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Risk is the cost of doing business. The key to success is knowing how to assess, mitigate, and avoid risk. As a business owner or manager, you must keep your employees, customers, vendors, and business information safe. One way you do this is through Know Your Business processes and controls. Some industries require you to have a Know Your Business procedure in place.

What is Know Your Business (KYB)?

"Know Your Business" (KYB) is a due diligence process businesses use to verify the legitimacy and assess the risk profile of other companies they engage with. It is similar to Know Your Customer (KYC), which does the same for individuals. KYB aims to prevent financial crimes like money laundering, terrorism financing, fraud, and theft, as well as ensure regulatory compliance.

Know Your Business is a research tool for evaluating a company's structure, ownership, and potential associated risks. It applies to customers, suppliers, vendors, and partners.

Some of the key elements of Know Your Business are:

  • Identity Verification: To assess its legitimacy, use tools to confirm the company's legal status, registration information, and physical address.
  • Beneficial Owners: Another important aspect is determining who owns and controls the business and performing a background check on them to learn all you can.
  • Assessing Risk: One of the most crucial aspects is evaluating the company's activities and industry and the potential risk for money laundering, terrorism financing, or other financial crimes.
  • Compliance: Due diligence also includes ensuring that the company adheres to anti-money laundering and other similar regulations.

The Know Your Business process involves collecting multiple data points, such as the company's registration with the Secretary of State, applicable licenses, company address, shareholder details, source of income, and more, to verify its legitimacy and detect any fraud or suspicious relationships.

Why is KYB important?

Anti-money laundering (AML) laws prohibit partnering with a fraudulent company. Thoroughly vetting a business before engaging with it helps you remain compliant and avoid high-risk entities. You may be severely penalized if you inadvertently partner with a dishonest company. Another reason that KYB is so essential is that it builds trust and strengthens your credibility with your customers and stakeholders.

Financial companies, such as investment firms, banks, and other financial institutions, are legally required to perform KYB and KYC checks as part of their regular duties.

Benefits of Knowing Your Business

Although Know Your Business is a regulatory requirement, it also benefits your business in various ways.

  • Know Who: Knowing who you are doing business with is crucial. A company may look fine on the surface, but underneath, it could be stitched together with shifty shell companies that are a front for nefarious activities.
  • Regulatory Compliance: Remaining compliant will help avoid steep fines or other government sanctions.
  • Fraud Detection: A solid Know Your Business framework can detect fraud and help you steer clear.
  • Risk Management: Risk assessment and risk management are key players in the business world. Developing a fast, efficient KYB policy and process is critical to keeping your company safe.
  • Reputation Protection: Aligning yourself with a shady company could ruin your reputation and destroy your business. Conducting due diligence upfront could save you.

Not performing Know Your Business due diligence can result in many negative consequences, such as:

  • Financial losses due to fraud or theft.
  • Legal fees to fight lawsuits.
  • Government fines.
  • Adverse media and loss of customer trust.
  • Reputational damage.
  • Poor business decisions and loss of sales.
  • Stakeholder disinterest.
  • Difficulty getting investors or funding.

Know Your Business: Required Steps to Verify a Company

A thorough and accurate KYB process includes a few steps. Each step may have multiple tasks and require gathering and assessing various data points. The general process is as follows:

  1. Verify Licensing and Registration: You must verify the company's legitimacy through corporation registration with the Secretary of State. You can also contact government offices to verify license holders. Specific industries require specialized licensing to operate within the state.
  2. Conduct Due Diligence: Due diligence is different for KYB than for KYC. With KYB, you must verify who owns the company and find out all about the owner's history, reputation, and dealings to assess whether or not they are a danger.
  3. Verification of Ultimate Beneficial Owners (UBOs): Who benefits from the company and its profits will tell you a lot and help you assess the risk factor. When dealing with a corporation, this might mean looking into board members, shareholders, managers, and officers.
  4. Sanctions Screening: Sanction screening is another crucial step in checking to see if the company is on any sanction or "at risk" lists with the U.S. and foreign governments, and might be known criminals.
  5. PEP Screening: You must also check if anyone connected to the business is involved with politically exposed persons (PEP) or linked to foreign governments or terrorist groups.
  6. Reputation Check: Check online and with media sources to see if any adverse information is floating around about them. Where there is smoke, there is often fire.
  7. Transaction Monitoring: Ongoing transaction monitoring will give you a snapshot of the larger picture and how they conduct their everyday business operations, making it easier to detect any red flags.

