Businesses face various types of risks – from internal operations to financial transactions, and also within their collaborations with other companies. For productive and successful business partnerships, as well as the prevention of fraud, digital KYB (Know Your Business) solutions have emerged.
Just like the well-known and widely adopted process of KYC (know your customer), digital solutions provide companies tools for verifying their clients, third-party vendors, and suppliers. It happens that third-party vendors are shell companies that exist only on paper, and collaboration with them takes businesses down.
Digital KYB Solutions – Definition
To avoid unfavorable outcomes in collaborations, companies are now offered business verification solutions. It’s considered as important as customer verification because suppliers and vendors can also bring risks of fraud.
Law enforcement agencies around the world are now enforcing digital KYB solutions to implement business audits in banks, financial institutions, and government offices. These are intended to prevent and help in the fight against frauds that ruin the reputations of businesses.
With the integration of KYB checks in their digital platforms, businesses can get complete information about the authenticity and credibility of potential corporate partners. Digital KYB solutions include authentication of registration numbers and jurisdiction codes assigned to a particular company.
How Digital KYB Solutions Work
‘Know your business’ process involves a detailed analysis of the beneficial owners, stakeholders, regular operations, and relationships with other businesses.
The collective use of technologies like Artificial Intelligence (AI), Machine Learning (ML) algorithms, and OCR (Optical Character Recognition) helps in the verification of key characteristics. These include the address, type of company, and trademarks.
In the case of customers, a due diligence process is conducted to check the background of transactions and accounts. It is an examination of financial records (or a potential investment or product) prior to entering into a proposed transaction with another party.
The high-risk cases go through enhanced due diligence. Similarly, business entities are also checked by carrying out due diligence to assess the risks.
You should consider a variety of factors when doing due diligence on a stock, including company capitalization, revenue, valuations, competitors, management and risks.
If you take time to do due diligence properly, you will be better equipped to make a decision that will align with your overall investment strategy.
The sanction screening process involves the AML screening of important entities of businesses, like the management and stakeholders. AML screening means searching the data of global watchlists for possible involvement of business entities in crimes like money laundering.
The red flags or high-risk business entities are those that are considered to have greater chances of involvement in illicit activities. It includes list scanning, PEP list scanning (politically exposed persons), adverse media screening etc.
For example, PEPs are considered more likely to be involved in criminal or negative activities thus it requires extremely detailed assessment before financial institutions think of associating with them.
The primary goal is to carry out an in-depth check to find out if your client or a vendor has any connection to any sort of crime, frauds, terrorist funding etc.
AML Compliance Obligations
Law enforcement agencies around the world are implementing updated regulatory measures due to increased financial crimes.
The Bank Secrecy Act of 1970 is where this process began to counter tax evasion due to illegal drug dealing. Basically, banks are required to report activities of their customers, like transactions exceeding a certain amount (usually $10,000).
AML compliance encourages businesses to verify their partner companies and suppliers before collaborations. In most cases, businesses do comply because non-compliance leads them to pay huge penalties. Apart from the amount they lose to these fines, there are also losses due to money laundering and terrorist financing.
Automated Verification Solution
The increasing requirement for automation of processes is an obvious necessity of the digital era. Old techniques of manually verifying data took long hours and added to the costs because humans are not as fast as computers when it comes to searching through large chunks of data.
This is why organizations that didn’t implement verification procedures due to the assumption that it will take too much time are now looking towards KYB checks. Automated verification reduces human resource expenses and adds to productivity.
Additionally, the security provided by automated systems far exceeds what humans can achieve with manual methods. This proves how efficient and thorough digital KYB solutions are.
Benefits of Digital KYB Solutions
Any organization involving use of financial operations or sensitive assets requires top-of-the-line security. With increasing frauds and monetary losses because of money laundering, it’s clear that businesses do not implement satisfactory measures for security. The results are hefty compliance fines and often bankruptcy.
Digital KYB solutions provide security to businesses and help prevent frauds in online spaces as well as fulfill compliance guidelines. Global authorities impose AML regulations that require businesses to carry out background checks of vendors and suppliers to know their legitimacy and credibility.
It often happens that shell companies that are created for illicit purposes harm businesses by not returning loans or fulfilling the decided requirements.
This not only causes the business to lose a lot of money, but they also have to pay compliance fines because such occurrences affect several entities at the same time.
In addition, blacklisted businesses trap companies by manipulation due to the lack of verification systems, often leading them to a dark spot in terms of compliance regulations. It’s not just shell companies either, there are also cases where the business seems to be legitimate and verified, but there are corrupt entities within their system. Corrupt employees are a danger to not only the business which they are a part of but also the partner companies.
These employees, like the rest, know everything about the company and are seemingly trustworthy, but in reality, they would be wanted by world agencies for financial crimes like money laundering and terrorist financing.
To sum it up, businesses face risks of losses due to internal and external suspicious activities, resulting in adverse consequences. To avoid bearing huge financial losses and compliance issues, KYB verification measures must be implemented. Digital KYB solutions are also significant in adding value to businesses and building customer trust.