Category: KYC & KYB

Introduction

With a projected GDP of USD 24.9 trillion by 2023, The United States of America will remain to hold the title of the World’s Largest Economy. This position has always provided lucrative opportunities not just for genuine investors but also for fraudsters and scammers. This is evident from the fact that the majority of all scams in the US revolves around the investment sector.

An Investment Scam is an initiative where fraudsters and scammers convince investors to expend their money in fraudulent opportunities offering high returns and unrealistically low risks.

With the advent of technology, along with the benefits it brings to investing and banking some concerns need to be addressed too. It is far easier for fraudsters to scam individuals and organizations as almost everything is going digital in the sector. Without proper precautionary measures, the boon of technology might turn against the very people whose lives it is trying to make better.

All this renders institutions to hesitate before adopting new technology and its applications. This should change and the careful adoption of technology with secure and safe measures is the right solution. One major measure for this is to obtain and verify crucial data of the entity without letting any red flags go unnoticed. This will help the financial institutions to assess and evaluate if the situation involves any potentially fraudulent activities. Properly implemented KYC achieves this.

Investment Scams and Financial Fraud From The Past Century In The US

No discussion about investment fraud can avoid the name Charles Ponzi, the first man to have nationwide infamy for creating one of the earliest pyramid schemes in the world. The term ‘Ponzi Scheme’ originated from his name.

In the late 1910s, Ponzi promised a 50% return in a mere 45 days time span. The scheme failed causing 5 banks and all investors to lose money and earning Ponzi more than $20 million ( Adjusted to inflation- $220 million). But this was just the dawn of the next generation of financial fraudsters in the country.

Musch closer to the 21st century, Kenneth Lay, the founder of corporate mogul Enron. His ‘strategic’ moves resulted in Enron’s stock price plummeting from $90 to just $1 between 1999 and 2001. The once $68 billion company filed for bankruptcy in the fall of 2001. Neither the banks who had loaned the company money nor the general investors who had invested had any idea of how much they had been hoodwinked until they lost all of it.

Almost every citizen in the US is aware of investment scams in the country. But the problem is that they have neither the required knowledge nor the clarity to protect themselves from the fraudsters. A simple solution is to have strict identification procedures and security measures from banks while onboarding a customer and carrying out transactions.

Apart from these big ones, numerous ‘nuclear’ scammers operate in the country.

Such fraudsters focus on stealing social security numbers by presenting themselves as phony tax officers or stealing the identity of the consumer and misusing it with the bank. Some of them even misuse benefits by forging fake documents to fool the financial institutions. With the advent of the internet by the end of the century, the scams began to go global attracting remote scammers from all over the planet.

 

How is Financial Fraud Faring In The Age Of Information?

In 2014 a Brazilian National under the name Rojo Filho opened more than 17 bank accounts under his real name in the US and used them for illegal money transfer and laundering. The banks included JP Morgan Chase, Citigroup Inc., and Wells Fargo. This was a true mockery of these bank’ policies to know their customers. These policies and systems were supposedly strict after the 2008 financial crash. ‘Supposedly’ being the operative word here. It did not add to the banks’ safety credibility that Mr. Filho had committed multiple financial frauds and investment scams before this.

Mr.Filho was a mere individual who was unsuccessful in the long term. Imagine how many successful scammers are slipping through the cracks.

The fraudsters who target banks and financial institutions are the primary targets for bank security. They impart a direct threat. But what most banks neglect is that even the scammer ripping off of an old man’s IRA or another’s 401(k) can be stopped by proper verification of bank accounts and customer information. The indirect effect this has is immeasurable.

The ease of access to the internet in the 21st century has given tremendous access to scammers. Governments and financial institutions are not blind to this and are taking the necessary precautions to avoid any large scale scamming. This has helped them to subdue singular massive fraud occurrences. But the small scale or as some may call, ‘nuclear’ incidents still take place.

With banks adopting automation more, ACH(Automated Clearing House) scams are also increasing. ACH is a network that functions as a central clearing facility for EFTs( electronic funds transfer) forming an integral part of the national banking system. In the ACH system, payments linger awaiting clearance and to complete the transactions. Using commercial customers’ credentials or even employees’ credentials the scammers manipulate the clearing process and transfer the funds to their desired accounts. If the customer data is well fortified this can be avoided.

A practical way to reduce this is to implement proper verification of customers and businesses. An initial evaluation is necessary, but even annual follow-ups strengthen safety.

Top 5 US States Affected By Financial Fraud and Scams

Though almost all types of investment scams occur in almost every state, we have focused on the state-wise relevant ones here:

1. Florida

Social Security numbers are the primary targets for scammers here. They pretend to be phony tax collectors representing IRS or other agencies and contact individuals to obtain their financial information. The state also has one of the highest numbers of identity theft cases. The majority of the 40,000 complaints received in 2019 were associated with government benefits and documents.

