Guide to Know Your Business

Know Your Business (KYB) refers to the due diligence review of a company or a business that a financial institution like bank deals with - it can be a customer, partner, supplier or any other entity. The KYB process is intended to help prevent identity fraud, money laundering, terrorist financing or other criminal activities. It is also intended to protect the financial institution from such activities.

A well structured KYB process establishes the identity and ownership of the company. For example, whether the company is a real trading entity or is it just a shell company. The KYB process also details who is benefitting from the financial activities of the business. KYB checks identify the ultimate beneficial owner(s) of the company.

Some of the key details verified against government and centralised databases are: Business addresses, business licenses and registrations, and identification documents of the ultimate beneficial owners (UBOs). And as standard, all know your customer processes should validate the details of individuals against central AML and Politically Exposed Persons (PEP) lists.

These KYB checks could include using the institution's own sources, government registries, publicly available sources and datasets, and information provided by the customer. Initial checks when starting a new relationship are important, but so is ongoing monitoring as the relationship develops.

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Contents of this KYB guide:

1. Why KYB matters - know exactly who you do business with
2. Overview of CDD and KYB process
3. Non-compliance with KYB regulations creates opportunities for fraud
4. Why identifying business customers is so hard
5. Identifying UBOs successfully
6. Minimising errors in manual onboarding
7. Automated KYB - how does it work
8. Benefits of automated KYB - faster and more reliable
9. How Laboremus is automating KYB for financial industry in Africa

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Why KYB matters in Africa - know exactly who you are in business with

The rapid growth in digital transactions has increased the importance of know your customer (KYC) and know your business (KYB) for banks and other financial institutions.

When done right, automated KYB (Know Your Business) streamlines and accelerates the onboarding and identity verification of corporate customers. You experience faster processing times and more reliable data with minimal human error and excellent regulatory compliance.

KYB is essential for financial institutions to verify the identity and legitimacy of their business partners, customers, suppliers, and other entities with whom they engage in financial transactions. KYB is similar to Know Your Customer (KYC) but focuses specifically on businesses, investors, shareholders, and ultimate beneficiary owners (UBOs).

A corporate customer can be anything from a small start-up to a multinational financial institution owned by a holding company. Fully following KYB/Anti-Money Laundering (AML) regulations can become a great burden, especially if the process is not automated or managed inefficiently.

With automated KYB financial institutions like banks, insurance providers, and micro-finance companies can more reliably prevent financial crimes such as money laundering, fraud, and terrorist financing. KYB also ensures compliance with relevant legal and regulatory requirements.

There are four clear aspects of a comprehensive KYB process:

• Risk Assessment: KYB assesses the risk associated with a business relationship. Factors such as the industry in which the business operates, its geographic location, and the nature of transactions are evaluated to determine the level of risk involved.
• Ongoing Monitoring: KYB is not a one-time process; it requires ongoing monitoring of business relationships. Changes in a business's ownership structure, financial health, or other significant events can impact its risk profile, and KYB helps identify these changes.
• Regulatory Compliance: Adherence to KYB requirements is essential to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. Failure to do so can result in legal risk, compliance fines, and reputation damage
• Customer Privacy: While KYB involves collecting sensitive information, it is essential for organisations to handle this data responsibly and in compliance with data protection regulations to safeguard customer privacy.

Given the huge opportunity for digital banking in Africa, KYB becomes an important tool for banks and financial institutions to reliably onboard new corporate customers faster and provide them banking services and credit products.

Overview of Customer due diligence (CDD) or Know your business (KYB) process

Know Your Business (KYB) is a systematic approach for financial organisations to verify the identity and legitimacy of any company or business with whom they engage in financial transactions.

KYB is essential for regulatory compliance and risk mitigation. Here is an overview of the KYB process:

1. Initial Information Gathering:

- Identify the business entity: Determine the legal name, registered address, and any other basic identifying information of the business.

- Collect ownership details: Gather information about the business's ownership structure, including names, addresses, and percentage of ownership for Ultimate Beneficiary Owners (UBOs) and key executives.

2. Document Collection:

- Request and collect legal documents: Obtain copies of relevant legal documents, such as business licenses, articles of incorporation, and partnership agreements.

- Validate ownership documentation: Verify the authenticity of ownership documents to confirm the identities of beneficial owners and stakeholders.

3. Risk Assessment:

- Evaluate business risk factors: Analyse the nature of the business, industry, geographic location, and transactional history to assess the level of risk associated with the business relationship.

- Conduct adverse media screening: Search for negative news or information related to the business or its beneficial owners that could indicate potential risks.

