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.
- 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.
- 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.