If you are a reporting entity under an AML/CTF regulatory framework, you must apply customer identification procedures to all your customers. This is a crucial part of your AML/CTF program. These procedures help to prevent money laundering and terrorism financing risks, and they must be followed for all types of customers, including non-individual customer types such as companies, associations, or trusts.
To check a customer's identity, you must collect and verify the information before providing any designated services to them. This includes verifying the identity of non-individual customers such as companies, associations, or trusts. This is commonly referred to as KYB (Know Your Business) checks. It's important to note that the entity being verified doesn't necessarily need to conduct business and can be just an asset-holding entity such as a trust or an SMSF (Self Managed Super Fund).
In this post, we'll cover the basics of KYB checks, why they're important, and how you can perform them. We'll also explore how to identify and verify UBOs (Ultimate Beneficial Owners), simple vs. standard identity verification procedures, and provide examples of how to verify different entity types. We'll also take a look at identity verification service providers and how bronID can help.
What is KYB (Know Your Business)?
Know Your Business (KYB) is a critical aspect of anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. It is a risk management process that requires financial institutions, payment service providers, and other organisations to verify and authenticate the identity, legitimacy, and ownership structure of a business entity or organisation before engaging in any financial transactions or forming business relationships.
How can you perform KYB?
The KYB process consists of several key steps:
- Collecting Information: The first step in the KYB process is collecting basic information about the other business entity. This includes the company's name, registration number, address, contact details, and other relevant data. Your business customer will typically provide this information to you, or you can find this information on the business's registration documents or public corporate registries (e.g. ASIC in Australia, ACRA in Singapore, or Companies House in the UK).
- Verifying Existence: Once you've collected the basic information, the next step is to verify if the organisation is legally registered and exists. You can do this by checking the registration details with the relevant corporate registry or other regulatory bodies.
- Understanding the Ownership Structure: A crucial aspect of KYB is to understand the other business's ownership structure, including shareholders, directors, and other controlling parties. This helps you identify any potential risks associated with the ownership or management of the business.
- Identifying Ultimate Beneficial Owners (UBOs): UBOs are individuals who ultimately own or control a business entity, either directly or indirectly. Identifying UBOs is essential for determining the true owners of a company and ensuring that they are not involved in any illicit activities or pose a risk to your business.
- Verifying UBOs' Identities: Once you have identified the UBOs, you must verify their identity details using reliable and independent sources. This typically involves verifying their government-issued identification documents (or certified copies), such as their passport, driver's licence, medicare card or other primary or secondary identity documents. The UBOs can also be electronically verified, for example, by employing an electronic Safe Harbour procedure or other electronic procedures that check independent and reliable electronic data sources.
- Ongoing Monitoring: After the initial KYB process, it's essential for you to continuously monitor the business relationship to identify any changes in the other business's risk profile. This includes monitoring transactions, updating customer information, and conducting periodic reviews to ensure that the business continues to operate in compliance with relevant laws and regulations.
How to identify and verify UBOs (Ultimate Beneficial Owners)?
Understanding who ultimately has control of your customer plays an essential role in detecting, disrupting, and preventing money laundering and terrorism financing. It can also protect your business or organisation from being exploited for other forms of criminal activity. As a reporting entity, you must identify the beneficial owners of your customers and assess the money laundering/terrorism financing risk they pose.
A beneficial owner is an individual who ultimately owns or controls an entity, such as a company, trust, or partnership.
- 'Owns', in this case, means owning 25% or more of the entity. This can be directly (such as through shareholdings) or indirectly (such as through another company's ownership or through a bank or broker).
- 'Controls', in this case, means having the power to make decisions about the entity's finances and operations. They may exert control through trusts, agreements, arrangements, understandings, policies, or practices.
Note that a customer may have more than one beneficial owner, but will usually have less than four UBOs (because 4 x 25%=100%).
Simplified vs. Standard identity verification procedure
Simplified identity verification procedure:
The simplified identity verification procedure is used when verifying an entity that poses a lower risk of money laundering or terrorism financing, such as publicly listed companies or regulated entities. In these cases, a significant amount of information is already publicly available or easily accessible to regulators, reducing the need for extensive due diligence.
When using a simplified identity verification procedure, you generally do not need to identify and verify the Ultimate Beneficial Owners (UBOs) of the entity. However, you should still collect evidence that demonstrates the entity qualifies for a simplified procedure. This may include confirming that the entity is publicly listed or regulated, and ensuring that its ownership and control structures are transparent and well-documented.
Standard identity verification procedure:
In contrast, the standard identity verification procedure is applied to entities that do not qualify for a simplified procedure or have a higher risk profile. The standard verification process typically requires more extensive due diligence, including identification and verification of the UBOs.
When using a standard identity verification procedure, you need to gather information about the entity's ownership structure, identify the UBOs, and verify their identities using reliable and independent sources. Additionally, you should assess the level of money laundering or terrorism financing risk posed by the entity and its UBOs, and maintain records of your identification, verification, and risk assessment processes.
Identity verification service providers
As a reporting entity, you can choose to perform KYB checks yourself, or you can use identity verification service providers to handle the process for you. These service providers use advanced technology and expertise to verify identities and assess ML/TF risk, helping you comply with regulations.
How can bronID help?
At bronID, we specialise in both KYC (Know Your Customer) and KYB (Know Your Business) checks. Our platform uses advanced technology and artificial intelligence to verify identities, assess IDV risk, and ensure compliance with regulations.
What sets us apart from other identity verification service providers is our ability to automate the id verification process of almost all entity types, including companies, trusts, SMSFs, associations, and government bodies across more than 100 countries worldwide. We have integrated with hundreds of registries around the world to collect incorporation and beneficial ownership data, as well as use artificial intelligence to read and review supplied documentation and accurately identify UBOs.
With our platform, you can perform KYB checks quickly and easily, reducing the risk of fraud and ensuring compliance with regulatory requirements. We offer two options for you to integrate our KYB solution - via a Whitelabel option or API, or through our pay-as-you-go bronID Portal.