It doesn’t matter whether it’s in the realm of fintech, crypto, investment, or online casinos, regulations around businesses that involve money transfers in significant amounts are getting more and more rigorous.
Two of the core parts of this are KYC (Know Your Customer) and KYB (Know Your Business), verification processes essential to all of the businesses above. Now they will potentially be utilized further, as recent verification proposals have shown.
Each of the industries we mentioned above has to use each of these processes in different amounts, however, while they generally involve different criteria, there are also many areas where they do overlap.
The Core Features of Both
KYC processes are entirely focused on an individual person and use three fundamental data points: first and last name, birth date, and current registered address. The intent here is to verify that your customer is, at the very least, a real person whose details are a matter of record.
KYC is usually done by the customer themselves and requires them to provide documentation such as official ID documents and proof of address, which can then be verified through various databases. KYB is essentially the same thought process, except applied to a business instead. Rather than the who and where of a single person, KYB instead looks for business registration, a business address, and the officially recognized representatives of the company.
Beyond documentation for the business itself, it’s usually required to go a step higher to find the UBOs (Ultimate Beneficial Owners) who are set to gain from the business, not just those directly in charge of the business. This is thanks to the often complex network of owners in the business world.
Why are they necessary?
These verifications are both time-consuming and costly in many cases, so many larger companies prefer using SEON for KYC verification and similar solutions for KYB, which generally help to confirm data authenticity as well as process large numbers, especially in KYC, where requests can be extremely frequent.
However, regardless of how long they take, in many parts of the world, they are entirely necessary. Designed to combat money laundering or other criminal aims (i.e.using crypto for criminal purposes), they are hard-written into the regulations of all major countries, and avoiding them can come with huge penalties. Even entire countries like Malta are having to bring their regulations up to standard to comply with EU reports.
More than that, proper checks are critical for businesses to avoid scandal or embarrassment down the line should customers or partners prove to be involved in criminal activity later on.
How Do The Two Practices Overlap?
On the face of it, KYC and KYB are quite distinct in both purpose and method; logically, KYC would apply to B2C businesses, whereas KYB would apply to B2B businesses. However, beneath the surface, they share a few common threads, as well as some grey areas that are not so well defined.
At the most basic level, the goal of each process is the same; to protect both the company and the relevant institutions of the country is from. Both also follow AML (Anti-Money Laundering) standards, and each process may be followed by continuous monitoring under those same standards.
Both often also require companies to use data verification services like EDQ to check against national records on their behalf, regardless of whether it is business details or personal ones.
The Gray Area Between the Two
Where it becomes especially tricky to separate the two is when the distinction between what is a business and what is an individual person becomes murky. When you look at iGaming, for instance, their players are almost universally clearly individuals, as there aren’t really many reasons for a company to sign up for an online gambling site.
However, taking an example from fintech, say that you have someone become a customer for the purposes of creating an account for their home business, like those built on the Etsy platform. It could be selling cakes, homemade clothing, or even tutoring or accounting, or other services of that nature. While these all do constitute businesses, that customer may not consider them notable enough to have them formally incorporated as an LLC or other company.
These are known as sole proprietorships in the U.S., where an individual pays personal tax on business proceeds instead of as a company. Depending on the jurisdiction and local laws, this may be more or less common, however, they can cause something of a headache. The big question is, when you’re running verification on this, do you run a KYC check as an individual or a KYB check treating it as a business?
When Should You Run a Business Check?
In general, for the case of sole proprietors, as they have not formally registered as a business, then KYB is unnecessary and often impossible to carry out as things such as business licenses and documentation don’t exist. While proceeds may come from a business, it’s more a company that KYB looks for. However, as soon as incorporation occurs and a company is formally registered, KYB becomes necessary to stay in compliance with AML legislation.
One key note is that a business, whether fintech, investment, or iGaming, should never rely on their customer self-reporting entirely for a number of reasons. Firstly, a customer may not be aware of their business status and may apply unnecessarily as a business or incorrectly as an individual, thereby getting the wrong checks.
There is also the possibility of intentional misreporting for the purposes of fraud, and Due Diligence holds the service provider responsible for detecting these cases. Should the provider have any doubts regarding documents or evidence submitted, they must go the extra mile themselves to verify everything is correct.
Are KYC and KYB Likely to Spread to Other Industries?
Discussions of having a formal ‘Internet ID’ for general users have been discussed for decades, however, so far, these verification processes look to be limited to financial transactions only. With that said, with blockchain technology already tracking transactions step-by-step, the way verification is handled is likely to see some changes in the coming decade.