With the increasing number of shell companies carrying out illegal transactions, you can’t overlook the importance of identifying the legitimacy of businesses and merchants you are involved with.
While government regulations and enforcement play a crucial role in combating financial crimes, relying solely on them is insufficient to cut down on these launderers.
When looking to engage in corporate collaborations, deploying reliable KYB (Know Your Business) solutions is a vital recourse to secure your business interests and ensure compliance with anti-money laundering obligations.
Read on to protect your organization from a range of risks your businesses could be exposed to by neglecting KYB.
KYB: What is it?
KYB, or Know Your Business, serves as the first line of defense for businesses against questionable companies, clients, and unethical activities. It involves authenticating the identity and legitimacy of another organization, its beneficial owners, directors, shareholders, and other vital segments to ensure they don’t pose any threats and risks.
Conducting a KYB check can include looking at the business’ operational and structural setup, registration documents, nature, and ultimate beneficial owners (UBOs) before evaluating all this against your company’s risk appetite and compliance requirements.
What are the Risks of Ignoring KYB Protocols for Your Business?
Without implementing transparent and robust KYB processes, your business can be exposed to many of the following risks, affecting its performance, and even threaten its long-term survival:
Insecure Business Relationships
Regardless of the B2B service and interaction you expect, success depends on mutual interests and understanding. The evolving digital technology significantly impacts businesses, and on top of this, businesses don’t have directive authority over their suppliers and vendors. Therefore, your company might consistently find itself needing to verify trust and reliability with other businesses to establish stable relationships.
By neglecting to conduct KYB checks, you can fail to create a reliable standard for communicating and building trust with other businesses. You might also be unable to solidify your reliance on the business you plan to work with.
Failed B2B Conversions
Deploying KYB solutions is key to earning the trust of a partner firm, avoiding any face-to-face fiddle, and generating a greater B2B conversion rate.
However, any firm that ignores accessing the KYB processes tends to miss out on generating credibility and trust with partner organizations. You might not be able to identify your business as an authentic entity and, thus, end up creating a negative impression. This failed attempt to earn trust directly impacts your firm’s B2B conversion rate.
Increased Financial Crimes
Financial crimes are among the direct risks your business can face without a KYB approach, as you would be ignoring the verification of potential partner firms. Not knowing who you are collaborating with or how the partner company operates increases your chances of being associated with financial crimes like money laundering, fraud, or other unethical practices.
Being a part of such financially fraudulent activities, even accidentally, can have severe consequences on your business’s financial position and reputation.
Losing Consumer Trust
Another risk your business can face by failing to comply with the KYB protocols is losing consumer trust. Collaborating with unverified or potentially fraudulent companies can put your consumers at risk. They might receive adulterated or poor-quality products and services or fall victim to scams. Some fraudulent entities can even attack your database to collect your customers’ personal details.
As a result of these occurrences, you may not only face legal consequences but also risk damaging your brand and losing customers.
Fuelling Corruption
The main reason for introducing KYB solutions is to prevent financial crimes and protect the integrity of business relationships. Neglecting KYB protocols can expose your business to corrupt entities or partners. Hence, you accidentally become a part of the corrupt practices and end up exploiting your customers who rely on your company’s services.
Knowing the Right Practices to Conduct a KYB Check
The risks of neglecting KYB solutions for your business can be heart-wrenching. Don’t worry! You can mitigate these risks by performing successful KYB checks. Outlined below are the best practices with which you can streamline the KYB process:
Outline KYB Policies and Procedures
The first thing you must do is outline KYB policies and procedures clearly. Make sure all parties comply with the rules and regulations of the jurisdiction your business operates in. Your company should have a standard set of KYB procedures and necessary documents to successfully onboard legitimate companies.
Identify Beneficial Owners
Look for the beneficial owners of your potential partner company to determine its business’s structure, nature, and source of funds. Determine the ownership with respect to the relevant jurisdiction. It may also be wise to document all necessary details of the beneficial owners.
Verify the Existence of Partner Business
To ensure the legitimacy of the business you intend to work with, verify its legal existence by obtaining the firm’s registration details, directors’ and shareholders’ information, and other essential legal documents. This helps confirm that the company is legitimate.
Screen for Fraudulent Persons
Conduct thorough background checks on the directors and key personnel of potential partner companies to identify any associations with fraudulent or corrupt activities.
Conduct a Risk Assessment
Don’t forget to conduct a risk assessment on the potential partner business and the industry and jurisdiction in which the company operates. Evaluate what financial crimes the firm can be potentially associated with, from money laundering to bribery.
Ongoing Monitoring
Conducting the KYB check is not a one-time thing but a continuous monitoring process to detect changes in another firm’s ownership structure, funding sources, communication channels, and transactions.
All these changes can contribute to the business’s altered risk profile.
Final Takeaway
Leveraging KYB solutions is the best thing you can do to protect your business against potential risks and threats associated with fraudulent companies or partners. Failing to conduct the KYB processes can expose your business to the above-discussed risks, from insecure business relationships and reduced B2B conversion to financial crimes and fueled corruption. Your firm should exercise caution with potential clients to avoid dealing with dubious entities, and shell companies, and inadvertently engaging in unethical business practices.