After the initial research to determine the nature of the business and assess its customer relationships, ongoing monitoring is required to maintain proper due diligence.

Information Required in a KYB Check

The information required during a Know Your Business check is long and may vary depending on the type of company, initial risk assessment, and nature of engagement. The process may differ for a customer than for a potential business partner. Some of the information gathered will be:

  • Name: The company's legal, registered name.
  • Physical Address: The business's legal physical address where it operates. However, their registered address may not match their physical operating address.
  • Taxpayer Identification Number(TIN) or Employer Identification Number (EIN): Depending on where in the world the company operates, it will have either a TIN or an EIN. You must collect it and verify its authenticity. These IDs allow companies to pay taxes and open bank accounts.
  • Business Registration Status: Check with the government agency (Secretary of State in the U.S.) to assess the current legal status of the business entity. It may be current or suspended. A business entity is not authorized to conduct business if its registration is not current and in good standing.
  • Licensing: Verify that the company has active licenses and permits for its type of business and that the licenses are up-to-date, allowing the company to operate within the jurisdiction.
  • Ultimate Beneficial Owners (UBOs): Identify the shareholders with at least a 25% stake in the company. Identifying those who benefit most will require a deep dive into their personal finances and interests to verify their legitimacy and legality. You must collect their names, addresses, and government-issued IDs and ensure they do not appear on government sanction lists.

Additional information collected may also include:

  • Basic information, including the company name, e-mail address, phone number, and faxes.
  • Details about share capital and ownership.
  • Beneficiaries of company assets.
  • Directors and officers of the company and their information.
  • Managers and supervisors, their names, positions, addresses, phones, and other details.
  • Business code (NACE, SIC, OKVED, etc.).
  • Number of employees going back ten years.
  • Export/import details of transactions and overseas relationships.
  • Real estate that is linked to the business and other asset holdings.
  • Vehicles owned by the business and their use.
  • Name of any subsidiaries, their registration code, residence/location, the amount and percentage of shares, and start date.
  • Litigations involving the company or any of its directors, officers, or shareholders.
  • Outstanding debts and tax debts.

By implementing KYB best practices, you can avoid developing relationships with companies engaged in money laundering, terrorist financing, tax fraud, theft, or on sanction lists.

Know Your Business Requirements and Practices: The Challenges

Although a solid Know Your Business plan is imperative to keep your company safe, it comes with some inherent challenges. The downside to not conducting due diligence is government sanctions, penalties, fines, and even possible bankruptcy. Some of the challenges that prevent companies from complying include:

  • Isolated Information: Many financial institutions segregate information into departments and groups. While not sharing may protect some interests, it can also hinder the effectiveness of a KYB plan. Cross-company transparency works best when implementing Know Your Business best practices.
  • Complexity & Resistance: With change comes resistance. The complexity of KYB laws could cause employees to become unwilling to adapt to the ever-changing rules, and they may avoid running background checks when they know they should.
  • Time-Consuming: Thoroughly evaluating a business partner or vendor takes time. Some within the company may see that as wasted time and not want to comply. Even with automated systems, a time constraint is required to complete the process correctly. Ongoing monitoring also takes time.
  • Cost Issues: Know Your Business practices are costly. It can cost an organization upwards of $70 million annually to run thorough background checks on all businesses they engage with. In addition to the initial data collection, ongoing monitoring, and extra resources required, there can also be security issues and inconsistent demands. Many clients may not cooperate, which makes the process even more difficult.