4. Sanctions and Watchlist Screening:

- Screen against sanctions lists: Check the business entity and its beneficial owners against government-issued sanctions and watchlists to ensure compliance with international sanctions regulations and AML/CFT regulations.

5. Financial Analysis:

- Analyse financial statements: Review the business's financial records, including income statements, balance sheets, and cash flow statements, to assess its financial health and stability.

6. Ongoing Monitoring:

- Implement continuous monitoring: Establish processes for ongoing monitoring of the business relationship, including regular updates on beneficial ownership, financial status, and compliance with regulatory requirements.

7. Compliance Reporting:

- Prepare reports: Generate reports detailing the results of the KYB process, including any identified risks or discrepancies.

- Maintain records: Maintain comprehensive records of all KYB activities and documentation in accordance with regulatory requirements.

8. Decision-making and Risk Mitigation:

- Determine whether to proceed: Based on the results of the KYB process, make an informed decision regarding whether to enter into or continue the business relationship.

- Mitigate identified risks: If risks are identified, establish risk mitigation measures, which may include enhanced due diligence, reporting to regulatory authorities, or even terminating the relationship if necessary.

9. Data Protection and Privacy:

- Ensure data security: Safeguard all collected information in compliance with data protection and privacy regulations to protect customer and business data.

10. Regulatory Compliance:

- Ensure compliance: Ensure that the KYB process adheres to all relevant anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, as well as industry-specific standards.

KYB is ongoing and dynamic as business relationships evolve and external factors change. Leading global financial institutions use technology, automation, and data analytics to streamline and enhance the efficiency and accuracy of their KYB processes while staying in compliance with evolving regulations.

Non-compliance with KYB regulations creates opportunities for fraud

There are industries where Know Your Customer (KYC) and Know Your Business (KYB) are practices regulated by law. For some entities, like financial institutions, KYC and KYB are mandatory to comply with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations. In practice, this means that you must screen your customers to see if they are, for example, a Politically Exposed Person (PEP) – meaning a person who holds high office in the public sector or has a job that makes them a possible target for financial crime or corruption.

Neglecting KYB/AML practices can have dire consequences. In the EU, your company or its personnel can be criminally charged for not taking reasonable measures to understand the ownership of your corporate customer. The severity of the consequences varies depending on the level of neglect and jurisdiction in which the company operates. For example, leading banks in Europe were penalised to pay fines of over USD $600 million for non-compliance and facilitating payment to illegal entities.

The most serious cases occur when a financial provider is actively participating in money laundering (i.e., they know it’s happening through their business but turn a blind eye to it).

Another, less severe, way to participate might be that the company is missing some of their customers’ business details, but there’s no actual evidence of money laundering. The company will get fined in both cases, but the severity of the penalty can vary.

There are three types of penalties for non-compliance: fines, reputation damage, and criminal sentences. In recent years, banks have received large fines because they have failed to follow regulations. Even board members, senior management of regulated industries might be held personally accountable for what has happened within their companies.

Besides following AML regulations, good KYC and KYB practices allow you to protect your own business interests (i.e., avoid scams and fines) and help you operate in an ethically sound manner.

Why identifying corporate customers is so hard

KYC (one person) and KYB (an entire organisation) have the same basic principle, but KYB can be a monumentally more demanding task depending on the size and nature of your customer’s business.

When it comes to KYB, it’s not enough to just identify the company you’re doing business with. You must go even deeper and recognise the Ultimate Beneficial Owners (UBOs). These are the natural persons who, as the term implies, ultimately gain the benefits associated with a company’s ownership or control. Different jurisdictions can have varying definitions of who is a UBO.

For example, in the EU a UBO is someone who owns more than 25% of a corporate entity.

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Identifying UBOs (Ultimate Beneficial Owners)

An individual is considered a UBO when their integrated ownership percentage is above a certain threshold. ‘Integrated ownership’ means that the ownership percentages across different levels in an ownership structure are multiplied.

Let’s look at an example:
Organisation A is owned by Person A (65%)

and Organisation B (35%)
Organisation B is owned by Person B (60%)

and Person C (40%)

Thus, the integrated ownership percentage of Person C in Organisation A is 40% x 35% = 14%

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This is just a simple example of integrated ownership, but there’s more to understanding someone’s true ability to control an organisation.

Besides the ownership of shares, you must investigate the voting rights related to those shares. In this way, you can determine the actual influence of a shareholder in an organisation. On top of that, ownership percentages can sometimes give a misleading impression of a shareholder’s ability to influence the outcome of a vote. In some cases, persons with a minority of voting rights can still determine the outcomes of different voting scenarios.

