Firms must strengthen Know-Your-Business procedures to trade in complex international landscape

By Chrisol Correia, Chief Strategy Officer and Interim Head of Marketing at Facctum

Since the Russian invasion of Ukraine in February 2022, strict sanctions aimed at curtailing Russian economic interests globally have surged. This escalation has been further fuelled by intensified global emphasis on Know-Your-Business (KYB) practices.

After the annexation of Crimea in 2014, Russia faced similar restrictions, affording Moscow ample time to develop methods to evade Western sanctions. Obscuring Russian businesses through intricate or opaque ownership structures and enabling sanctioned entities to hide their origins has indeed yielded success.

Originating from the acronym ‘KYC,’ the term ‘KYB’ has gained increased prominence and significance as businesses prioritise compliance with regulatory standards. In the current environment, the ramifications of neglecting thorough KYB checks can be severe and consequently, a basic understanding of the businesses your company serves is no longer sufficient. As such, firms will now require new or expanded KYC workflows, processes, technology, risk assessments and datasets.

KYB in Practice

The requirements imposed by KYB regulations can vary depending on the location. However, regulatory bodies expect enterprises to collect and manage a broader range of information about their customers, associates, and suppliers. This entails scrutinising the fundamental aspects of a company, evaluating and verifying complex ownership structures, and identifying the key individuals responsible for the business.

Valid justifications can exist for complex business arrangements or offshore financial accounts. For instance, individuals may desire to acquire assets discreetly to conceal their identity from sellers. Nonetheless, it is of utmost importance for businesses to steer clear of inadvertent associations with financial crimes.

Applying KYB Processes

KYB is now expected to function as an ongoing process. Simply confirming partners’ credentials at the beginning of a relationship or collaboration is insufficient. Objectives can change, and the ownership and governance structures of companies frequently evolve.

Monitoring supply chain collaborators and meeting additional regulatory obligations, such as conducting regular audits of financial transactions and reporting unusual patterns or discrepancies, requires increasing reliance on extensive data. To align with elevated KYB criteria, firms are compelled to analyse vast datasets from both traditional and unconventional sources, including news headlines, social media platforms, intelligence briefs, and global corporate registries.

Risk management firms can assist by utilising state-of-the-art technology and risk analytics to sift through and evaluate this wealth of data. This capability empowers enterprises to enhance decision-making by accessing more accurate insights.

Ensuring comprehensive KYB assessments occur is a formidable task for businesses. However, neglecting to do so can result in serious repercussions. The commercial risk lies in enterprises potentially lacking a clear understanding of their customers or partners, which could lead to inappropriate product offerings or a failure to address their business needs.

Even more concerning is the potential for businesses to inadvertently support sanctions circumvention. The consequences for such a lapse can manifest as substantial fines, damage to reputation, or even corporate criminal allegations. A recent instance that illustrates this, was the Deutsche Bank who was fined $186 million due to inadequate anti-money laundering efforts. This followed a series of incidents where the German investment bank engaged in transactions with nations sanctioned by the US.

Lack of consistency between regions

Moreover, companies, especially those with a global presence spanning various regions, face additional challenges when implementing KYB protocols. One significant challenge is the lack of uniformity and consistency in corporate KYB practices across international markets.

For instance, in Europe, each European Union member has the authority to establish its own anti-money laundering (AML), Know Your Customer (KYC), and KYB guidelines. As a result, companies operating in these regions may struggle to assess relevant ownership frameworks since such data is not publicly available.

However, the EU has issued several directives known as AMLDs to provide some structure. The Fourth AMLD (4AMLD) introduced initial KYB requirements, including the creation of central Ultimate Beneficial Owner (UBO) registries and expanded Customer Due Diligence (CDD) rules for verifying ultimate beneficial owners.

Furthermore, in certain regions, essential records remain non-digital. Despite efforts to digitise corporate registries for better access, this transition has not been universally adopted. Consequently, crucial data may remain inaccessible or challenging to retrieve. This increases the risk of businesses unintentionally engaging with unidentified or unverified risks. To address this, companies must develop strategies, including technological solutions, to navigate the complex global environment and ensure robust KYB procedures.

KYB Compliance is key

Nevertheless, it is essential for enterprises to implement all necessary measures to establish and maintain strong KYB protocols. By gaining a comprehensive understanding of customers and their activities, as well as ownership structures, businesses can ensure compliance with regulations. This task can be demanding, particularly in a fragmented global business landscape, yet confronting this challenge is crucial to safeguard against risks posed by illicit actors and financial crime.