KYB vs KYC: What is the difference?

The Know Your Customer (KYC) and Know Your Business (KYB) processes are common regulatory requirements for financial institutions (FIs) that require them to establish who their customers are and understand what kind of financial activity they are involved in. Both are essential to maintaining the financial system’s integrity by mitigating risks associated with money laundering and terrorist financing.

What are KYB and KYC?

KYC and KYB form part of a firm’s customer due diligence (CDD) process. Depending on the level of risk identified during KYC and KYB checks, firms will perform varying levels of ongoing monitoring throughout the business relationship.   

What is KYB?

KYB is a verification process used when one business engages with another – as opposed to a business engaging with an individual. It plays a similar role to KYC in helping establish and verify customer identities. It can also accurately assess the level of risk involved in starting a business relationship with the entity in question. KYB helps businesses investigate and determine whether an entity is a genuine organization or whether the business owners have set it up as a front for illicit activity of some kind – i.e., a shell company. 

Once the legitimacy of a business has been verified, the business’ ownership structure must also be established, including the company’s directors and ultimate beneficial owner (UBO). Identifying these individuals can help shed light on whether the business is legitimate, whether there are links to illegal activity, and whether there are anonymous parties in play. 

At the same time, KYB can help businesses assess risk by determining whether the entity under scrutiny or its employees have been sanctioned, received criminal convictions, or attracted negative news coverage attached to previous activities.

What is KYC?

KYC is a procedure for verifying a customer’s identity and monitoring their financial behavior. It is carried out when a business onboards a new customer and continues throughout the business relationship on an ongoing basis. A number of territories require KYC to be carried out by law to help prevent money laundering and the financing of terrorism. 

Regulated industries include financial services, such as banks or investment platforms, and other services, such as insurance or gambling. These industries are considered more susceptible to identity fraud than others, so it becomes very important to check that a customer is who they say they are. KYC also plays a role in helping businesses assess the risk of lending to a customer by understanding their background and history. 

What is the difference between KYB vs KYC?

The difference between KYC and KYB is that the former focuses on conducting business with individuals, whereas KYB relates to building trusted relationships with corporate customers. While KYC procedures gather information about an individual, a KYB check involves collecting and screening information about a company. 

KYB and KYC regulations

KYC and KYB requirements vary by jurisdiction, but there is a framework of 40 recommendations for KYC set out by the Financial Action Task Force (FATF) that member states must adhere to. These recommendations provide overarching standards for FATF member countries in their shared global effort to prevent and combat financial crime. Jurisdictions can use these recommendations to establish and maintain a robust KYC system for their economies.

United States KYB/KYC regulations

KYC laws first came into existence with the 2001 US Patriot Act, set up to combat terrorist activity in the United States and other countries. The act strengthened existing requirements around CDD and anti-money laundering (AML), and also introduced special measures such as additional record keeping and UBO identification. In 2016, American KYB laws were strengthened with the addition of the CDD Final Rule, or Customer Due Diligence Requirements for Financial Institutions.  

EU KYB/KYC regulations

In the EU, member states set their own KYC and AML rules, although the EU itself has set up some directives and regulations to govern what these should entail. One important piece of legislation in this region is the General Data Protection Regulation (GDPR), which requires high standards of data privacy and record keeping. In 2021, the EU proposed a unified AML/CFT rulebook and the creation of a new EU Anti-Money Laundering Authority (AMLA). This is due to come into force by 2024. 

UK KYB/KYC regulations

The UK’s approach to KYC and KYB is similar to the EU, including GDPR. In 2020, its AML regime was updated to move from the EU directive to FATF standards. However, the UK’s exit from the EU in 2021 created turbulence and a spike in scam activity. Among other changes, the EU’s identity verification system is no longer accessible to British and Northern Irish institutions. 

What are the key requirements for KYB and KYC compliance?

Although regulations and procedures vary worldwide, the processes for KYC vs KYB can be generalized based on the requirements common to all or most jurisdictions. 

KYB verification process

• Collect basic identifying information, such as company address, registration or incorporation documents, and the identities of key people in the business.
• Verify the legitimacy of the collected information.
• Identify the UBO.
• Screen against sanctions lists and available government registries in relation to the company and individuals within it.
• Monitor transactions on an ongoing basis to identify suspicious patterns of activity, or other red flags.
• Screen for politically exposed person (PEP) status.
• Monitor for adverse media coverage and social media/online sources.

KYC verification process

• Collect basic information such as name, date of birth, address, and nationality, along with any former names or aliases used.
• Verify identity using personal documents.
• Check against government registers, global watch lists, and sanction lists.
• Screen for PEP status.
• Gather information on background and financial history for risk assessment, in the case of risk-based KYC.

The challenges and benefits of KYB and KYC

KYC and KYB offer obvious benefits in protecting businesses and mitigating threats to national security. They also provide crucial decision-making information for businesses when assessing risk before lending to someone. 

Additional benefits that highlight the importance of KYB and KYC screening include:

• Mitigating the risk of onboarding illegal or illegitimate companies.
• Identifying ownership structures.
• Ensuring sanctioned entities are not onboarded or are swiftyly offboarded/subject to an asset freeze if a customer is designated.
• Increasing efficiency by leveraging an automated screening solution.
• Creating a holistic overview of the customer.
  

However, traditional KYC and KYB processes that use manual procedures can be time-consuming and absorb a lot of resources. Such practices can introduce delays and complications to new business relationships, requiring both parties to wait for verification or gather documentation which must be securely moved between one physical place and another. 

Advanced KYB and KYC solutions 

To effectively tackle the challenge of KYC/KYB compliance while maintaining a positive customer experience, firms must adopt advanced technological solutions. In recent years, KYC and KYB procedures have been transformed by the introduction of online and digital solutions including virtual verification and automated KYC and KYB checks. Electronic KYC, also known as eKYC, means that KYC checks can be carried out without either party having to physically meet or send documentation. 

The advantages of automated solutions like these include:

• Enhanced efficiency: By implementing automated KYC/KYB solutions, businesses can manage a higher volume of KYC/KYB checks in a shorter time, expediting the onboarding process and reducing the time taken for alert remediation.
• Improved accuracy: Automated KYC/KYB verification checks significantly minimize the risk of human error. Through the use of automated algorithms and real-time data, businesses can ensure consistent and reliable results, leading to more precise decision-making and reducing the likelihood of data entry mistakes or oversights in the remediation process.
• Scalability: Manual KYC/KYB screening processes can be time-consuming and overwhelming, especially during periods of high demand or when handling numerous customer applications. Automated solutions offer scalability, allowing businesses to handle increased workloads without compromising efficiency or accuracy, thus maintaining a smooth and consistent screening process.
• Risk mitigation: Automated KYC/KYB functionalities, such as dynamic risk scoring, are crucial for firms focused on mitigating risks related to onboarding or conducting enhanced due diligence (EDD). These features assist in identifying potential risks and preventing unauthorized access to financial systems.