Global ownership structures are often complex, with many levels, paths, and circles. The above example shows that ownership percentages in these structures can give a misleading impression about one’s true ability to impact the outcome of a vote. Despite the 2% ownership, Persons C, D, and E can still impact all possible voting scenarios in the ‘subject’ organisation.

Then there’s the complexity that comes with foreign entities and persons. If they own shares in a company, the information for UBO identification must be retrieved from registers across borders. Local laws can even have different definitions of UBOs, which makes calculating the integrated ownership more difficult.

Finally, some organisations have no shareholders who fulfil the UBO threshold criteria. Here, board members or people with daily management responsibilities are identified as UBOs.

These complex ownership structures can make it difficult to ensure all necessary compliance checks are directed at the right persons and entities. True ownership can be hidden behind nominee shareholders, shell companies and trusts which can be owned by other entities in other jurisdictions and so on. Using automated digital identification systems can make a huge difference in the search for UBOs.

Minimising errors in manual onboarding

Gathering and processing all the necessary information for onboarding new customers sometimes requires tremendous effort, especially when there are multiple jurisdictions involved. You might have to follow long and complex paper trails. Sometimes the paper trails don’t even exist, since some jurisdictions don’t require the documentation of beneficial ownership. The data you must work with can be outdated or inaccurate. Some datasets might be in different formats. And so on, and so on.

Then on top of onboarding new customers, you must maintain records of your current customers. Does their UBO structure change over time? Is their risk profile evolving?

All this makes manual identification of corporate customers a huge burden. To give some perspective, it can take about 3-4 months to onboard a corporate banking customer. Of course, every case doesn’t take months, but those “easier” onboarding cases require time and resources just as well.

Luckily, there are ways to add automation into the KYB process. This will make identification faster, free up your resources and make it easier to maintain up-to-date data on business relationships.

How does an automated KYB process work

A reliable KYB process should have the following attributes for it to be a useful mechanism for banks and other financial institutions:

• KYB should be trusted. The most important aspect of identifying corporate customers is to achieve certainty. There are both financial and legislative reasons to be sure you really know who you are doing business and how that business is run.
• KYB should be fast. In today’s digital landscape people have become used to everything happening at the snap of their fingers. Having a fast onboarding and identification process makes customers happier and allows business to run smoothly.
• KYB should take minimal effort. Minimising the amount of manual labour required to identify business customers frees up resources and personnel to work on other important tasks and projects.

With Laboremus' automated KYB, verification process is handled automatically and can be completed in just minutes. Business owners are verified, using comprehensive verifications and reports, including central business watchlists, NIRA and URSSB database, TIN verification, and more.

Financial institutions can set up custom logic post these automated KYB verifications. For example, if you want to prioritise conversion, you can automatically trigger an email requesting more information if there’s no match against a business lookup report. Or, if you're focused on rooting out fraudulent businesses, you can set up ongoing monitoring against international watchlists.

For the inevitable edge cases that do require human input, our solution surfaces business and beneficial owner information in a unified view for your team. For these flagged cases, you can quickly make a decision and trigger automated actions with a click — whether it’s sending followup comms to additional individuals to verify them or closing out related helpdesk tickets.

Automated KYB and identity verification – faster and more reliable

Then how do you get a smooth, fast, flawless, and secure digital onboarding experience while at the same time meeting KYB compliance requirements? Answer: take advantage of automation to minimise manual steps.

You get three major advantages.

First, you can create a reliable structure to your onboarding process. If you use paper forms, which are manually assessed, your customers can add whatever notes they want or they might forget to fill in important details. With digital forms, you can make sure that all the necessary information is filled before the user can proceed to the next part. This also allows you to perform quality checks on the information already while the form is being filled.

The second big advantage is the amount of digitally available data. For example, when the user types in their organisational number, you can automatically fill in the name of the organisation and the address based on information received via an API. Unlike in the paper world, everything doesn’t have to be filled manually. Besides making things faster, this reduces the chance for human error.

The third advantage is that national borders tend to matter less and less in the digital world. Let’s say you are onboarding a corporate customer, and you must find out the UBOs. In the world of manual onboarding, you might have to ask for

a passport copy from an owner in a different country to be delivered by a courier company. In the digital world they can scan their ID, sign it digitally and deliver it in real time. Getting hold of data is less of a burden for everyone.

A properly working automatic solution can perform the identification process, including all the necessary checks, much faster than if a human must do everything. To perform its job properly, the system operates in a large ecosystem

of identity verification and trusted international data sources. This allows it to automatically identify datapoints like addresses, possible sanctions, PEPs and UBOs. By integrating automation with existing workflows, the potential for human error is greatly reduced.

