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How credit unions can uplevel their KYB processes

Having a comprehensive Know Your Business (KYB) process is essential for complying with global AML laws. Learn more about KYB compliance for credit unions.

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Last updated:
6/4/2024
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⚡ Key takeaways
  • In order to compete with the big banks and grow your member base, your credit union must offer digital onboarding options for individual and business accounts.
  • This means having a plan in place to digitally verify the legitimacy of the business and the identities of the business’s ultimate beneficial owners (UBOs), and to conduct ongoing monitoring.
  • A flexible KYB solution can help your credit union better serve its members — regardless of the type of business entity they are and whether they are domestic or international — while also ensuring you comply with relevant regulations.

As big banks increasingly invest in offering their customers a pleasant mobile-first experience — from the first moments of onboarding through the customer lifecycle — many credit unions have found themselves embarking on similar digital transformation journeys. 

Customers expect digital options for banking and other financial services. If your credit union doesn’t offer digital onboarding, your ability to attract new members is limited. In a worst-case scenario, it could even cause your existing member base to take their assets to a competitor. 

If your credit union offers financial services to business accounts, this will include digitalizing your Know Your Business (KYB) program.

Below, we offer a short refresher on what KYB is and how it works. We also speak to the key KYB challenges that credit unions face and provide advice on digitalizing your processes for long-term, cost-effective compliance success.

What is KYB? 

Know Your Business (KYB) is a term that refers to the due diligence process that must be completed before your credit union can engage with a business — either as a vendor or member. 

As such, it’s an important part of your credit union’s anti-money laundering (AML) program, and a key piece of denying criminals entry into the broader financial system, which could be used to launder illegal funds.

The goal of KYB is to understand whether a business and the people who run it are safe for you to do business with, from the perspective of money laundering risk. With this in mind, your KYB process will typically seek to answer the following questions:

  • Is the business real or is an illegal enterprise (i.e., a shell company)?
  • Who owns and runs the business (i.e., who are its beneficial owners)?
  • Are the individuals real people who can reasonably be attached to a business (i.e., they aren’t underage winery owners)? 
  • Are these individuals engaged in, or at risk of engaging in, money laundering, tax evasion, financial terrorism, or other crimes?

Know Your Business is closely related to Know Your Customer (KYC). The key difference is that while KYC is focused on verifying individuals, KYB is focused on verifying businesses. In the world of credit unions, KYC is sometimes called KYM Know Your Member.

Which organizations do credit unions need to KYB?

As financial institutions, credit unions are required to perform KYB on any business or company seeking to open an account with them. (Verification requirements, including KYB and KYC, are outlined in full in the Customer Due Diligence Final Rule.) 

This means that if your credit union offers products or services to any business — in the form of business banking, business credit, or business loans — you must perform KYB for those members during the account opening process. 

It’s also a good idea to verify businesses that you work with in other capacities — such as vendors, suppliers, consultants, and other business partners — as doing so helps remove doubt about whether or not a business is trustworthy.

How does the KYB process work?

The KYB process typically involves three steps — the first two of which should be performed before you engage with a business and the last of which should be performed on an ongoing basis. 

1. Business verification.

During this step, your goal is to verify that the business is real and that it does not pose any money laundering risk. Business verification typically requires your credit union to collect the following from every entity you are considering doing business with:

  • Business name
  • Business address
  • Proof of registration or incorporation 
  • Details about the company’s ownership structure

Often, business verification includes the collection of certain business documents, such as the business’s certificate of incorporation, articles of association, operating agreement, owner/shareholder register, and register of company directors. Other types of proof you may choose to collect include bank statements, tax returns, and proof of address

2. Ultimate beneficial owners (UBOs) identification and verification.

Once you have verified the business, your attention will turn to the individuals who own and control the business — its ultimate beneficial owners. This includes anyone who owns at least 25% of the company, as well as anyone who exercises substantial control over the business. 

Once you have identified these individuals, you must verify their identities. This will typically involve collecting and verifying the individual’s name, date of birth, address, taxpayer identification number, and Social Security number. 

During this step, you will also need to determine whether any of the company’s UBOs pose a risk of money laundering or other financial crimes. Watchlist screenings, sanctions list screenings, politically exposed persons (PEP) screenings, and other reports can all help you in gauging the risk each person poses.

3. Ongoing due diligence and transaction monitoring

Once you have verified both the business and its UBOs, you can onboard the business as a member. But onboarding doesn’t signal the end of KYB; instead, it marks the transition into the longest phase of the process: ongoing monitoring.

During this stage, you are responsible for periodically reassessing the money laundering risk posed by your members and for maintaining and updating customer information as necessary. Likewise, your credit union must conduct transaction monitoring and file relevant reports, such as suspicious activity reports (SARs), as necessary. 

Key challenges of KYB for credit unions

The KYB process largely looks the same for credit unions as it does for other financial institutions. But credit unions may face unique challenges with KYB, especially in recent years.

