Know Your Customer (KYC) and Know Your Business (KYB) are fundamental components of anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. While often conflated, they serve distinct purposes and impact different aspects of financial transactions, particularly in the context of payouts and money transfers.
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What is KYC?
KYC refers to the process of verifying the identity and assessing the risk profile of individual customers. Financial institutions must collect and analyze information such as name, address, date of birth, and government-issued identification to establish the customer's identity. The goal is to prevent fraudulent activities, money laundering, and other financial crimes.
What is KYB?
KYB, on the other hand, focuses on verifying the identity and assessing the risk profile of a business entity. It involves gathering information about the company's structure, ownership, directors, and beneficial owners. This process helps financial institutions understand the nature of the business, identify potential risks, and comply with regulatory requirements.
Determining the Account Owner: KYC or KYB?
The key question in any project is: "Who owns the money in the account?" There can be the following situations:
CONSUMERS - If the money in the account is owned by the consumer, the KYC process needs to take place. This usually means that the user (consumer - not a company) needs to provide his/her ID or passport and a selfie, meeting or video call needs to happen to make sure that the consumer is a real person signing a contract with the payment institution. There are many additional verification methods that the payment institution may require, but these are the main ones.
BUSINESS - If the money is owned by a business, the KYB (Know Your Business) process must take place. This usually means that not only does the user (company owner, manager, etc.) need to provide their ID and take a selfie or video call, but the payment institution needs to verify the beneficiaries (owners of more than 25% of the company's shares).
In both cases, the payment institution is obliged to check whether the consumer, company director or company owner is on various sanctions lists, e.g. OFAC or UN sanctions lists.
KYC and KYB in Payout to Cards Projects
In most Payout to Cards projects, we encounter the situation where the account owner is a business, typically a payment institution, wallet, or fintech. This means a KYB process is sufficient. Our role involves verifying the business partner's legal status and authority to conduct transactions. We request basic sender information like name but rely on the partner's existing KYC for user details.
However, in some cases, direct payments from consumer accounts are necessary, requiring either a complete KYC process by the partner and sharing results with us or us conducting the KYC on their behalf.
Challenges and Considerations
Implementing effective KYC and KYB processes can be complex and time-consuming. Financial institutions must balance the need for compliance with the customer experience. Some key challenges include:
Customer Onboarding: Gathering accurate and complete customer information can be challenging, especially for high-risk customers or those with complex financial profiles.
Continuous Monitoring: KYC and KYB are not one-time processes. Financial institutions must continuously monitor customer and business activities for changes that may impact their risk profiles.
Technological Advancements: Leveraging technology can help streamline KYC and KYB processes, but it also introduces new risks, such as data privacy and cybersecurity concerns.
By clearly defining whether a KYC or KYB process is required and following the outlined steps, businesses can efficiently navigate the complexities of project implementation while maintaining compliance with regulatory standards. Verestro is committed to supporting clients in this process and ensuring smooth operations.
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