Know Your Business (KYB) is a set of verification procedures that helps companies avoid getting into business with criminals. KYB verification also confirms those businesses are following industry rules and standards, like Anti-Money Laundering (AML).
Regulated companies (like banks and insurance companies) follow KYB procedures to protect their business against bad actors. In short, KYB makes it harder for criminals to pass as legitimate businesses and make money illegally.
History of KYB
The origin of Know Your Business (KYB) dates back to 1970 with the Banking Secrecy Act (BSA). Under the BSA, U.S. financial institutions must keep stringent records and file reports on cash transactions over $10,000 as well as on any suspicious activity. At the time, the BSA aimed to make it hard to launder dirty money from drug trafficking—a hot topic during the War on Drugs.
The BSA served as the groundwork for several anti-money laundering (AML) regulations laid out in the 2001 USA Patriot Act, including Know Your Customer (KYC). Since KYC requires financial firms to verify that their customers are who they say they are, the flow of money to terrorist organizations is prevented.
Know Your Business was a loophole fix to KYC. Before KYB, banks didn’t have to identify the beneficiaries of the businesses they served. In other words, bad businesses could hide criminals’ identities and perform illegal transactions on their behalf. Today, KYB and KYC work together to promote transparency and shine a light on any potential criminal activity in regulated industries.
What Purpose Does KYB Serve?
KYB is similar to the Know Your Customer (KYC) verification standard. The goals of both are the same: to identify and verify a person or entity in a compliant way. The main difference regards the user being identified. Aptly, KYC looks at a regulated company's customers, and KYB looks at other business entities a company may engage with.
The end goal is to confirm that entities in business relationships are authentic and not being used to conceal the owners’ identities for nefarious purposes like funding terrorism, laundering money, committing tax crimes, or participating in other criminal activity.
What Does KYB Look Like in Action?
One of the key components of the KYB process is ultimate beneficial ownership (UBO). This transparency tool allows companies to understand who directly benefits from business profits. It also prevents criminals from trying to hide their identities through shell companies.
Let’s say a criminal wants to create an anonymous, off-shore business in a low-regulation country to avoid AML compliance scrutiny. Without Know Your Business procedures in place, a legitimate business could get mixed up with this criminal’s business, which could land them in hot water with regulators.
KYB also provides companies with other relevant information about the businesses they engage with. Following KYB protocol can shed light on whether a business or any of its employees have been exposed to political corruption, are subject to international sanctions, or are or have been the subject of investigations related to criminal activity. In other words, it confirms that companies—and their employees—are doing business aboveboard and fairly.
Compliance refers to the regulations, laws, and guidelines governing businesses and financial institutions.
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- 2What is Section 314(b)?
- 3Financial Crimes Enforcement Network (FinCEN)
- 4Customer Due Diligence
- 5Customer Identification Program
- 6What is Section 314(a)?
- 7Suspicious Activity Report
- 8Politically Exposed Person
- 9Specially Designated Nationals
- 10What is a Currency Transaction Report?
- 11What is OFAC?
- 12What is the Bank Secrecy Act (BSA)?
- 13What is PCI DSS Certification?
- 14What is AML Compliance?
- 15Office of the Comptroller of the Currency (OCC)
- 16Personal Identifiable Information (PII)
- 17Compliance Risk Management?
- 18What is Know Your Customer (KYC)?
- 19Know Your Business (KYB)