Since the Panama Papers scandal in 2016, it has become standard practice for businesses that want to take on other businesses as customers (or partners) to find out exactly who they’re working with. That includes making sure the onboarded business is legitimate, as well as that its beneficial owners are real people who are representing themselves truthfully and aren’t involved in illegal dealings. This is known as “Know Your Business”, or “KYB”.
Many companies are already required to screen individual customers and employees, as well as monitor transactions, for risk indicators of financial misconduct. Needing to now apply this due diligence to other businesses and their owners can stretch a company’s money, time, and other resources even thinner. That’s why many organizations are investing in tools and systems to automate KYB verification: to cut down on the need for manual work, which slows down the process and is more prone to mistakes.
This article discusses what it means to automate KYB, why it’s advantageous for organizations, how to do it, and what obstacles companies typically face when implementing it.
First, let’s talk a bit more about what KYB automation is and why many organizations feel it’s an important concept to invest in.
Know Your Business (KYB) automation refers to using technology to complete KYB tasks – typically data gathering, data verification, and risk assessment – without needing as much manual intervention. The goal is to comply with regulations while accelerating the process and avoiding human error.
KYB automation is important because AML, CFT, and CPF regulations compliance is critical for trust and security – not only for individual businesses, but also for entire industries and economies. However, the processes required to comply with these regulations, such as KYB, require extra work on the part of organizations.
That work requires spending time, money, and human resources that the company would rather spend towards fulfilling its operational objectives. So automating KYB and related processes frees up these resources for the company to do what it’s designed to do.
Automating KYB isn’t just about easing the costs of compliance. There are other benefits it can bring to a company, too. Here are detailed explanations of 5 reasons why many companies are looking to automate their KYB.
There are a number of methods a business can use to automate its KYB process flow. Here are some currently-used options.
Some systems can speed up KYB processes by automatically making decisions on clearing or flagging businesses based on pre-programmed rules. One example is Middesk’s Business Verification tool, specifically its Policies feature. It allows for selecting auto-approval criteria for business profiles (e.g. exact or similar name match; exact, approximate, or similar address match; no sanctions list matches; and exact TIN match) so they are only slated for manual review if they don’t meet these criteria.
Expanding a KYB system’s capabilities to analyze large amounts of business verification data (beyond that of an organization’s current business clients and partners) can help with automation as well. It can aid in spotting patterns that point to a business being legitimate versus high-risk or even phony, allowing for more accurate automated decision-making in whether to onboard or retain a business client/partner or not.
AI, when trained properly, can automatically perform several parts of the KYB process. These include collecting relevant data, verifying a business’s information matches official records, and analyzing a business’s data to develop a risk profile and/or score. And similar to big data analysis, AI can continue learning from previous cases it encounters to identify patterns and improve its decision-making capabilities.
As much as companies want to automate the Know Your Business process, they often find there are several roadblocks to doing so. Here are some of the biggest ones.
A key hurdle for KYB automation is that there are few – if any – “single sources of truth” for compliance-related business information, either internationally or within individual countries. This means that organizations have to cross-reference multiple sources of information – some of which may even be different between businesses being screened – to piece together what they need to know for the sake of KYB regarding businesses being onboarded.
There are two scenarios in which this is especially problematic. The first is when a business is relatively new and doesn’t have a significant digital footprint yet. The second is when a business has a complex corporate structure that makes it difficult to find out who its beneficial owners are. This latter case can be compounded by the business having divisions – or even shell subsidiaries – in different countries, which in turn may have different laws regarding public access to business information.
Another hazard of having to rely on disparate information sources for KYB is that some of them may contain outdated or otherwise conflicting information. This can cause automation errors and arbitrary judgment calls that result in businesses receiving inaccurate risk assessments. This, in turn, could potentially lead to businesses being mistakenly rejected or offboarded.
Some KYB automation tools are capable of scanning certain individual and business identity documents for veracity and risk indicators. But there are some documents that may not be able to be verified on the first attempt, if at all. Some are uncommon types of documents that an automated KYB system isn’t used to dealing with. Others are unstructured documents that are useful for KYB, but can’t yet be processed by a machine. Still others may not contain all information required for KYB, either by design or due to an omission caused by human error.
While this doesn’t necessarily mean these documents are fraudulent, it does necessitate some degree of manual review on them. This, of course, slows down the process, costs more resources, and increases the risk of subjective errors.
Another obstacle to automating KYB can be the actions and preferences of (representatives of) businesses being onboarded or otherwise screened. For example, some may be hesitant to consent to newer automated forms of KYB verification. They may not understand how these methods work, or have questions about their privacy implications. Or they may simply prefer older methods that have more proven track records.
Now that we’ve looked at some of the available ways to automate KYB, as well as some of the common hurdles to doing so, it’s time to develop an implementation plan. Here are some pointers to keep in mind when doing so.
One thing that will go a long way towards choosing the right KYB automation system is to clearly define what criteria it has to fit. For example, what specific regulations does the organization have to follow? And what standard of proof is needed to be compliant with those regulations?
The organization should also think about what specific problem it’s trying to solve by automating its KYB. Are too many businesses being mistakenly rejected or offboarded? Is the current KYB system costing too much money and human resources? Does the organization have a backlog of high-priority cases that compliance agents are too busy to review manually?
The organization clearly defining what it needs, and why it needs those things, is a good first step towards choosing the KYB automation solution that’s right for it.
Especially if using big data or AI in implementing KYB automation, make sure the data used in the process is from reliable sources. Missing, inconsistent, or outdated data can result in misinformed decision-making that can result in unintended rejection or offboarding of legitimate businesses. Or worse, it could allow for the accidental onboarding or retention of phony or overly-risky businesses.
Organizations can have different KYB needs depending on which industries they’re in, as well as on risk factors either within an individual organization or in an industry overall. So it’s important for an organization to pick a KYB automation solution that allows for customizing risk criteria, in order to target its most common and/or impactful risks. Customization should also be used to update these criteria in response to changing organizational and industry circumstances.
Of course, an organization should train its employees sufficiently on how to automate KYB in order to ensure smooth implementation. But part of that training should be explaining why KYB is being automated. That includes both the objectives and overall benefits for the organization, as well as how automation will free up employees to work on less menial, higher-priority tasks. The goal should be to get employees excited about learning about new technologies that can make their jobs easier.
Once its KYB system is automated, an organization should occasionally check that the automation is doing what it was intended to do. Is it reviewing all the information it needs to in order to be compliant with regulations? How accurately is it identifying legitimate or problematic information, businesses, and owners? If there are problems, are they problems with how the automation is set up, or are they problems with source data quality? To what extent is the automation saving resources, freeing up compliance team members, and speeding up the business onboarding process?
If something about the automation isn’t meeting expectations, the organization should promptly make any necessary adjustments. This will help it avoid regulatory trouble and other risks while getting more out of the benefits of KYB automation.
You can start automating your KYB with Middesk. Our Business Verification tool includes Policies, which allows you to automatically assign a business to someone on your team. Then they can review the business’s details, place a new order to enrich the data you collect on a business, or auto-approve or auto-reject a business. All of this saves time while enforcing compliance requirements.
Business Verification also provides plenty of extra useful risk assessment information about businesses. It can tell you who’s involved with the business, what the business’s web presence is like, whether the business has (had) any litigation against it, and more.
To get a demo, contact our sales team.