Operating any financial services company requires near-constant risk analysis to ensure everything is "above board". It's crucial your company does not fall foul of corporate regulations. Financial institutions and banks are particularly susceptible to being targeted by criminals, so the financial services sector is, rightly, closely regulated.
Financial institutions are required to perform stringent due diligence on corporate customers. This is partly to identify who is actually in charge of a firm or who profits from it. Checks performed on corporate clients are part of a compliance process known as Know Your Business (KYB). The process relates to identifying and understanding the Ultimate Beneficial Owner (UBO) of a firm. Essentially, you want to know the business you are onboarding and its UBOs are legitimate. You don't want to onboard a firm that turns out to be a front for money laundering!
Financial institutions can find management of corporate onboarding extremely complicated and time consuming though. Because of the risks associated with financial crime, a lot of checks are needed to meet compliance standards. Plus, anti-money laundering regulation can vary across jurisdictions and identifying or tracing potential UBOs is not an easy task.
Fighting financial crime
The world of finance is no stranger to criminal intent, which is why KYB and anti-money laundering (AML) have been happening in some form for years. It can be a game of cat-and-mouse for banks trying to manage fraudsters. Names like Steven Hoffenberg and Bernie Madoff are synonymous with Pyramid Schemes and hoodwinking financial institutions. KYB looks to find and address unwanted or disreputable clients before they can scam, steal or launder funds.
It is also no surprise financial institutions are held to a high standard in terms of knowing who they are dealing with either. Financial crime is big business and the numbers at stake are mind blowing. Rightly or wrongly, banks and other financial institutions as gatekeepers with KYB processes helping to decide whether criminals are allowed in or kept at bay. The act of customer due diligence is a weapon in a bank's armoury to fight organised crime.
What does UBO mean?
As mentioned, UBO stands for Ultimate Beneficial Owner. It defines the legal entity or individual that financial institutions will be doing business with. This is a cornerstone of KYB and is essential to understanding what financial transactions are going where and who ends up profiting from them.
Finding and mapping UBOs is part of Customer Due Diligence (CDD). A financial institution will perform a risk assessment on their corporate client to build a picture of trust. In the process of CDD, the financial institution carries out investigations involving numerous data checks to identify the UBO(s) and verify they are legitimate to have as a customer.
What is KYB?
First off, let's start with the basics. KYB, or Know Your Business, outlines the process a financial institution must go through to verify the legitimacy of a corporate client. This is partly done by validating the ownership structure and identities of business owners. KYB is a form of risk mitigation for financial services companies, as understanding the organisation structure creates transparency. With transparency you have a clearer picture of ownership and you are able to establish whether the firm is trustworthy. You are also avoiding a litany of potential issues related to financial crimes like money laundering.
KYB, finding UBOs and creating an accurate picture of a corporate structure is far from straightforward for several reasons:
- Ownership can change quickly
- A UBO might sit outside the published organisation structure
- An owner could live anywhere in the world
- Beneficiaries may have interests in lots of different companies
- Accessing up-to-date KYB data can be tricky
- AML regulations vary globally
Digital compliance solutions can help resolve some of these challenges, providing access to data on UBOs and automating compliance workflows to align regulation.
KYB - essential to financial institutions
For financial institutions and banks to maintain compliance, KYB is an integral part of risk management. It is also a moral obligation. Failing to perform KYB properly can land a firm in legal hot water, but it can also lead to organised crimes like human trafficking and drugs trading.
By its nature, working with businesses or corporate clients is more complicated than dealing with an individual. There is a lot more digging, investigation, difficultly, and decision-making involved in thoroughly vetting a UBO. Added to this is the fact that in most instances there will be more than one UBO. This multiples the complexity of KYB and tasks to be undertaken during CDD. It is vital banks perform due diligence on any and all UBOs they will be working with, otherwise the door is left open for illegal activity.
Adoption of compliance solutions
Financial services firms can find it hard to keep up with KYB because of its complexity. There has been rapid digitalisation of financial services and criminals have been quick to exploit that. Changes to AML regulation across global jurisdictions is trying to keep pace, but that means yet more for the financial institution to manage. In some cases, adoption of compliance solutions or RegTech to support automation of KYB has been slow.
Caution around new tech might be explained by not wanting to disrupt service and risk losing high-value corporate customers. Or it might be a trust issue, because if you have a team of compliance professionals dedicated to due diligence, you're more sure things won't slip through the net. Lack of digital transformation means some financial institutions still rely on shared databases to match key executives to a company. This method and other manual KYB checks are slow going and far from foolproof as a solution in a fast-moving, digital operating environment.
The reality for banks and financial institutions is they need to perform CDD at pace in a global and digital world. Automated compliance solutions (RegTech) is the only sensible option. But, compliance people will always be needed in a KYB process. They look review documentation. Assess discrepancies around income sources. Check bank records and other assets in a portfolio. The compliance professional cannot be replaced with it comes to the "sniff test". Does this feel right? An automated solution can present the data quickly, but humans analyse it and create a full picture. This is where the human-automation hybrid adds value. RegTech can help untangle the complexity of KYB, perform data checks and prompt workflows, then it can bring in compliance people to make risk-based decisions.
An automated KYB process will make use of global datasets and populate new records for corporate clients. It also returns information pertaining to UBOs. The deep dive into individual UBOs can include whether they are Politically Exposed Persons (PEP), screening for adverse media, and other background checks, all of which can be automated. This saves the compliance professional valuable time and helps them create a reliable picture of the corporate structure.
KYB is a vital part of risk management and of combating financial crime. The intensity of due diligence in corporate onboarding relates to regulation and the amount of money at stake. A robust KYB process, automated with RegTech and controlled by professionals, is a key way to tackle this complex and knotty compliance challenge.
If you are onboarding or monitoring corporate clients, PassFort can help you streamline your KYB activity. We are here to help with a range of SaaS solutions to automate the CDD process, including providing access to data, transforming policies into workflows and bringing in your compliance team when judgement is needed.
Get in touch today to arrange a chat and to find out more about PassFort.