Manual processes

For many credit unions, KYB is an incredibly labor-intensive process that can take days or even weeks to complete. Verifying that a business is legitimate might mean manually reviewing the company’s website, LinkedIn presence, and address on Google Maps and cross-checking that information against the member’s application. Verifying income or source of funds might involve collecting documents that must then be physically analyzed for tampering or forgery. Verifying a UBO might mean requiring them to come into the branch for an interview. 

These manual processes aren’t just burdensome for your staff. They also affect your applicants, who have likely grown accustomed to digital applications and may be bewildered by long wait times for approval. 

A digital KYB solution helps alleviate some of this burden, reducing friction and empowering you to keep onboarding periods short so that you can approve and begin serving your business members as quickly as possible. 

Multiple company profiles

As noted above, a key part of the KYB process lies in identifying and verifying the individuals who own and control the businesses you work with. Designing an adequate KYB flow requires you to understand the ownership structure of the businesses that make up your member base. 

Varying ownership structures further complicate the KYB processes. Sole proprietorships, general partnerships, LLCs, corporations, and S-Corps are all organized differently. This means that KYB will look slightly different for each type of business that your credit union serves — and that’s before you add in the other types of organizations, like schools and nonprofits, that you might work with as well. 

If your KYB process is largely manual, addressing this issue would mean designing a different process for each type of business entity your credit union serves. But with an automated KYB solution, it’s possible to design and leverage a single pre-built verification flow with branching logic that automatically changes based on the type of entity being verified. 

A more international member base

As your member base expands, you might begin to see an increase in the number of foreign businesses seeking your services. Even if your credit union serves exclusively domestic companies, it’s possible for those businesses to have one or multiple foreign owners. In both of these scenarios, you will need a plan in place for global KYB

It’s rarely the case that the same KYB processes you use domestically will suit your credit union internationally. Each jurisdiction has its own AML and KYB laws and regulations that you must comply with, which may be more or less strict or prescriptive than federal regulations. Additionally, data that is available in one jurisdiction — for example, a UBO registry or issuing database — may or may not be available in another, forcing you to design an alternative means of verification based on data availability.

Fintech partnership risks

Modern members increasingly demand digital and mobile banking from their credit unions, amongst other services, but this innovation can be costly to implement, especially if you are building it internally. It’s against this backdrop that many credit unions have begun partnering with fintech companies in order to provide the services and innovation that customers have come to expect.

While these partnerships provide value, they can also introduce regulatory risk without proper due diligence. While you may know that you need to perform KYB on any fintech company you are considering partnering with, it’s also critical that you ensure your partners have their own KYC/KYB processes in place for their end users. 

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How Persona can help

As you evaluate KYB solutions, it’s important to prioritize flexibility. Here at Persona, we understand that KYB isn’t one-size-fits-all, and we’ve built flexibility and customization into every aspect of our identity platform. 

With our automated KYB solution, you can create different verification flows for the different types of members your credit union serves — whether they be individuals or businesses; domestic or international; sole proprietorships, LLCs, or corporations; and anything in between. That way, you can be confident that you’re always collecting the information you need to be doing KYB right — while providing a pleasant experience for your members that doesn’t sacrifice conversions.

Worried about international KYB? Don’t be. Our solution directly integrates with more than 150 data sources around the world, making global verification easier than ever. Adapt quickly to new and changing regulations, no matter where in the world your members are based.

Interested in learning more about how Persona can help you design the KYB program your credit union needs to build a competitive advantage in serving a broader member base? Request a custom demo today or get in touch with any questions.

Published on:
5/20/2024

Frequently asked questions

How many credit unions are there in the United States?

According to the 2023 National Credit Union Administration Annual Report, there are currently more than 4,600 federally insured credit unions serving approximately 139.3 million members. Between them all, credit unions oversee an estimated $2.26 trillion worth of assets.

What is member due diligence?

Because credit unions are not-for-profit businesses, they technically don’t have “customers” in the same sense that for-profit businesses have customers. Instead, the individuals who use their services are called “members.”

Member due diligence (MDD) is simply the Customer Due Diligence process tailored to credit unions.

What are the key AML regulations credit unions must comply with?

Like other types of financial institutions, credit unions must comply with a range of AML laws and regulations. In the United States, this includes:

How did the final rule issued by FinCEN in September 2020 affect credit unions?

Prior to September 2020, whether or not a financial institution was required to establish a formal AML compliance program depended on whether or not it was federally regulated. 

Those that were federally regulated, including credit unions regulated by the National Credit Union Administration (NCUA), were required to implement a comprehensive AML program. Those that were not federally regulated, including credit unions insured privately, were not subject to these requirements. They were, however, still subject to certain reporting requirements under the Bank Secrecy Act, including the requirement to file currency transaction reports and suspicious activity reports.

The final rule issued by FinCEN in September 2020 sought to erase this discrepancy. With the issuance of the final rule, all financial institutions were required to establish an AML compliance program, regardless of whether or not they were federally regulated. This brought all credit unions under the same regulatory regime.

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