• Complaints per 100,000 increased to 997.8 in 2017
• Total complaints were 208,443 in number

2. Georgia

More than 13,000 cases of identity theft were reported in Georgia in 2019. More than half of this includes government documents and financial benefits frauds. This occurs in a state with a financially dependent youth population with an average student loan debt of $32,283.

• Complaints per 100,000 increased to 924 in 2017
• Total complaints were 96,316 in number

3. Nevada

Nevada mostly had a mix of general financial fraud and identity theft cases in 2017 and 2018. A state that was hit hard by the housing crisis, citizens of Nevada are still struggling after a decade of recovery. The near 8% unemployment rate in the state also contributes to an increase in fraud as people are financially pressured.

• Complaints per 100,000 increased to 770 in 2017
• Total complaints were 23,071 in number

4. Delaware

New accounts are opened in other people’s names for phone and utilities frauds. This is more than in any other state in the US. Even the surging number of imposter scams contributed to the state becoming the 4th(2017) most affected from 5th most (2015).

• Complaints per 100,000 increased to 758 in 2017
• Total complaints were 7,290 in number

5. Michigan

Michigan stands out as of all the major states affected, its citizens had far fewer debts than most of the others. Nonetheless, it was severely affected by the cases of INvestment scams and other financial frauds.

• Complaints per 100,000 increased to 750 in 2017
• Total complaints were 74,689 in number

 

What Is KYC And How Does It Help?

In 2003 the Congress implemented the Customer Identification Program (CIP) as a provision of the USA Patriot Act. It prescribes institutions to verify the identities of individuals who conduct financial transactions with them. It is more commonly known as KYC

Know Your Customer (KYC- for individuals) or Know Your Business (KYB- for organizations and institutions) are processes where a firm identifies and verifies the data provided by its clients.

Clients or potential client data is obtained. This includes names, dates of birth, addresses, etc. From individuals and checking Companies House registration, ultimate business owners, annual returns, etc. for companies and businesses. KYC identifies PSCs(Persons of Significant Control), Ultimate Beneficial Owners, and exposed individuals.

Most businesses and financial institutions perform KYC manually using physical ID documents such as the original copy of the passport or driving license. As technology has advanced not only is it more convenient for digital processing but also safer as the options offered by novel fintech security players are well fortified. A Digital KYC process would cross-check all details with multiple data sources from government entities and other bodies to ensure accurate safety.

KYC prevents fraud in multiple ways. Some of them are listed below:

Tracking Tax Evaders
Undoubtedly, track evasion is a type of fraud. The perpetrators defraud the government and thereby the general public of the country. There have been cases in the judiciary where major tax evaders have been tried for grand larceny from the public. To perform this, individuals with high-income use banks to conceal their financial assets. This permits them to evade the high taxes levied on them by the government.

AML(Anti-Money Laundering) and KYC processes prevent such activities. They verify and confirm the identity of the customers as well as the data they provide. Referential data is stored after compulsory document and compliance checks. This will assist authorities in future investigations if there ever arises a need.

Continuous Transactions Monitoring
Regular Transaction Monitoring with compliance checks forms an essential part of KYC processing. Potentially suspicious customers are tracked and reported accordingly. This includes money being transferred for terrorist financing and money laundering. It prevents the flow of black-market funds into the economy preventing any funding for terrorist entities.

Such measures reassure the customers and stabilize trust in the financial system. This will encourage the public to act with integrity and report relevant instances.

Background Checks
Background checks help institutions to evaluate potential customer’s risk classification and status on government watchlists. This provides safety to the organization to be not involved in financial crime, even unintentionally.

Overall Benefits
As an overview, we can say that KYC helps understand the customer’s legitimacy better. All kinds of scams extract customer data and misuse it in another portal. KYC allows prevention at both levels. It makes it hard for scammers to produce legitimacy and double checks the use of data by verifying it with existent credible databases.

For scams ranging from basic identity theft to massive money laundering and terrorist funding, KYC will be a wall hard to pull down. Every single data provided by the customer will be used to verify at each access point. Not only does it fight the problem upfront, it roots it out by making it near impenetrable for scammers to even register as processors or other false pretexts. This renders the investment scammers to oust from their existing methods.

Ultimately KYC reduces investment scams and more significantly develops trust. Adopting strict KYC procedures ensures the customer that the institution is concerned with lawful business practices. This translates into credibility and a good reputation improving the trust in the company.

