Companies operating within certain industries, such as the financial space, are required by law to verify that any business they work with — whether the business is a customer, consultant, supplier, or distributor — is a legitimate enterprise. These requirements are broadly referred to as Know Your Business (KYB) and are related to both Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
Complicating the matter is the fact that these laws and regulations can vary substantially per country and industry. Additionally, registries and databases vary from country to country and may not all hold the same information.
For businesses that operate internationally — or aspire to do so — all of this variation can pose a serious challenge. That’s why it’s so important to have a plan for dealing with international KYB requirements.
Below, we provide a brief overview of what Know Your Business is and discuss the unique challenges of addressing it on a global scale. We also take a look at some of the laws governing KYB requirements around the world.
What is Know Your Business (KYB)?
Know Your Business (KYB) refers to the process of verifying the legitimacy of any company your business works with. In many ways, it’s similar to KYC — except instead of simply verifying the identity of an individual, you are doing so for a business and its key stakeholders. For this reason, it’s also sometimes called corporate KYC.
In addition to verifying the business itself, the KYB process involves identifying the ultimate beneficial owners (UBOs) that are behind the company, and verifying that those individuals a.) are who they say they are, and b.) are safe to do business with. The end goal is to determine whether or not the business you are working with is real, legitimate, and trustworthy.
In other words, KYB helps your company avoid inadvertently working with criminals or illegitimate businesses that might take advantage of your services, platform, or relationship to launder money or commit other financial crimes.
Generally speaking, any business that is subject to KYC requirements is also subject to KYB requirements. This includes financial institutions such as banks, brokerages, insurance companies, fintech companies, cryptocurrency exchanges, and other related businesses.
Even for businesses not operating in a regulated industry where KYB is required, performing KYB checks can be beneficial. Simply put, a thorough KYB process can act as one more layer of defense protecting your business against fraudsters and bad actors.
What is international KYB?
International KYB is simply the process of applying Know Your Business processes and best practices on a global scale.
It requires that businesses operating in multiple countries or jurisdictions understand how KYB laws and regulations vary from country to country and use that understanding to adjust their KYB workflows to meet each country’s requirements.
In other words, international KYB is a means of reducing legal and regulatory risk involved in operating internationally.
Global KYB laws and regulations
Because KYB laws and regulations can vary significantly from country to country, it’s important to be aware of the regulations in place in whatever jurisdictions you operate within. Below are some of the most important KYB laws and regulations around the globe (but by no means a comprehensive list).
United States
In the United States, KYB requirements are laid out in a number of different laws and regulations. These requirements vary by industry.
Financial institutions are guided primarily by the Bank Secrecy Act (BSA) of 1970, which was the country’s first law designed to combat money laundering. It has served as the foundation upon which all subsequent laws and regulations have been built, setting the stage for transaction monitoring and mandating the reporting of suspicious activity — as well as transactions surpassing a certain threshold.
In the aftermath of 9/11, the USA PATRIOT Act was signed into law. This amended the BSA and required financial institutions to collect and verify the identity of individuals looking to open an account with them.
Then, in 2016, FinCEN issued the Customer Due Diligence (CDD) Rule for financial institutions. This included requirements to “identify and verify the identity of the beneficial owners of companies opening accounts,” amongst other requirements. The CDD Rule has widely been seen as the government’s response to the bombshell Panama Papers.
In addition to the requirements set forth in the CDD Final Rule for financial institutions, all businesses — regardless of industry — must avoid doing business with companies and individuals found on the Office of Foreign Assets Control (OFAC) sanctions list.
Online marketplaces operating in the United States have their own KYB requirements, as established by the INFORM Consumers Act. This law requires online marketplaces to collect and verify certain information about sellers that bring in at least $5,000 in revenue during any given year. This includes the seller’s contact information, tax identification number, and bank account information.
Another piece of pending legislation, the SHOP Safe Act, would implement additional KYB requirements for sellers' items that could harm the health and safety of the consumer.
Europe
In Europe, each European Union member state has the ability to design its own AML, KYC, and KYB laws and regulations. That said, in an attempt to guide the development of these laws, the EU has issued a series of directives, known as AMLDs.
KYB requirements were first outlined in the Fourth AMLD (4AMLD). This included the creation of central UBO registries and expanded existing CDD requirements related to the identification and verification of ultimate beneficial owners. Subsequent directives (5AMLD, 6AMLD) have continued to build upon and refine KYB requirements.
