International Regulatory Laws that Mandate KYB Checks for AML Compliance

AML Compliance

The world is under a technological transition with unique and revolutionary digital products and services. Problems are getting catered to with high-tech and artificial intelligence-based solutions. On the one hand, this has provided numerous opportunities to young minds and companies. However, on the other hand, it has led to an enormous threat of security dilemmas, data theft, cybercrimes, and financial crimes, such as money laundering. Therefore, identity verification has become a mandatory process in every organization. KYC and KYB checks are performed to ensure legitimacy, security and measure trust levels while assessing the risk potentials associated with individuals and businesses.

Understanding the Meaning of KYB (Know-Your-Business)

Know-your-business, or KYB, is a set of actions taken to confirm the legality of an organization. KYB checks are conducted in business-to-business relationships and environments where companies deal with one another in the form of contracts, partnerships, and agreements. Moreover, KYB also applies to vendors and service providers before a company seeks their services. Simply put, KYB is referred to as stringent measures or policies to verify a business through which one organization authenticates another during the onboarding process.

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KYB checks consist of collecting the firm’s documents and evaluating them in depth to identify any anomalies, such as false details or signs of document theft. Likewise, the document verification process detects fake documents through an automated checker. Furthermore, the identity of the ultimate beneficial owners (UBOs) of organizations must be verified to gauge potential risks and identify any traces of money laundering. The company’s transactional records are also critically examined to track the funding source and income proofs. In all, KYB checks are conducted to boost the overall security of B2B relations, ensure accountability, and comply with AML as well as counter-terrorism financing regulations.

The Need for KYB Verification Company Regulations

KYB regulatory laws vary from country to country and are specific to the domestic political or economic situation. For instance, the states falling in the Global South, or developing part of the world, are prone to financial corruption, bribery, and, money laundering. Similarly, some are even suspected of facilitating and financing terrorist networks. Thus, the countries have joined hands to fight the menace of money laundering and terror funding by enforcing strict AML/CFT laws domestically. KYC and KYB checks are the tools to achieve that. The states have devised rigid accountability systems with defined penalties, including hefty fines and even imprisonment. Therefore, public or private, financial or non-financial organizations must remain diligent while onboarding other companies to avert compliance failures, monetary risks, and reputational losses.

KYB Regulations in the European Union

Every EU member state has the right to legislate its own AML compliance laws and develop KYB checks as needed. However, each state follows the guidelines for anti-money laundering efforts, known as AML directives (AMLDs), issued by the European Union. The Fourth AML Directive (AMLD IV) outlined business verification services for the first time in the EU. It comprised comprehensive policies to establish central UBO registries and modify the existing client due diligence requirements aimed at UBOs’ identity verification. EU’s AMLDs cover every business setup, including e-commerce and online companies, meaning that they must ensure KYB compliance to fight money laundering. The succeeding AMLDs continue to refine the KYB checks and approaches.

The United States & KYB Laws

There are various statutes put forth by the US government that outline KYB and AML compliance. They differ depending on the nature of the industry. However, the primary guidelines for anti-money laundering efforts are issued by the Bank Secrecy Act of 1970 (BSA), the first-ever AML-specific law in the country. It acts as the foundation stone on which subsequent anti-money laundering rules and regulations are laid. As per the BSA, organizations must perform strict transaction screening and generate Suspicious Activity Reports immediately after detecting any anomaly.

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The USA Patriot Act was introduced in the post-9/11 circumstances. It passed slights amendments in the BSA and specifically instructed the financial organizations to verify clients’ identities before onboarding them. Furthermore, in 2016, the Financial Crimes Enforcement Network (FinCEN) administered the Customer Due Diligence Rule to financial institutes. This rule mandates them to verify the ultimate beneficial owners (UBOs) of a company before commencing business partnerships. Additionally, the US-based online marketplaces fall under the INFORM Consumers Act, the most recent legislation, being introduced in 2023. According to this law, e-commerce markets must collect and authenticate sellers’ essential details, such as tax statements and bank records.

FATF’s Recommendations

The Financial Action Task Force is an intergovernmental body that aims to fight financial crimes, specifically money laundering and terrorism financing. Each country takes directions from FATF’s 40 Recommendations to formulate AML policies. These directions include specified KYB checks, including, the verification of UBOs of every company they partner with. Furthermore, FATF’s gray and black lists include the countries and wealthy business tycoons that are suspected of money laundering or terrorism facilitation, imposing economic sanctions on them. Hence, organizations must ensure checking all these watchlists before jumping into agreements and forming working relationships with other businesses.

In a Nutshell

KYB checks are critical to achieving AML compliance and different states have introduced their own laws specified for business authentication measures.