Conclusion

KYC is no longer an additional measure for banks to take. It is mandatory for safety. But methods of KYC implementation have altered in the US over the decades. The pen and paper approach is no longer viable and what we see are the prerequisites of a coming digitization. As Cyber Crime and Investment Scams evolve to adapt, we must take it with absolute certainty that we stay ahead of the fraudsters.

KYC will prevent scams, especially investment scams as the scammers in this particular arena are not as sophisticated as more developed fields like advanced cybercrime. But we must consider the fact that the scammers will evolve according to the cages they are put in. They are already evolved over our current traditional methods. KYC alone may not safeguard in certain occasions, but without KYC the sector doesn’t stand a chance. It has come to that, digital KYC is the next step in financial security for all institutions, including the traditional ones.

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Written By:

Signzy

Written by an insightful Signzian intent on learning and sharing knowledge.

The Panama Papers incident highlights one of the most significant financial leaks in the last decade. It refers to the 11.5 million leaked encrypted confidential documents of Panama-based law firm Mossack Fonseca. These files were made public on April 3, 2016 by the German newspaper Süddeutsche Zeitung (SZ). They had christened the name as the “Panama Papers.”

The documents revealed the active network of more than 214,000 tax havens. These involved people and entities across 200 different nations. A joint effort was made by SZ and the International Consortium of Investigative Journalists (ICIJ) for a year to decipher the encrypted files. The files furnish detailed information about thousands of offshore “shell” companies. These were used by some of the world’s most influential people to conceal wealth or avoid paying taxes.

Mossack Fonseca was established in 1977 by Jurgen Mossack and Ramon Fonseca. The firm was one of the top offshore legal services providers until April 2016.

The Panama Papers allegedly reveal a global system of undisclosed offshore accounts, money laundering and tax evasion. They displayed how influential people around the world use shell companies to conceal assets. They can also be involved in possible illegal activity.

The Source of the Name “Panama Papers”

The files have been given the moniker “Panama Papers” due to the country of origin. However, the government of Panama has vehemently objected to the name. This is because it seems to put some blame or negative association on the country itself. This is despite any involvement of the government in the actions of Mossack Fonseca. Nonetheless, the nickname has become widespread. However, some media outlets that have covered the story have designated them as the “Mossack Fonseca Papers.”

The incident is the greatest disclosed data breach around a law firm. After the incident, founding partner Ramon Fonseca and other public sources stated that the firm’s network had been jeopardized by hackers sometime in 2015. Security researchers identified numerous unpatched vulnerabilities in Mossack’s website and email server. These could have been very easily compromised by hackers. A total of 2.6 terabytes of data — including 4.8 million emails, 3 million database files, and 2.1 million.pdf files — were leaked. including client documents dating back to the 1970s.

Main Highlights

 

• The Panama Papers were a massive leak of financial files from the database of Mossack Fonseca. This firm was the fourth-biggest offshore law firm in the world.
• The documents were leaked anonymously to German newspaper Süddeutsche Zeitung (SZ), which released them on April 3, 2016.
• The files date back to as far as the 1970s. They shed light on a network of 214,000 tax-havens. These involve wealthy people, public officials, and entities across 200 nations.
• The confidential documents were made public by the International Consortium of Investigative Journalists (ICIJ). The body is a non-profit organization based in Washington. It said that the documents contain details of both current and former world leaders. Other important people include businessmen, criminals, celebrities and sportsmen.
• A majority of the files showed no illegal activity. However, some of the shell corporations were for fraud, tax evasion, or avoiding international sanctions.
• The ICIJ’s website lists banks including HSBC, UBS, Credit Suisse, Deutsche Bank who have utilized Mossack Fonseca. They used the firm to create offshore accounts.

The Truth In Netflix — How The Story Goes Hollywood

The Panama Papers scandal had a multifold impact on nations. It enhanced the national and global focus on the overall harm of money laundering, tax evasion, and terrorist financing. The incident also helped propel the international critique of USA as a potential haven for money laundering and tax evasion. This is mainly due to provisions in the U.S. to form legal entities. Such entities are formed without having to disclose the identity of true beneficial owners. It also showed the world how lawyers can facilitate their clients’ money laundering.

The somber reality sure caught the attention of Steven Soderbergh. he soon went on to direct the recently launched Netflix-original “The Laundromat”. The movie revolves around the main protagonists of the Panama Papers incident

– Jurgen Mossack (portrayed by Gary Oldman)

and Ramon Fonseca (illustrated by Antonio Banderas).

