Importance of KYB in Banking for Financial Security

Onboarding the business is challenging for banks and other financial institutions. The banks have to verify the business through rigorous inspection. The financial ecosystem and reputation of the business can be badly damaged because of fraud cases. To mitigate such challenges, the KYB in banking is the most reliable solution. KYB stands for Know Your Business, and it is the detailed inspection process used to evaluate the company’s financial performance. The banking sector must understand the importance of business due diligence for financial transparency.

What is KYB in Banking?

KYB in banking involves the bank collecting business information and screening to ensure compliance with legal requirements. The financial institutions offer financial services to the business community; thus, it becomes mandatory for banks to scrutinize the companies. To know your business, banks must analyze a company's objective, type, and financial performance, which allows a better understanding of the information gathered. The verification process targets identifying possible threats connected with the business: money laundering, terrorist financing, and other types of illicit funding. It assists in identifying the companies involved in money laundering, finance terrorism, and other unlawful funding. The Financial Action Task Force suggested anti-money laundering AML policies to fight financial crime and money laundering. Performing the AML checks is one of the efforts to perform the KYB verification to ensure the control and prevention of fraudsters.

How does KYB for Banks Work?

KYB in banking is the process of conducting a thorough scrutiny of the business while opening an account to enhance efficiency, especially for digital transactions. Often, business transactions are of a significant scale; as a result, tracking the cash flow in a business entity is not easy. KYB process assists the bank in confirming the business account while opening and tracking the day-to-day transactions. This, in return, assists in the making of healthy financial relations with minimal risk of fraud and other unlawful activities. Here, the KYB banking process is discussed in detail:

Business Identity Verification

KYB in banking starts with the identity verification of the business, for which information such as the name of the company, physical address, telephone number, registration number, and tax identification numbers of the company is collected. The documents required for business verification are as follows:

• Utility bills, lease agreement, or deed to their residential/commercial premises where they reside/operate a business.
• Business formation documents include a certificate of incorporation, articles of organization for limited liability companies, partnership agreements, and business permits.
• Compliance Documentation
• Balance sheet, income statement, cash flow statement, or any tax returns.

Ownership Analysis

KYB banking involves identifying the ownership structure of the business as a major step in the process. For KYB Compliance, UBO information, including his name, contact number, photocopy of his passport, and driving license, as well as other licenses relevant to the industry in which the business will be operating, is collected and scrutinised. To enhance risk assessment and management, it is essential to verify the UBO because they have a significant share in assets and decisions.

Ongoing Monitoring

The verification of a business is not a one-time requirement: it has to be periodically conducted. Thus, the supervision of business activities and transactions contributes to the recognition of illicit financing. The enhanced due diligence reduces the financial risks in future from risky partner companies.

Benefits of KYB in Banking

The advantages that KYB offers to financial institutions are as follows; let us explore some of them;

• KYB banking involves the validation of companies’ and their proprietors’ identities to increase financial safety and counter fraud.
• KYB checks help financial institutions to meet regulatory requirements. Banks that check the business must adhere to the AML and CTF standards, as failure to do so can lead to sanctions, hefty fines, or other types of punishment.
• Business verification contributes to the evaluation of third-party risk by undertaking a continuous monitoring process with periodic reporting of risks at the banks.
• KYB guarantees to the banks that it extends either loans or credit lines to legal entities free from illegal funding risk.

Concluding Remarks

KYB in banking is a requirement that must be fulfilled when a business opens an account in a bank. The business screening consists of detailed research of its legitimacy. From the business identification, its ownership understanding, related compliance requirements, and enhanced due diligence, KYB in banking assists in the validation of third parties. This assists financial institutions in avoiding the formation of accounts of businesses engaged in economic crimes. Thus, the KYB helps banks to prevent the onboarding of companies in financial crimes. Therefore, the KYB ensures that the bank is opening credit lines to verified businesses.