What is KYC vs KYB vs an AML check?

What is KYC in banking?

KYC stands for Know Your Customer and is a required check to be carried out by any financial institution opening and managing financial accounts. Banks and other financial service providers are regulated by the Financial Conduct Authority (FCA) and are obligated by law to identify their customers and verify their identity. Firms must demonstrate to the regulatory body that they understand who their customer is and have obtained all the necessary information to understand their needs at the time of onboarding.

All financial providers must comply with FCA regulations to ensure customers accessing UK financial products are doing so for legitimate reasons to make financial transactions safe, and to prevent money laundering.

What does a KYC verification check do?

A KYC verification check verifies the name and identity of a customer. KYC documents are formal documents obtained for this purpose. Typically, customers will have to provide proof of name, address, and in some cases, income.

This is a mandatory process that takes place to identify and verify the customer’s identity at the time of onboarding or during remediation. These checks confirm the customer is who they say they are and eliminate the potential risk of fraud, money laundering, or other financial crime.

What does AML mean?

AML stands for Anti-Money Laundering. It is a set of measures carried out by FCA-regulated entities to prevent financial crime. Anti-money laundering is the process of making sure that customers are not partaking in money laundering or using an open current account to disguise where funds are coming from or where they are going.

As part of crucial AML procedures, financial providers must demonstrate to the FCA that they have carried out customer due diligence by conducting a KYC check for a consumer or a KYB check for a business. AML is the objective that KYC and KYB checks aim to achieve to prevent money laundering.

What is an AML check?

AML checks are designed to identify customers and to assess their associated risk with financial crime. KYC is an example of an AML prevention measure. These checks help FCA-regulated bodies to onboard new clients safely and compliantly by proving customers are who they say they are.

What does an AML check involve?

AML checks such as KYC and KYB ensure companies remain compliant with FCA rules and regulations. According to FCA, AML checks should identify the customer, verify the customer’s identity, and assess, and where appropriate obtain information on, the purpose and intended nature of the business relationship or occasional transaction.

To ensure these requirements are met, AML checks involve getting evidence of the claimed identity, checking the evidence is genuine and/or valid, checking the identity exists, checking if the identity is at high risk of fraud, money laundering, or other financial crime, and determining whether the identity belongs to the person who’s claiming it.

What does KYB mean?

KYB stands for Know Your Business and is the process used to identify and verify the identity of a business or organisation. Know Your Business checks ensure a company understands the corporate structure of a business client.

Additionally, KYB ensures financial bodies understand and can verify the identity of the person/people who own or control the business, often referred to as Ultimate Beneficial Owners (UBOs) and Persons of Significant Control (PSC). This is achieved through further performance checks that ensure there is no untoward history about the business and the people behind it.

What does a KYB check do?

A KYB check enables a company to confirm a business exists and that they are active and trading. Furthermore, the KYB procedure also confirms the business nature, principal activities, jurisdiction of operations and customer profile. This information is then used to determine the level of financial risk by considering the type of product the business is buying and how they say they will use that product.

How to perform a KYB check

To perform a KYB check, a company must collect information about the other business entity. This includes the business name, registration number, address, and contact details. An organisation could require as many as 150 different data points when conducting a KYBC check.

Once this information has been collected, the organisation must verify the existence of the business and ensure it is legally registered. Then, it is crucial for the financial provider to understand the business operation including stakeholders, directors, and other people with direct business control. This will help to identify any risk associated with ownership.

Next, it is important to ensure the business owners or individuals with control of the business entity are not involved in illegal activity to minimise risk.

Once the initial check has been conducted at the time of onboarding, the business profile will continue to be monitored in line with FCA compliance. This includes monitoring transactions, updated information, and periodic or perpetual reviews.

What is the difference between KYC, KYB and AML?

The key difference between KYC and KYB is the type of customer they are dealing with. KYC focuses on consumers and works to identify a named individual, while KYB focuses on verifying the businesses they work with. Often, KYB is referred to as a subcategory of KYC compliance.

AML is the process of ensuring that the business or consumer being onboarded by a financial provider is not involved in financial crime. KYC and KYB are just two examples of checks that aim to achieve AML.

How does the KYC process work?

The KYC process works to reduce fraud and financial crime risk. Effective KYC checks involve knowing, understanding, and confirming a customer’s identity, their financial activities, and the risk they pose.

Customers are asked to provide documents to confirm basic information such as name and address to verify their identity. Then, their level of customer risk is assessed. To remain compliant with FCA rules and regulations, financial providers are then required to monitor and record any changes in their accounts.

What is eKYC?

eKYC stands for Electronic Know Your Customer and is the digital process of verifying a customer’s identity and other particulars using electronic technology.

Traditionally, customers are asked to supply paper proofs such as a passport, utility bill, or birth certificate, which takes manual hours to match up and confirm. Automated systems allow eKYC to analyse data documents easily and quickly verify customers in real-time and strengthen KYC and KYB checks.

With the ability to verify the identity, occupation, address, and jurisdiction of a customer within a matter of minutes, eKYC significantly speeds up the onboarding and remediation processes for companies by leveraging innovative technology.

What is pKYC?

pKYC stands for Perpetual Know Your Customer and is the ongoing process by which financial providers continuously update customer information to manage risk.

Currently, customer risk assessments are carried out periodically. At onboarding the customer risk assessment determines how often a customer needs to be reassessed based on the level of risk they pose. Low-risk consumers are businesses that are typically evaluated every five years. Medium-risk consumers and businesses are reassessed every three years, and those who pose a high risk of financial crime are reassessed every year.

Perpetual Know Your Customer encourages companies to assess customers perpetually, or continually. Rather than reassessing a customer only when a material or suspicious change in their status occurs, pKYC aims to continually monitor customers to reduce manual workload and reflect changes in a customer’s risk assessment. Businesses use third-party data sources and AML analytics to flag potential changes in risk status.

Who should implement KYC, KYB and AML?

Any financial institution or company regulated by the FCA is required by law to carry out KYC, KYB, and AML checks with the goal of reducing illegal financial activity.

This includes but is not limited to banks, accountants, law firms, estate agents, tax advisors, high-value art dealers, credit unions, and asset managers.

When should you implement KYC, KYB, and AML measures?

The types of businesses that are required to carry out KYC, KYB, and AML compliance measures should implement checks at the time of onboarding new customers and during remediation of existing portfolios.

Why is compliance important?

KYC, KYB, and AML compliance is important to ensure companies know their customer and the risks associated with them. It is an obligation by law and companies regulated by the FCA that do not comply may be fined by the regulatory body.

After the initial review and assessment, customers should be continually monitored and their risk assessment should be reviewed either periodically, as frequently as their level of risk indicates, or perpetually (pKYC).

How are KYC and AML checks complementary to each other?

AML is something FCA regulations aim to prevent using KYC and KYB checks. These are the checks that form the base of AML compliance and fraud prevention. For this reason, KYC and KYB compliance are complementary to AML compliance as they both work to achieve the same outcome.