 

“How do 15 million millionaires in 200 countries stay rich? With lawyers like these — “ The trailer of the movie “The Laundromat” itself hints to a satirical flavor and adds to the point we mentioned earlier. Many people may find knowledge through humor in the movie. But the original characters certainly don’t share that perspective. The movie has been subject to an extensive lawsuit by the original duo. They have cited the grounds of the movie as “defamatory”

The incident and resulting scandal also illustrates another looming threat. The growing frequency, ease, and potentially devastating consequences of data breaches are concerning. Cyber attacks can threaten even the richest and most powerful people. The breach of client confidential information held by a law firm can have serious potential legal consequences. This applies to both the firm and its affected clients.

The Impact On The Indian Subcontinent

 

The Indian Express was the partner of the ICIJ project on the Panama Paper Leaks. They had revealed the names of over 500 Indians in its report. This came after 8 months of an extensive investigation of over 36,000 files.

The list publishes the names of corporate figures like the DLF owner K P Singh and nine of his family members. Other names include the Indiabulls Sameer Gehlaut, Vinod Adani who is also a businessman and the elder brother of Gautam Adani. India-born Dutch businessman Ratan Chadha who is the founder of Mexx clothing is also mentioned in the list.

• The list provides details of big businessmen to celebrities of Bollywood and politicians. Top names from Bollywood include Amitabh Bachchan & Aishwarya Rai Bachchan.
• Mohan Lal Lohia, Abdul Rashid and others are also named among others in this context. The list also shows the addresses of businessmen in Panchkula, Dehradun, Vadodara and Mandsaur. It also includes cricket franchise deals. The files indicate linkages of those people who are already under the scrutiny of the CBI and Income Tax department.
• The main accusation against Indians is that they propped up their offshore companies long before the rules were changed in 2013. it was with the intention to place foreign exchange in a tax haven.

Violations of Indian Laws Under Panama Papers Leak

There are mainly laws which are being violated in the Panama Papers case which have been found under the investigation,

• The Incorporation of Companies Overseas.
• Acquisition of the majority shares of overseas companies in contravention of FEMA rules.
• Violation of RBI’s Liberalised Remittance Scheme.

According to Indian legislation, Indians could not incorporate companies outside India. This is because remittances to foreign countries were not allowed before 2004. RBI in 2004 introduced a scheme called as Liberalised Remittance Scheme. This permitted individuals to remit upto $250,000 in phases. These remittances could be utilized for different reasons. Examples — medical, gifting, buying shares, etc.

The people were facing a lot of confusion on this issue. So, the RBI issued a notification in the year 2010. This stated that though the Liberalised Remittance Scheme, Indians are allowed to buy shares. However, it specifically prohibits the setting up of companies abroad by individuals.

RBI issued another notice in 2013. It allowed resident Indians to invest in joint ventures through the Overseas Direct Investment route. So, any company overseas by an Indian can be considered legal only if it was established after 2013.

Insurance Swindles, Shares Fraud and Money Laundering — The Stark Realities Of The Panama Papers

Take One (Insurance Fraud):

The Laundromat portrays the impact on individual lives with respect to the business handled by Mossack Fonseca. The first incident revolves around Ellen Martin (portrayed by Meryl Streep) and her husband (played by James Cromwell). Ellen Martin and her husband Joe are on a pleasure boat at Lake George, New York when it capsizes, drowning Joe. Ellen tries to get compensation from the boating company for Joe’s death. But she could not do so. The reinsurance company that the boat company’s owner and son Matthew bought their policy from was sold to another company based out of Nevis. The Nevis-based company is actually a trust of one of Mossack’s shell companies. It was under investigation by the Internal Revenue Service (IRS) for fraud. Several attempts to contact Mossack and the Nevis-based company were unsuccessful. Ellen travels to Nevis to confront Malchus Boncamper, the manager of the trust. Malchus tricks Ellen and escapes to Miami. But on the way he is caught and arrested by IRS-CI Special Agents at a Miami airport.

Take Two (Shell Shock — Bogus Shares)

The second story is about Simone, who is the daughter of Charles, an African billionaire. Simone discovers her best friend is having an affair with Charles. He offers her shares (supposedly worth $20 million) in one of his investment companies to keep her silent. She accepts his offer. But when she with her mother travels to Mossack’s offices in Panama City to claim the shares, they turn out to be worthless. This is because they are actually part of a shell company under Mossack that only exists on paper. The companies individual values turn out to be $100 and $27 each!!

Take Three (Money Laundering)

The third story is a dramatization of the death of Neil Heywood, part of the Wang Lijun incident. Heywood (renamed “Maywood” in the film), is an intermediary for wealthy Chinese looking to funnel money abroad. He visits a Chongqing hotel to meet Gu Kailai. Maywood demands and pressures Gu for a much higher price. This is if she wants him to continue laundering money for her family through a shell company Mossack owns. Gu responds by poisoning Maywood’s drinks. Gu discloses the incident and reports Maywood to Chongqing police chief Wang Lijun. He secretly records the conversation; he then reports her to the Chinese government.