As in the United States, online marketplaces operating in Europe are also subject to separate KYB requirements. The DAC7, an EU tax directive, requires online marketplaces to collect, verify, and report certain seller information annually. This includes information about the seller’s identity, EU member state of residence, banking information, TIN, business registration number, revenue information, and more.
Japan
In 2018, Japan amended its Ordinance for Enforcement of the Notary Act to include certain KYB requirements. The amendments were passed in order to help Japan better comply with the recommendations of the Financial Action Task Force (FATF).
Under the amendments, any business seeking to notarize its articles of incorporation must first declare any beneficial owners. These beneficial owners are defined as:
- The company’s directors
- Any individual capable of exerting influence on the company’s business activities (via investment, financing transactions, and other activities)
- Any individual who directly or indirectly owns more than 50% of a company
- Any individual who directly or indirectly owns more than 25% of a company (if no individual fits the 50% threshold)
For each individual listed as a beneficial owner, the following information must be collected:
- Name
- Address
- Nationality
- Gender
- Date of birth
- Ratio of total company voting rights
While the database is not accessible by the public, it can be accessed by any individual or institution that has demonstrated legal interest.
Financial Action Task Force (FATF)
The Financial Action Task Force (FATF) is an intergovernmental organization established to combat money laundering globally. Countries around the world use the FATF’s 40 Recommendations to guide and develop policies related to combating money laundering.
While the FATF’s 40 Recommendations cover a lot of territory, they specifically include recommendations related to KYB. This includes recommending that:
- Businesses should identify and verify all UBOs for every company, institution, or organization they work with
- Countries should facilitate this process by establishing a UBO registry and making the information available to organizations.
While countries are under no legal obligation to comply with the FATF’s recommendations, they are considered the international AML standard.
Challenges of international KYB
Businesses that operate in multiple countries, or that work with businesses in multiple countries, have to deal with certain challenges that are not present when performing KYB domestically. These challenges include:
Variations in KYB laws and regulations
Just as the laws and regulations guiding AML and KYC requirements vary from country to country and region to region, so do the laws governing KYB requirements.
For example, certain countries may require a business to perform certain types of verifications or collect certain pieces of information, while others may not. This adds a layer of complexity if you operate in multiple jurisdictions. In response to these country-by-country variations, you may be tempted to simply apply the strictest KYB requirements to all users, but this may introduce unnecessary friction and could potentially lead to a reduction in conversions.
Before expanding into any new market, you must first understand the KYB requirements of that market, and then factor these requirements into your KYB and onboarding workflows. Dealing with this added complexity takes time, effort, resources, and funds. It also increases the risks associated with regulatory action (in the event that you get things wrong).
Variations in the availability of data
A large part of the KYB process involves verifying who a company’s ultimate beneficial owners are, and then verifying the identities of each of those individuals. Companies can perform this verification in a number of different ways. Database verification — the process of querying an issuing or authoritative database to confirm certain details provided by a customer — is commonly used in this regard.
But this method comes with one significant caveat: Database verification is only effective if the database or registry exists — and if it is queryable.
Unfortunately, just because an authoritative database exists in one country does not mean that a similar database will exist in another. For example, not all countries have a UBO registry. And just because a UBO registry does exist doesn’t mean it will contain all of the information that you need.
Even if an appropriate data source does exist, integrating with and querying it can be a challenge. A business that operates in 10 different countries, for example, might find itself in the unenviable position of needing to integrate with 10 different UBO registries — which, again, adds complexity and cost to the entire process.
The right partner makes all the difference
Just because complying with international KYB requirements poses challenges does not mean they are insurmountable. In fact, a lot of the confusion and complexity involved can be addressed simply by choosing the right partner for your IDV, AML, and KYB needs.
Ideally, the partner you choose to work with should be one that understands how KYB and KYC requirements vary from country to country and integrates with as many data sources (such as country-specific UBO registries) as possible so you don’t need to worry about building those integrations yourself.
Here at Persona, we understand just how complex international KYB requirements can be and why a one-size-fits-all approach doesn’t work. That’s why we’ve designed our KYB solution to be highly flexible and customizable — so you can build the workflows that make the most sense for your business and the jurisdictions you operate within.
In addition to deep coverage of US authoritative and issuing databases, our international KYB solution (currently in beta) also offers business registry coverage in over 100 countries and international database coverage in 40+ countries.
Check out our coverage map or contact us to understand how our database verification works across different countries.
Disclaimer: It is your responsibility to make a final determination regarding KYB/KYC risk and specific country requirements. We recommend you consult with an attorney regarding your obligations in your particular jurisdiction.
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