KYB Best Practices

You need a solid plan to get the most out of your Know Your Business program. Your process should include a robust set of best practices that you and your employees can follow easily to complete the job. KYB best practices include:

  • Establish Clear KYB Policies: Draft a clear, comprehensive policy around Know Your Customer activities, tasks, and objectives. Be very clear about the roles of specific employees and department heads, what needs to be collected, how to collect data, and how your company will assess risk. Be clear and concise but also detailed. Anyone reading it should be able to execute the policy naturally. Regularly review and update the policy to comply with changing regulations.
  • Develop Easy-to-Follow KYB Practices: Along with your policy, outline each task in your KYB program using "step-by-step" instructions. Make the practices as easy as possible so employees don't take shortcuts or avoid doing them.
  • Train All Staff on KYB: Train everyone in the company about Know Your Business and why it is so important. The goal is to get everyone from the top of your organization to the bottom on board with fulfilling the company's KYB objectives. Buy-in is crucial for success. Provide ongoing training, initial lessons for new employees, and ad hoc classes as needed.
  • Use Risk-Based Objectives: Develop a list of risk profiles and adapt your due diligence process to each risk-level client, partner, or supplier. This process will make your KYB practices more efficient, using resources only where needed.
  • Leverage Technology: Use the latest technology to help you achieve your KYB goals and accomplish tasks quickly. AI can streamline your efforts, automate routine tasks, and improve your accuracy and efficiency.
  • Continuous Monitoring: One of the most critical steps is ongoing monitoring to ensure nothing has changed with your partners, suppliers, and clients. Conduct periodic audits to look for anything that requires further investigation. Take corrective action when necessary.
  • Regular Reviews: Review your entire KYB process, policies, and implementation regularly, looking for gaps in compliance or inefficiencies. Make changes as necessary.

Industries that Use KYB

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Financial organizations are required by law to conduct KYB screening to avoid doing business with criminals. Some of those types of companies include:

  • Commodity Brokers
  • Investment Firms
  • Banks
  • Mutual Funds
  • Fintech Companies
  • Securities Dealers
  • Other Financial Organizations

Some additional types of companies that are required to comply with AML regulations include:

  • Gambling Marketplaces
  • Cryptocurrency Companies
  • Auditors
  • Tax Advisors
  • Credit Unions
  • Asset Managers
  • Notaries
  • Real Estate Companies/Investors
  • Global Trade Companies
  • Insurance Companies
  • Government and Public Services
  • Legal and Compliance Companies
  • E-commerce Firms

Know Your Business vs. Know Your Customer - What's the Difference?

Although very similar, Know Your Customer and Know Your Business are different things. They both refer to government regulation processes of vetting people you do business with, but differ slightly. How they are different includes:

  • Both are verification measures to comply with AML regulations.
  • KYC verifies the identity of the individual customers or clients and assesses their risk.
  • KYB verifies the identity, validates the legitimacy, and assesses the risk of businesses you partner with, use for vendors, or engage with in another capacity.
  • Companies use both to prevent financial crimes and money laundering.
  • KYC applies primarily to financial institutions, whereas KYB applies to many different types of businesses.

How "Know Your Business" Background Checks Aid Compliance

Know Your Business methods are primarily designed to ensure compliance. Governments enact rules to prevent companies from laundering money or committing other financial crimes. The government forces companies that might be affected by these criminals to perform thorough background checks to help detect fraud and assess risk before crimes happen. Government regulations, to some degree, delegate to businesses the work of detecting criminals and helping stop them.

The History of KYB Compliance

Know Your Business regulations date back to 1970 when the Banking Secrecy Act (BSA) was enacted. This initial law required financial institutions to keep strict and accurate records about cash transactions over $10,000 or any suspicious activity. Banks were also required to file reports to the government. These rules were created to make it harder for crime organizations to launder dirty money from drug trafficking as part of the U.S. War on Drugs.

BSA was the foundation upon which later anti-money laundering (AML) regulations were developed in 2001 with the USA Patriot Act. Two of the components were Know Your Customer and Know Your Business. The primary goal of KYC is to stop the flow of money to terrorist organizations by verifying customers before allowing them to open or use bank accounts.