The story ends with the arrest of Gu and her husband Bo Xilai for Maywood’s murder and for corruption in connection to The Wang Lijun incident. It was a major Chinese political scandal which began in February 2012. This was when Wang Lijun, vice-mayor of Chongqing, was abruptly demoted. He had revealed the details of British businessman Neil Heywood’s murder and subsequent cover-up to the US Consulate.

Interestingly, Neil Haywood, was depicted as a shark in the shell company game through the movie but not much details were provided about him. A point to be noted here is that the film is vague about the reasons why the offshore world thrives. It bludgeons its message home as a “haves vs have-nots” narrative. The particular focus is on tax evasion. This misses some of the other reasons that AML practitioners should be concerned about offshore companies.

KYB — Why It Would Have Been The Anti-Laundromat?

Besides legal considerations, there are also social and ethical responsibilities for knowing UBO. It means the ultimate beneficial owners (UBO) of companies you are doing business with. The Panama Papers disclosed over 200,000 shell companies that hid billions of dollars from lawful taxation. These hidden funds go into the hands of already influential people . In turn, it creates a larger tax burden for society.

Implementing Know Your Business (KYB) requires investigating the UBO structure by law. This is part of the customer due diligence (CDD) process.

KYB in Europe

For example the 4th AML Directive is already in effect in Europe and requires:

identifying the beneficial owner and taking reasonable measures to verify that person’s identity. In this way, the obliged entity is satisfied that it knows who the beneficial owner is. UBO includes legal persons, trusts, companies, foundations and similar legal arrangements. KYB takes reasonable measures to understand the ownership and control structure of the customer.

A beneficial owner in the EU is an entity/individual who owns more than 25% of the corporate entity. Currently the EU customer due diligence requirements are:

(a) identifying the customer and verifying the customer’s identity. This can be done on the basis of documents, data or information procured from a reliable and independent source.

(b) identifying the beneficial owner to the extent that the obliged entity is satisfied. It knows who the beneficial owner is.

© assessing and obtaining information. This is done as required on the purpose and intended nature of the business relationship.

(d) monitoring of the business relationship including scrutiny of transactions. This includes all transactions undertaken throughout the course of that relationship. It ensures that the transactions being conducted are consistent with the obliged entity’s knowledge of the customer, the business and risk profile.

KYB in the US

In the US, the Customer Due Diligence (CDD) Final Rule went into full effect May 11, 2018. It states that all covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted). Financial institutions (FIs) includes banks; brokers or dealers in securities, mutual funds; and futures commission merchants and introducing brokers in commodities.

Unfortunately, different jurisdictions have different requirements. Even within the same jurisdictions different regulations are applicable. For example, besides the Bank Secrecy Act (BSA), which covers the CDD rules, US FIs also have to consider Dodd-Frank, SEC disclosure rules, OFAC (Office of Foreign Assets Control), and FACTA (Foreign Account Tax Compliance Act).

Conclusion

The Laundromat may appear entertaining to many a Netflix enthusiast, but the mortifying part is that it is based on true events. Previously we have encountered movies like The Big Short, The Wolf Of Wall Street and many such titles. These have been entertaining and devastating at the same time. You often love to see and hear about the ways that con man take money, but we often forget that in many cases, its YOUR money that is getting taken and it is YOU that gets scammed.

But there is hope — once KYB comes into full sway. The enforcement and regulatory authorities will finally have the trail to follow fake organizations and prevent hundreds of millions of dollars worth of economic offenses in the form of financial fraud. Yes, you might not have an original classic like The Laundromat, but at least your money will be safe — and then you can always turn to Ocean’s Trilogy for a similar experience, only fictional.

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Reach us at: www.signzy.com

Written By:

Signzy

Written by an insightful Signzian intent on learning and sharing knowledge.

 

 

 

Know Your Business (KYB) process is not so different from the most widely known and standardized Know Your Customer (KYC) process. The difference lies in the purpose and intentionality of the process. The focus is on identifying companies and suppliers in the first case. It changes to consumers or customers in the second one.

KYB (Know Your Business) process shares all the features we have seen in defining KYC processes. The difference lies in the user to identify. In the standard process, potential clients or users are identified to register them in a company. KYB process involves identifying the person responsible or legal representative of a business.

Most B2B (Business-to-Business) companies need to carry out due diligence to identify the businesses they work with. This is to fight money laundering and other tax crimes. It also ensures that they work with organizations with security and guarantees. Even so, in the great majority of occasions, as in the financial sector, it is a mandatory requirement of legal compliance.

