Introduction

In the last decade, global businesses have been fined roughly $26 billion in fines for failing to comply with compliance related regulations. This statistic underscores a critical component underlying fintech companies globally: knowing exactly who you're doing business with.

Whether you're a financial institution, a fintech startup, or any business handling financial transactions, understanding the distinction between Know Your Customer (KYC) and Know Your Business (KYB) is extremely important for your business.

Understanding KYC (Know Your Customer)

Know Your Customer (KYC) serves as your first line of defense against fraud and financial crimes when dealing with individual customers. KYC is a regulatory requirement that mandates businesses to verify the identity of their customers before opening accounts or conducting financial transactions.

The KYC process involves:

• Collecting personal identification information (name, date of birth, address)

• Verifying government-issued identification documents (passport / national ID)

• Screening against sanctions lists

• Assessing the customer's risk profile

• Monitoring ongoing transactions for suspicious activity

While KYC helps protect your business from fraud, it also helps build trust with legitimate customers who appreciate your commitment to security.

Understanding KYB (Know Your Business)

Know Your Business (KYB) takes verification to another level when dealing with corporate customers. While KYC focuses on individuals, KYB focuses on business entities, their ownership structures, and their legitimacy.

KYB verification involves:

• Confirming the business's legal existence and registration

• Identifying and performing KYC on ultimate beneficial owners (UBOs)

• Verifying business documentation and licenses

• Analyzing the company's ownership structure

• Screening for sanctions and adverse media coverage

• Monitoring business activities and transactions

The stakes are higher with KYB because business relationships often involve larger transaction volumes and more complex ownership structures that could potentially mask illegal activities.

Regulatory Framework: A Global Perspective

Global Standards

The Financial Action Task Force (FATF) provides the foundation with its 40 recommendations, serving as the global blueprint for verification requirements.

Regional Requirements

United States:

• The Patriot Act of 2001 sets the baseline for verification requirements

• The Customer Due Diligence (CDD) Final Rule strengthens beneficial ownership identification

• FinCEN provides ongoing guidance and enforcement

European Union:

• 6AMLD (Sixth Anti-Money Laundering Directive) tightens criminal penalties

• Upcoming unified AML/CFT rulebook (2024) aims to standardize requirements

• GDPR influences data handling throughout the verification process

United Kingdom:

• FCA oversees verification requirements post-Brexit

• Money Laundering Regulations 2017 provide the regulatory framework

• Emphasis on risk-based approach to verification

The Verification Process: A Practical Guide

KYC Verification Steps

1. Initial Information Gathering

   • Collect basic personal information

   • Request identification documents

   • Record proof of address

2. Verification

   • Validate document authenticity

   • Cross-reference provided information

   • Screen against sanctions lists

3. Risk Assessment

   • Evaluate customer risk profile

   • Determine level of due diligence required

   • Set monitoring parameters

KYB Verification Steps

1. Business Information Collection

   • Gather registration documents

   • Obtain corporate structure information

   • Identify all beneficial owners

2. Enhanced Verification

   • Verify business registration

   • Screen all beneficial owners

   • Check for regulatory compliance

3. Ongoing Monitoring

   • Track business activities

   • Monitor transaction patterns

   • Update verification periodically

KYC & KYB Challenges and Solutions

Common Challenges

• Complex ownership structures

• Cross-border verification requirements

• Resource-intensive manual processes

• Constantly evolving regulations

Technology Solutions

• AI-powered document verification

• Automated sanctions screening

• Blockchain-based identity verification

• Real-time transaction monitoring

Conclusion

Understanding and implementing proper KYC and KYB processes is critical for any company dealing with financial related activity. It’s important to stay informed about requirements, leverage technology, and maintain robust processes in order to stay compliant.

About Arch

Arch is building a next-gen wealth management platform for individuals holding alternative assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services, powered by BitGo.