• Chrisol Correia, Chief Strategy Officer and Interim Head of Marketing at Facctum


• 27.07.2023 03:45 pm
#kyb

Following Russia’s invasion of Ukraine last year, we have seen a huge rise in the number and velocity of Russian sanctions, which as a result has also brought an increased regulatory focus on ‘Know Your Business’ (KYB) practices.

We saw KYB practices come into the spotlight through the annexation of the Crimea back in 2014, which brought a new wave of restrictions put on Russian trade and commerce. Now almost a decade has passed, sanctions evaders have had the time to adapt and expand new methods for avoiding international sanctions. One of the most effective practices was for Russian companies to hide within complicated and obscure ownership and control structures. This tendency meant that sanctions individuals and businesses were able to conceal their country of origin and therefore avoid sanctions. 

First stemmed from the title ‘KYC’, we have seen the term ‘KYB’ develop and grow in both prominence and importance as compliance with regulatory requirements rises up the agenda for many businesses. We are in a time where the consequences of not performing rigorous KYB checks can be detrimental and as such, it is no longer acceptable to just have a simple understanding of the customers businesses are serving.

Understanding KYB

Due to recent geopolitical events regulators have a much higher expectation of businesses when it comes to KYB. In order to comply, companies must collect and process and gather a wealth of data about their clients, partners, and suppliers. Businesses must be able to access and verify companies extended ownership structures in order to pinpoint the person running the business. 

Complicated business structures or offshore accounts can arise for example, when someone wants to purchase an asset and keep their identity hidden from the seller. However, it is important that businesses work to ensure that they are not inadvertently becoming an accessory to financial crime or sanctions infractions.

KYB checks are also not just a one-time procedure. Regulators are now cranking up the pressure and these checks are now required at every step of the journey. As interests and actions can change over time, ownership and control structures can also shift and adjust to these. Therefore, just verifying stakeholders at the beginning of the relationship is no longer sufficient. 

However, continuously keeping on top of these regulatory checks, requires a lot of data and effective record-keeping . To comply with KYB standards, firms are utilising large volumes of data from both traditional and alternative sources, such as news headlines, social media, intelligence reports, and company registries from across the globe. 

To help, businesses can lean on specialised risk management companies that make use of innovative technology which can comb through this excess of data and therefore make the task much more manageable for businesses.  

The consequences for not complying with these new regulations can be detrimental to businesses. For starters, it can pose commercial risks to businesses that do not understand their customers well and thus are less likely to meet their needs. However, even more severe is the risk that a business could be assisting with sanction evasion. The repercussions can be hugely damaging and can involve hefty fines, reputational damage, or prosecution. For example, it was recently reported that Deutsche Bank, was fined $186 million for insufficient anti-money laundering progress following a string of cases that the German investment bank had been completing transactions with countries sanctioned by the US.  

Navigating the current landscape

Unfortunately for businesses, the current global landscape brings its own list of challenges when it comes to operating KYB checks. For example, when solely looking at corporate KYB, there is a notable lack of standardisation across the world’s markets. 

We see many countries with differing rules when it comes to taking on a new business. Even in the present day, it is still legal in some regions to register a company with full anonymity. As a result, firms operating in those locations may consequently find it hugely challenging to assess a company’s ownership structure, when the data is not public knowledge. 

In addition, in some domains, related documents have not been digitalised. Despite huge progress in widening accessibility to company registries and bringing them online, this has not been fully achieved. As a result, companies are being restricted access to crucial data and therefore are less likely to be able to detect certain risks. 

Due to these current challenges, it has never been more important for companies to find new ways to navigate our current landscape and ensure that their KYB checks are both rigorous and consistent. Despite the challenges mentioned, there is a wide range of products on the market through risk management business that can help support other firms to maintain effective KYB processes. Companies that have an accurate idea of their customers and their ownership of customers will be the ones least at risk of not meeting their regulatory obligations.