For example, companies that offer professional services to other companies must establish KYB. This is to identify the legal representatives of these businesses. It also verifies their connection with the client company.

As with the KYC process, digital solutions in KYB help

– reduce costs

– eliminate bureaucracy

– develop control methods that are safer and more reliable than traditional methods.

KYC To KYB — How One Led To The Other

The US Banking Act of 1970, laid the foundation for the Anti Money laundering (AML) regulations. Customer Due Diligence (CDD) was deemed essential to the financial sector. The term assigned to CDD at the earlier stages was Know Your Customer or KYC.

However, in June 2016, a loophole was found in KYC compliance regulations in the US. These regulations ensured the identity of the customers while assesing the risk factors associated with them. The loophole is that financial institutes weren’t required to identify or verify the stakeholders and beneficiaries of the businesses and entities they are serving. This meant that legitimate firms could unknowingly shelter bad entities or shell companies. These entities could perform illegal and high-value transactions on their behalf. To verify the identity of businesses, the need for KYB was born.

 

Talking About KYB Terminology

Ultimate Beneficial Owner | UBO

A UBO or Ultimate Beneficial Owner denotes the person or entity that is the ultimate beneficiary of an organization that initiates a transaction. A UBO of a legal entity is a person who possesses:

An interest of at least 25% capital of the business.

At least 25% voting rights at the common meeting of shareholders

A minimum receipt of 25% of said organization’s capital as a beneficiary

Customer Due Diligence | CDD

Customer Due Diligence is a KYC process. It involves conducting background checks on clients. This helps in risk mitigation before further dealings. Business relationship risks may root from many factors in the finance factor. These may have financial crime, creditworthiness and inefficient AML/CFT policies.

Enhanced Due Diligence | EDD

Enhanced Due Diligence is a KYB process having a greater level of scrutiny of potential business partnerships. It also highlights risks that evade Customer Due Diligence.

Simplified Due Diligence | SDD

This is the simplest level of due diligence that can be carried out on a customer. This is appropriate where there is nil to moderate risk of money laundering or terrorist financing. Under such criteria, products and services fall into simplified due diligence criteria. The only requirement is to identify your customer.

AMLD5 Guidelines — Role In KYB Compliance

Recently, two major regulatory global directives were updated. These are the 2nd Payment Services Directive (PSD2) and the Fifth Anti-Money Laundering Directive (AMLD5). The PSD2 requires financial institutions to share data with other institutions. This can be done through the use of APIs (Application Programming Interfaces). On the other hand, AMLD5 compels financial businesses to keep checks on personal information online.

Some key takeaways of AMLD5 –

Obliged entities should assess the information available in KYB records. Then they can proceed with the data process to mitigate any gaps in the Ultimate Beneficial Ownership (UBO) data. There may be gaps or new requirements to obtain information. KYB periodic reviews can be used to obtain or confirm existing beneficial ownership information. This way, the necessary information is available for updating relevant beneficial ownership registers.

The following are the requirements for a robust KYB process:

1. Collect information on the customer, UBOs and intended nature of the business relationship.

2. Gather data on the source of funds and wealth of the customer and UBOs. The reasons for the intended or performed transactions can also be procured.

3. Gain consent of senior management for establishing or continuing the business relationship.

Need For KYB In Businesses

KYB checks are most relevant in the context of AML compliance currently. In India, the major reason for introducing KYB is fraud. Despite advancements in KYC, frauds at the organizational level continue to occur in India. Here are some examples:

 

Money Laundering Through Shell Companies

A common method of money laundering is through the establishment of fake companies. These are also called shell companies. Most of these appear compliant with the Government of India. However, these companies do not really exist. Shell companies sell no goods or services. They exist only on paper, not in reality.

In a recent crackdown on Chinese companies in India, the Income Tax Department conducted a series of search operations. A scant number of Chinese individuals and their Indian counterparts were found. They were engaged in money laundering and hawala transactions through shell entities. Above 40 bank accounts were created in various dummy entities. These were used in the transactions of over Rs 1,000 crore. With KYB, these shell companies could have been easily investigated and identified faster.

Chit Fund Scams

In India, chit fund scams go back to several decades. In such cases, a registered organization looks authentic. But it mainly just cheats people with lucrative offers. The customers end up providing money. Then the company disappears without a trace.

In Himachal Pradesh, a recent scam was run under the name of Sarv Manglam Cooperative Society Non-Trading Company. This organization was registered in Dharamshala. The members were been accused and arrested for cheating people of Rs 2.75 Cr. With KYB, this could easily have been prevented as the UBO information would have appeared as bogus or fraud.