Before KYB, banks only had to verify individuals, not businesses or beneficiaries of those businesses. This allowed criminal organizations to hide transactions behind legitimate identities, performing illegal activities on behalf of the company. Know Your Business was enacted in 2016 to close that gap. The two combine to promote transparency and risk assessment throughout various industries.

KYB Regulations

Know Your Business regulations are not standardized and can differ widely based on the location of your business. However, the typical laws in charge of compliance are some of those below:

  • The Bank Secrecy Act (BSA)
  • The CDD Final Rule
  • EU's Anti-Money Laundering Directives (5AMLD/6AMLD)
  • Financial Crimes Enforcement Network (FinCEN)
  • Financial Action Task Force (FATF)

When loopholes are discovered, amendments are created to fix them. For example, the CDD Final Rule is an update to tighten the customer due diligence (CDD) portion of the Bank Secrecy Act by FinCEN in 2016. Requiring KYB regulations within the CDD requirements helped to improve transparency and detect criminal operators behind money laundering and other illegal activities. The focus on "beneficial owners" was a turning point. These owners are people who own, manage, or are responsible for a company and who benefit through voting rights, shares of stock, or have control over bank accounts.

Although many different types of companies are required by law to conduct KYB and KYC background checks, other companies in non-mandatory industries also use them to better understand their customers, vendors, and partners and keep their companies clean and out of trouble.

What is a Know Your Business Check?

A Know Your Business verification is a complete background check to learn all you can about a business, its transactions, relationships, and significant beneficiaries. It can be done both manually and using automated Know Your Business software.

Who Needs to Perform KYB Checks?

Companies in the financial industry (banks, investment firms, fintech organizations, mortgage companies, etc.) are legally required to perform regular KYB checks. Other regulated industries must also conduct regular Know Your Business partner background checks. Others may include luxury goods retailers, auction houses, insurance, real estate, and legal services.

However, even though you may not be legally required to adhere to Know Your Business regulations, it's just good business sense to do so anyway. You can't be too careful these days, and knowing as much as possible about those you do business with is essential.

Manual vs. Automated KYB Checks

When developing a Know Your Business solution, you have two options available: a manual approach or an automated system. Gathering the information manually can take a lot of time and effort and require additional resources that could be better spent on other tasks. An automated approach offers you some significant advantages, such as:

  • Quick Onboarding: Automated KYB checks can speed up the process of onboarding new clients, suppliers, or partners.
  • Fewer Errors: Collecting and processing information manually could result in errors, whereas automated systems can eliminate human error and ensure accuracy.
  • Compliance: Automating your KYB processes can also help streamline your compliance and ensure you follow governmental guidelines to the letter.
  • Better Risk Management: AI can quickly and more accurately identify and mitigate risks before you are even aware of them, preventing fraud and other financial crimes.
  • Cost Savings: Hiring dedicated resources to perform regular KYB checks is costly. Automating the process can speed things up and save you money.
  • Improved Customer Experience: Faster and more efficient onboarding of customers, partners, and suppliers can improve their experience and, along with it, your reputation.
  • Continuous Monitoring: AI can also handle the heavy lifting of continuous monitoring and scan for suspicious activity or changes in the business profile.
  • Data Analysis: Automated tools can sift through millions of pieces of data within milliseconds, which would take a human being much longer, and they could miss something. Plus, AI can analyze data more efficiently and compare it with other information simultaneously.

How to Perform a KYB Check

Performing a manual KYB check could take time, or you could do it by using a business background reporting firm. If you plan to do it manually, you may have to contact the Secretary of State or other government agency where the business is registered and then pay a fee to get copies of their documents.

You may also have to contact other government offices to collect copies of their licenses and permits. The most challenging part of the process will be identifying the officers and executives of the firm and their details. You may have to use multiple sources to gather all the pertinent information to assess risk and decide whether to move forward or not.