Then there’s the aspect of cross-border potential. When your business expands to new markets with their country- specific legislation, a properly automated digital system will be able to operate in your new environment just as reliably as it does in your other well-established markets.

Benefits of automated KYB - faster and more reliable for you and your customers

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1. Easy to onboard new customers

Depending on the product or service you are offering, having a clunky and outdated onboarding process can really hurt your conversion rate. This is especially true if your industry features tough competition. In 2019 alone, the global commercial banking market lost an estimated $ 3.3 trillion because of unfinished attempts to onboard corporate customers.

2. Faster and cheaper

As we have already discussed, automated digital identification makes onboarding faster than if everything must be done by hand. It also reduces cost since employees don’t have to manually gather and fill all the information. Instead, your personnel will have time to focus on other important tasks. On top of that, faster onboarding makes your customers happier. You can start doing actual business right away instead of suffering long waiting periods.

3. Pre-filled forms

While checking for company information, an automated identification system can speed up registration by auto-filling much of the company’s information onto your forms. The easier the onboarding process is for your customers, the less likely they are to drop off.

4. Regulatory compliance and security

An automated solution must be able to fulfil the highest level of compliance. This can be achieved by working with an experienced provider that has in-depth understanding of local markets, uses trusted international data sources, and follows regulations and industry best practices. This also allows you to easily expand cross-borders.

5. Identify UBOs

You need to be able to identify UBOs across borders and jurisdictions. Having access to trusted global data sources is the first step. The second step is to calculate ownership of shares and true control of an organisation, including voting power. Laboremus' solutions take away the complexity from UBO identification.

6. Lookups

By connecting you to trusted third party registries, you get easier access to information. You can validate and enrich identity data on both personal and organisational level. This includes many features like names, addresses, financials, sanctions, PEPs, business roles, ownership, authorisations and UBOs. Lookups work seamlessly across borders. Laboremus does all this through a single API.

7. Brand management

Doing business with the wrong people or entities can do massive harm to any company’s brand reputation and risks their entire business. A proper KYB tool helps you to make sure you don’t accidentally create business ties with anyone under sanctions which could lead to serious consequences. Even “just” getting caught under an avalanche of bad press is no joke and will hurt any business. Don’t lose the trust of your customers and the public.

8. Maintain a happy relationship with your current customers

After you have successfully onboarded your customers, it’s time to begin the second chapter of your relationship, to do business.

With Laboremus' solutions, you can continue to offer your customers the same kind of frictionless and trusted service they already experienced during onboarding. Here’s how.

9. Simple login and authentication

Simple login means a smooth customer journey, but it doesn’t mean lack of security. By applying a multi-factor login with techniques like electronic IDs (eIDs), biometric scanning, a dedicated mobile app and SMS/email one-time-passwords, you can make unauthorised entry nearly impossible while still allowing the right users easy access.

10. Effortless payments

Proper digital identification makes payments both effortless and safe. It helps you avoid frauds, even sophisticated ones, where money isn’t either coming from or going to the bank account it’s supposed to go.

How Laboremus is automating KYB for financial industry in Africa

Streamline by Laboremus helps banks and other financial institutions meet KYB compliance requirements while speeding up the onboarding process. You can onboard new customers online by doing an identity check automatically in real-time as part of your digital onboarding. And you can go deeper to identify who has signatory rights, who are the various shareholders and who are the decision makers.

Over 40 financial institutions in Africa use our identity verification, digital KYC/KYB and customer onboarding solutions.

We help our customers experience the following benefits that power their growth:

Do cross-border business seamlessly: turn a challenge into an opportunity by choosing one supplier that supports your market expansion ambitions by easing local regulations with compliant solutions for all markets.

Grow your business: 68% of potential end-users leave due to a poor onboarding experience. Choose the right technology partner to streamline your KYC/KYB and AML-compliant onboarding processes across channels and borders and watch your conversion rates take off.

Provide digital and secure customer engagement across channels with low friction: an easy login is the key to a smooth multi-channel customer journey. By implementing a seamless and secure digital identity journey, you can increase the digital engagement with your end-users and thereby also improve your retention. Get multi-factor login with electronics IDs, biometric scanning, SMS / email / OTP or a dedicated app. While also meeting all compliance requirements.

Reduce complexity, while saving time & money: It can be challenging to keep up with the rapid pace of technological and regulatory changes for digital identity solutions - and the security requirements that come with it. Outsourcing the development and management / operation of digital identity, authentication and signing solutions to a full-service Digital Identity provider with high regulatory and technical expertise, can save you money and time.

For further information about Laboremus and our digital KYC and KYB solutions, please visit www.laboremus.ug and connect with one of our product experts to understand how you can automate Know Your Business (KYB) for your organisation.

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