Bank Loan Frauds

These kinds of fraud involve a bogus organization. It registers as a genuine service company. The objective is to scheme people into providing payments by cash or through fraud accounts. Recently this has become a pain point in multiple states.

The Anti-Bank Fraud Wing of the Central Crime Branch on 6th Feb 2020 arrested six persons. The accused were running a call center in Pazhavanthangal (Chennai). They cheated several persons who sought loans online. In a similar incident this year, 4 fraudsters were arrested in connection to fraud of Rs 2 crore from more than five banks. This was done by pledging forged land documents. With KYB, the business information could have been traced early on.

Challenges associated with manual business verification

Businesses are required to verify customers, corporate clients, and other critical information under the KYB guidelines. Some of the major challenges for this process are are:

Time taking manual onboarding process

 

Normally, KYB verification for customer onboarding can be a hectic manual process. This is because it requires extensive efforts. In a 2019 Survey Report by Thomson Reuters on AML Insights, 47% of respondents used manual document scanning during client onboarding. This ensured a robust digital identity verification at the expense of laborious effort. The report further states that 4/10 companies employ no digital verification at account opening.

The conventional method leads to a frustrating customer experience. Customers are probable to abandon the account creation process. Moreover, the chances of errors and mistakes when done manually are higher.

High compliance cost

In the Thomson Reuters report, 95 % of respondents reported that data accuracy was very important. 93% cited both well-structured data and company reputation/credibility were also crucial. High costs are required for manually retrieving UBO information. These other factors also drive up the cost for manual KYB verification.

Complex ownership structure

KYC/KYB regulatory directives such as AMLD5 and PSD2 CDD rules make it necessary to verify and identify the business entities. This becomes a mandatory regulatory requirement. Financial institutions rely on gathering business details from clients. This is done with a manual process of filling in forms and verifying the information manually. There exists a high probability of data discrepancies to occur in this process.

Data inconsistencies

Companies can afford manual data retrieval. But the problem of data verification remains. There are multiple sources for collecting companies’ data. Sometimes the information can be defunct or invalid.

Technology To The Rescue — Areas To Address For Automating KYB

With an increase in regulatory requirements, the above points clearly state the need to automate the current process. Here are some solutions that could help businesses:

Automated KYB onboarding

AI-powered verification opens an opportunity to increase the efficiency of the onboarding process. It also reduces the cost and speeds up the process.

The manual method for retrieving UBO information can be achieved in a fashion similar to KYC process. What used to take 24–30 days for manual KYC has been reduced to 2–3 minutes by Signzy’s VideoKYC solution.

Access to authentic business registries

Companies must have access to the properly updated business registries. This is valuable and will make business compliance an easy task. Signzy’s proprietary APIs that can easily retrieve company information. This can be done from reliable sources like from the Registrar Of Companies (ROC) database

API integrated KYB solutions

Advanced API integrated solutions can be designed to aggregate data from various sources. Businesses only need to enter the required details to retrieve data. For ex, business registration number and the jurisdiction code where the business is operating.

Signzy provides a host of microservices involve unique APIs that can extract and verify the UBO data in a matter of hours as opposed to days. Our APIs are also capable of cross referencing data across multiple govt. Databases and sanction lists.

Virtual Identification Using VideoKYC

Businesses are now turning towards automated software. This is due to increasing compliance costs. Software helps conduct checks for everything. This includes from basic forgery attempts to advanced negative checks. The data is cross-referenced against sanction lists across the world.

With Signzy’s VideoKYC, the entire process can be completed in a matter of 2–3 minutes. Our unique video conferencing tool can also allow officials to interact and verify the credibility of the data. This is done while maintaining KYB compliance as well as data accuracy.

Scope Of The KYB Market

 

The market for KYB includes multiple services. Ex: business verification, beneficial ownership identification, and risk assessment and so on. This market is projected to grow to $11.8 billion by 2022. This projection comes from OWI Labs in their recent report

The total global KYB addressable market, as of 2017, the value of the market is estimated at

$5.6 billion with an annual growth rate estimated at 16 percent, adding up to a market size of $11.8 billion in 2022

KYB in Europe

In Europe, the AMLD5 has already been implemented. It facilitates the businesses to know about the UBOs. This is to enable trust between foundations. It also ensures legality of the entities to comprehend the structure of the business and customers.

Devoid of commitment to KYB and other related AML activities can have extreme consequences. For example, Deutsche Bank was fined $16.6 million last year by Frankfurt prosecutors. This was due to failure to observe suspicious transactions. This came as a direct result from their poor management of their AML processes. Previously, a £163 million fine from the UK’s Financial Conduct Authority. This was again due to effective AML oversight. Criminal activity associated with a business can also harm credibility and reputation. It can also cause other business disruptions.

