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The Pillars of Security: KYB Verification and AML Protocols Unveiled

by Arthur Zuckerman

In today’s business world, the advanced challenges to transparent financing require high-level security protocols. A business has to build partnerships to diversify its network and boost growth in the industry. Onboarding the company without a verification process is vulnerable to financial risks, legal consequences, and reputational damage. The legal bodies set up rules and regulations regarding business verification to combat such challenges. Businesses must comply with regulations such as anti-money laundering (AML) to identify as legitimate ones and mitigate fraudulent activities. For this reason, an organization must conduct KYB verification while establishing financial relationships. 

Primary Components of KYB Verification

Know your business is the due diligence process in which a complete inspection of a third party occurs to verify its legitimacy. The KYB verification helps to detect red flags by analyzing the business information and screening against the official databases. The primary purpose of KYB is to verify the business identity, ownership structure, financial status, intended nature or purpose, and compliance obligations. The KYB Checks evaluates the legal and financing status of the onboarding company. This business verification process consists of the following steps:

  • Information Collection: The first step in KYB involves collecting information such as the company’s name, mailing address, physical address, registration number, and tax identification number. contact number. The documents such as proof of address, financial statements, ownership documents and all the industry-relevant information are collected.
  • Documents Screening: All the collected documents undergo a screening process to verify their validity and detect falsified ones. The business documents are checked in cross-reference to the government and legal bodies’ databases.  
  • UBO Verification: For the verification of the ownership structure, it is necessary to collect ultimate beneficial owner UBO data and analyze it. The UBO information is screened to determine its legal status which ensures security in financing.  
  • Apply AML Checks: AML checks are applied over the company to analyze its compliance with anti-money laundering AML regulations. It involves screening the business against databases of sanction lists, black lists, and politically exposed persons (PEP) lists. 
  • Enhanced Due Diligence: This involves real-time screening of the business to track and control fraudulent activities. Enhanced due diligence detects any update in ownership structure, compliance regulations, and other potential risks. 

Role of AML Checks in KYB

Anti-money laundering AML screening is an essential component of business verification. This screening process helps to identify high-risk business profiles associated with activities such as money laundering, fraud, terrorist financing, corruption, tax evasion, and other financial crimes. The scope of  AML checks is to assess the company’s compliance with AML regulations and detect violations. The company’s information is scrutinized to ensure business partners that it is in compliance with laws and regulations imposed by regulatory bodies. If the AML regulations are updated, conducting checks will report the company before facing legal consequences. 

Furthermore, companies must have a rigid policy for monitoring third party’s compliance with obligations. Up-to-date AML checks play a crucial role in enhanced due diligence of the business partners. The perpetual AML screening helps corporations to mitigate the risks of money laundering in financial relationships. 

Global AML Regulations

Anti-money laundering is a constantly emerging challenge to the whole globe. The laws and regulations to fight money laundering vary by region. However, the Financial Action Task Force (FATF) is an international body that regulates the policies to counter financial crimes in different regions of the world. Mostly, the FATF has the global guidance authority to regulate the laws and regulations.         

Regulations in The US 

In 1970, the Bank Secrecy Act (BSA) was the first set of rules and regulations related to anti-money laundering. After the enactment of the BSA, several regulations were implemented to identify and report suspicious activities, including money laundering and terrorist financing. In the US, AML laws from 1970 to 2000 mainly focus on the war against anti-money laundering crime. In 2001, the USA Patriot Act was imposed after 9/11, which covered terrorist financing as a crime and amended the BSA. According to the Patriot Act 2001, the customer requires identity verification while opening a new account in a financial institution. This act forbids financial institutions to onboard foreign shell banks. It also established a policy for conducting enhanced due diligence on foreign accounts.

Furthermore, the anti-money laundering Act of 2020 (AMLA) represents the most recent amendment to the BSA and encompasses the Corporate Transparency Act (CTA). Under CTA, it is the federal requirement to verify beneficial owners of businesses. The primary amendment in BSA occurred to expand identity verification in businesses operating in cryptocurrency. This forbids businesses from concealing information from financial institutions and expands penalties in case of violations. 

Regulations in EU 

The 6 AMLD, 5 AMLD, and 4 AMLD are the primary directives fighting against money laundering in Europe. 

  • 6th AMLD: The EU Sixth Anti-Money Laundering Directive AMLD imposed on 3 June 2021 to strengthen AML regulations. It also placed higher responsibility on regulated bodies to combat financial crime.
  • 5th AMLD: The EU’s 5th Anti-Money Laundering Directive (5AMLD) was effected on Jan 10, 2020. The scope of this directive is to expand control over more sectors and ensure more transparency in the fight against money laundering and terrorist financing.
  • 4th AMLD: The 4th Anti-Money Laundering Directive (4AMLD) of the EU aims to combat money laundering and terrorist financing by ensuring that the EU framework aligns with the Financial Action Task Force (FATF) recommendations on anti-money laundering (AML) and counter-terrorist financing (CTF).

Regulations in the UK 

The UK’s Economic Crime Plan 2019-22 highlights the extensive scale of money laundering. The Institute of Financial Accountants IFA members are considered watchdogs who fight against illicit funding in the UK economy.  IFA creates an ethical obligation for members to comply with industry-specific regulations and to report non-compliance with laws and regulations, including those related to money laundering. The detailed money laundering regulations in the UK come under the Proceeds of Crimes Act 2002 (POCA). Other regulations are as follows:

  • Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (Money Laundering Regulations 2017) 
  • The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (Money Laundering Regulations 2019)

AML Screening Process in KYB

In the KYB verification process, the AML screening step consists of the following steps: 

  • The politically exposed person PEPs list is checked to verify that none of the UBOs has political influence in the company. 
  • Sanctions screening involves checking that the company has not imposed sanctions on it. 
  • The evaluation of the companies helps to identify which requires enhanced due diligence. The high-risk business profiles undergo constant screening to detect the red signals. 

Streamline KYB Verification

Onboarding the business through KYB verification is the secure gateway to establishing financial bonds. In KYB verification, screening of AML regulations helps to evaluate the legal status of the third parties. The screening process is a detailed inspection to check the company’s background, compliance status, and finances. Conducting global AML checks over companies helps detect red flags and, ultimately, legal consequences of non-compliance. The business world must understand the importance of AML protocols in KYB verification while making financial relationships.

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