sure that financial activities are regulated and help in reducing the risk of financial fraud. The major factor that sets both compliances apart from each other is who they target:

Major Difference between KYC and KYB

  • KYB: The guidelines in almost KYB compliance are followed by all the industries as different types of schemes and frauds have led to huge losses to customers and businesses alike. KYB compliance includes all types of businesses and structures and it is well established throughout most of the industries. The industries that follow KYB compliance most stringently are banks and financial institutions. 

Key Requirements for KYB & KYC

Since KYB and KYC are built to target different client types and different data, the data that is verified is different. To register for verification, the core data for verification remains the same, which are financial documents and identity documents. 

  1. Data for KYB

As KYB specifically targets businesses and organizations, the verification process requires information that includes a character report of the UBO of the business and of business investors that hold a quarter share, each. The necessary verification data includes:

  • Business address
  • Recruitment reports
  • Business license and registration
  • Identification documents of UBOs, and business partners.
  1. Data for KYC

KYC focuses on an individual customer of a bank or a financial institution that needs to verify themselves by providing identity and address proof documents. These records help in verify the financial situation of an individual and help banks assess how risky a certain customer can be. The necessary verification data for KYC includes: 

  • Social security number or PAN Card number.
  • An ID card issued by the government. 
  • Any debit card or credit card issued by a bank.
  • A copy of utility bills such as electricity bills.
  • Driver’s license/Passport with a digital photo.

Virtual Identification for KYC and KYB

One of the major reasons that banks and financial institutions are moving towards digitized KYB and KYC compliance is to provide better efficiency. Traditional KYC methods used to require people to submit the verification data in person, but with the improvement of technology, the same can be done using digital methods. 
The whole process can be done in just 2-3 minutes, depending on how fast the online document verification solution is. DIRO’s online document verification technology can verify documents instantly which means the KYC process can be done in just minutes. 

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Best Ways to Reduce Friction During Customer Verification Process

customer verification process

Businesses have to verify hundreds or even thousands of customer identities every single day for several reasons. To reduce fraud of all kinds, e-commerce organizations, banks, hospitals, and other financial institutions have to verify customer identities.

The most obvious reason for doing customer identity verification is identity fraud. Although a strict customer identity verification process leads to increased friction for the customers.

Poor user experience and tough onboarding can annoy customers into leaving the onboarding process. As more and more customers and businesses offer online transactions, verifying customer identity becomes more prevalent. To keep up with the growing customer demands and legal obligations, businesses have to apply a series of customer verification processes.

There are some methods organizations all over the world can follow to reduce friction during the customer verification and onboarding process.

How to Reduce Friction During Customer Verification?

1. Eliminate the Tediousness

Verification of customer identity is crucial when money or sensitive information is involved. Businesses build their reputation around good customer experience. It’s reasonable that most businesses would want their customer verification process to be as accurate and as effective as possible.

Most organizations fail to understand the difference between an efficient and a smooth process. A perfect customer verification process can also be uncomfortable and monotonous for users. In this digitally driven world, poor customer experience is the stepping stone for driving users away. 

The key is to find ideal authentication and verification methods that don’t make the onboarding process tough. It is not a good business strategy to provide customers with a poor customer experience. One example of smooth and efficient verification is Two-Factor or Multi-Factor Authentication. This verification process requires your customers to enter their username-password and then enter a code that’s sent to their email or mobile phone.

As multi-factor authentication is really common worldwide, the process is easy to recognize and provides an incredible user experience for the customers.

2. Make The Process Faster

The world has gone digital, customers don’t want to wait for hours for a simple onboarding process. One of the fastest methods of authentication is by allowing your customers to log in by using their accounts like Microsoft accounts, Google accounts, and Facebook. Although you’ll have to make your customers trust in the process and that the username and password are not shared by anyone.

This method of customer verification is very common as almost all people use Facebook, Twitter, Google, and Microsoft. This process is sure to reduce friction as most users are aware of this type of customer verification process. To make things better, it is fast, secure, and seamless. 

3. Don’t Over-Rely on Humans

If the customer verification process isn’t automated, then it automatically leads to additional friction and poor customer experience. The manual verification process can become overwhelming if there’s an influx of customers waiting for verification. 

As the business grows, so does the number of customers. With a manual verification process, it can become tough to keep up with the customer demands. Increased customer demand can create a bottleneck that slows the process down immensely. It’s a problem that can become too tough to handle. 

Well, you can always hire extra employees to keep up with the growing demand. However, having an automated customer verification process can be a far more viable solution as opposed to hiring a new team. 