Therefore, KYB is an essential element of anti-fraud frameworks and requirements. This includes Anti-Money Laundering regulations. An extension of KYC and regular due diligence is having a proper KYB process within your organisation. This protects against potential clients and vendors who intend to commit money laundering activities or other financial crimes. By establishing and understanding risk levels during onboarding, organisations can manage potential vulnerabilities. They can also respond effectively to indications of fraud or crime.

KYB in the US

The Customer Due Diligence (CDD) Final Rule is active from May 2018 in the US. This rule states as:

“Beginning on the Applicability Date, covered financial institutions must identify and verify the identity of the beneficial proprietors of all legal entity customers (other than those that are excluded) at the time of opening a new account (other than exempted accounts)”

The financial institutions constitute banks, dealers and brokers, mutual funds and futures commission merchants. However, different jurisdictions constitute different requirements. For example, the US financial institutes, in addition to the Bank Secrecy Act (BSA), are also liable to OFAC (Office of Foreign Assets Control), FACTA (Foreign Account Tax Compliance Act) and SEC disclosure rules.

KYB In India

The newly developed concept of KYB is still in its infancy and yet to be fully applicable across all business sectors. While the regulatory authorities have to take the developments of KYB under consideration, the need for KYB is clear in certain business sectors, particularly in financial space as listed below:

Banking

With money coming in from all corners of the globe, banks must be able to perform Know Your Business (KYB) checks on a client base that may be moving money all around the world. In addition, a “beneficiary owner”, which is a derivative of KYC, must be a present as a priority before financial transactions take place.

A recent article by Times Of India has brought to light how certain “fake” branches have been operating in major Indian states. These are Tamil Nadu’s Cuddalore district as an SBI branch, as well as a false branch of Karnataka Bank which was discovered in Phephna in Ballia district. The culprits behind the 2nd incident swindled almost Rs. 17 lakh in terms of new accounts and fixed deposits. With such fraudulent methods in full sway, KYB in banking is now necessary more than ever.

Lending

India’s lending market is one of the largest in the world, particularly with the advent of digital platforms. Digital lending to micro, small and medium enterprises (MSME) in India can grow upto 7 lakh crore by 2023, a 15x increase in annual disbursements. This is based on a joint report by Omidyar Network and Boston Consulting Group (BCG).

Assessing the integrity and ability of a borrower can be difficult — despite assets backing the loan, making it rock-solid. Unfortunately, there is no stereotypical “fraudster”. There is no scam artist who can be profiled or categorized. A polished CEO with an impressive background can look the same as every other swindler. Lenders need to be particularly mindful of who the borrower is and this means conducting proper due diligence. KYB in lending can help assess:

• The background of the directors and the organization
• Past offences/lawsuits/ criminal cases registered
• Any other controversial data which may harm future business

SMEs/Merchant Onboarding

KYB (know your business) checks are crucial to help businesses verify customer identification by gathering and verifying important documents. It should be mandatory for most financial companies to conduct KYB on their customers/businesses to protect against money laundering, identity theft and fraud. KYB can be incorporated at the time of onboarding to minimize risks as well as mitigate potential frauds.

A lot of companies adhere the use of time-consuming manual KYB processes due to:

• Need for complete checks and collect signatures from multiple directors
• The applicant is not always the director
• The application can quickly become a complex journey if there is overseas ownership or beneficial ownership

Insurance

India does not have an effective insurance fraud law against insurance frauds. According to an article in Business Today, frauds burnt a Rs 45,000-crore hole in the Indian insurance industry’s pocket in 2019. Most of these are due to bogus or fraud claims passed. In many cases, insurance companies, their intermediaries or those pretending to be either of them may also perpetrate frauds.

As India’s insurance industry continues to grow, fraud management is now a major concern for insurers and business leaders. Fraud risk in the insurance value chain can originate from internal as well as external factors. There is also the risk of employees misusing confidential information. Colluding with fraudsters is on the rise. Insurers must install internal checks and balances to rectify such issues.

KYB can also contribute by providing the list of people who have access to sensitive client information as well as conduct checks against the background and history of the organization as well as the people involved.

Conclusion

The global business markets are growing at a rapid pace. Companies must tighten customer due diligence for clients. The KYB processes and checks defined above can take hours to days without a platform with automation capabilities. However, cutting corners to achieve faster onboarding without proper controls increases the risk. It exposes the business to fraudulent actors and their illicit activities. Therefore while complete automation remains a challenge, care must be taken to improve KYB to match the levels of KYC automation that has already been achieved.

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

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