Instead, you could use a commercial tool like EntityCheck, where we gather all the company information for you into one easy-to-use dashboard. You can run unlimited business background reports on any company nationwide. Using EntityCheck, you save time and money.

How EntityCheck Can Help with KYB Checks

When engaging with new businesses for partnerships, as suppliers, or as customers, you must avoid companies that engage in illegal activities or have serious financial problems. It's your job to assess the risk of doing business with them. The more you learn, the better off you will be. EntityCheck's primary goal is to collect business data, providing you with everything you need to know to assess and mitigate risk to make better decisions.

The information you can find in an EntityCheck background report includes the following:

Secretary of State Filings

The Secretary of State is the state repository for business filings, including Articles of Incorporation, annual reports, changes in ownership, and business entity type designations. An EntityCheck report can show all that information.

UCC Filings

UCC filings, or UCC-1 filings, are public notices filed with the Secretary of State that declare a creditor has a legal claim on assets. UCC filings help establish priority for payouts if the debtor files for bankruptcy or experiences other financial difficulties. These filings are used for various assets like equipment, vehicles, inventory, accounts receivable, and real estate. EntityCheck provides you with the following information on UCC filings:

  • Filing Details
  • Business Details
  • Classifications
  • Scores
  • Addresses
  • Creditor Details

Professional Licenses

Many industries, like real estate, dentistry, nursing, teaching, hairdressers, appraisers, electricians, etc., require professional licenses before doing business. Individuals must undergo the proper training and testing before earning these licenses. Professional licenses are credentials that verify a specific skill or level of knowledge in the chosen field. Governments issue these permits or licenses after the person has passed the final exam and paid the fee. These licenses let the public know that the individual or business is qualified to perform the services required and meet government standards. The EntityCheck license information will show:

  • First Name
  • Middle Initial
  • Last Name
  • State
  • License Type
  • License State
  • Issue Date
  • Expiration Date
  • Last Known Status
  • Licensees
  • License Categories
  • License Types
  • Businesses
  • Business Owner(s)
  • Address
  • Phone

Court Records

Many court records are public and readily available for review. They contain a wealth of information about people, companies, and any related legal issues. You can generally find information on lawsuits against the company, bankruptcies, liens, judgments, and federal dockets, which can fill in many blanks about a business or its owners. Some of the court record information you will find with EntityCheck includes:

  • Case Number
  • First Name
  • Last Name
  • State
  • Bankruptcies
  • Debtor Info
  • Creditor Info
  • Court Info
  • Attorney Info
  • Trust Info
  • Federal Docket Details

Trademarks

A trademark is a legally protected sign, word, phrase, design, or symbol owned by a specific brand or product. It differentiates it from all others, prevents unfair competition, and ensures consumer protection. The purpose is so that consumers can quickly and easily identify a brand through its products or services. Trademarks protect intellectual property so that no one can duplicate them without permission. A few trademark examples are the Nike "swoosh," the phrase "Just Do It," and Coca-Cola. A trademark can even be a specific color or sound. EntityCheck provides the following information on trademarks:

  • Serial Number
  • Registration Number
  • Individual's Name
  • Mark

Employees, Agents, and Officers

A company is built on the people who own and run it. Finding out all you can about a company's officers, employees, and agents can help you determine whether or not the business is viable and worth partnering with. Since KYB is centered on company beneficiaries, this section is critical. Some of the employees/agents/officers' information you can find with EntityCheck includes:

  • Employee Details
  • Education

Patents

A patent is a government-granted legal right to an invention. A patent protects the invention from anyone else producing it, selling it, or using it for a period of "usually" 20 years. Patents are forms of intellectual property granting the holder exclusivity over their invention. Patents protect investments and protect products from being copied. EntityCheck provides the following information about patents:

  • Patent Number
  • Publication Number
  • Application Number
  • PCT Number
  • Internal Registration Number
  • Assignor Name

Try a FREE EntityCheck business search today and learn more about a company than you thought possible.

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Know Your Business SolutionsTry a FREE EntityCheck business search today and learn more about a company than you thought possible.