Manual processing of customer verification usually relies on cumbersome methods of getting ID information. Manually authenticating all the information can take too much time, also the manual verification process can be riddled with errors. Human error is a part of life and manually verifying customer information can be full of errors. Human errors are exactly the weak points fraudsters look into in a verification process. To avert this disaster, an automated verification process is suggested. As a business, you should consider checking your customer’s information automatically using “Knowledge-Based Authentication”. 

4. Choose a Flexible Customer Verification Process

A simple rule of thumb is that you build a strong process of verification for verifying customer data. Fraudsters will always try to get through a business’s systems for completing fraud of any kind. As a business, it is imperative that you keep building stronger solutions. As verification features get stronger, fraudsters keep deriving new methods of getting around the verification process. 

Customer verification systems are under a constant threat of attack from fraudsters. The best systems offer different methods of customer verification, enhancing speed and customer experience which can’t be done using a manual method of verification. 

You should make sure not to rely on just one verification method that can be easily broken down. The method of verification you chose should be able to offer verification from different providers or different ways of verification. 

5. Verification Methods Should Not Violate any Laws

Businesses aren’t aware that some automated ID checking processes can violate privacy and other laws. If your business is associated with a service provider that doesn’t follow rules and regulations, your business can be open to huge fines.

A lot of jurisdictions require advance notification and consent to process a person’s ID information. In some unique cases, you may even require written consent from the customers. Some online businesses have no choice but to use manual customer verification due to certain restrictions.

Businesses need ID verification solutions because some products and services are age-restricted. Not following this particular rule can lead to a huge lawsuit. Before choosing a customer verification solution, a business needs to make sure that it follows all the legal requirements for its customer base.

Conclusion

Your end goal should be to provide your customers with a smooth user experience, while still accurately verifying the ID of your customers and complying with legal obligations. Fortunately, solutions like DIRO’s online document verification can offer you instant customer document verification. Instant document verification means instant customer ID verification which reduces friction immensely eliminates human error and detects and mitigates fraud. DIRO provides 100% proof of authentication backed by forensic data.

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KYC: How Does KYC Complement ID Verification Process?

id verification process

It is crucial for businesses to know their employees and it is even more crucial to know who their customers and clients are. KYC (Know-Your-Customer) is a vital regulation component for any business to reduce fraud. It is a process that helps to identify and verify customers and who they claim to be. 

Especially for organizations that offer their services worldwide and the number of fraud is ever increasing. To mitigate fraud and improve the customer onboarding process, Know Your Customer becomes an important parameter. Out of all online types of fraud, identity fraud is the most common type of fraud. In 2020 itself, FTC received over 150,000 complaints of identity fraud. The number is huge and is on a constant rise, but with the implementation of strict KYC regulations, this can be taken into control. Now that everything is becoming digital, organizations need to rely on online KYC solutions.

KYC Solutions in the Modern Economy

Regardless of the industry type, KYC compliance is essential. The utilization of effective KYC solutions can assist in verifying whether the claims made by customers or clients are legit or not. Verifying the identity of customers is the foundation of all positive and successful business relations. 

KYC compliance helps businesses tackle customer risk, thereby companies can save themselves from potential fraud that can lead to hundreds and thousands of dollars worth of fraud. It also helps in complying with anti-money laundering policies. Moreover, it also helps in maintaining a positive brand image, a better brand image leads to a better user experience. Constant fraud and bad debt records can damage an organization’s reputation. 

KYC compliances are essential for financial institutions, as they can be employed before any kind of lending or online transactions. If we talk about mortgage lending etc, then KYC solutions can help the lenders learn new information about the customer’s job and his/her ability to pay off the loan.

Need for Partnering With Professionals for KYC Solutions

To reduce fraud, financial industries need to tie up with third-party KYC solution providers. It also helps to make sure that companies don’t compromise the safety and security of their business. Third-party KYC solutions providers have ideal solutions that individuals and businesses can employ to comply with the KYC solutions. 

KYC solutions all over the globe utilize national government-issued IDs, advanced technologies, and solutions to scan through and analyze large chunks of data. In the case of B2B services, companies have to ensure that the businesses they are dealing with don’t have a known history of money laundering. Documents provided by customers during the time of onboarding are cross-checked with a variety of databases like government and private databases. 

How does DIRO’s Solution help in Online KYC Compliance?

DIRO’s online document verification API verifies online documents instantly. The technology captures original documents online directly from the source. Verifying online documents using DIRO’s solution is much more secure than sharing and verifying original copies in person and uploading copies of documents online. 

It can help in KYC compliance, reduce onboarding friction, and improve a positive customer experience. The technology can access all banks, utility companies, and government portals with automated user consent and multi-factor impersonation checks.

The utilization of an online document solution from DIRO ensures 100% proof of authentication and the output is a court-admissible document with forensic data. KYC compliance for the financial industry can be completed easily using DIRO’s unique online document verification technology.