How to KYB, KYC and KYCC & Why It Matters

In recent years, regulatory enforcement has revealed the devastating consequences of neglecting due diligence procedures like Know Your Customer (KYC) and Know Your Business (KYB). 

One striking example is Binance, the world’s largest cryptocurrency exchange. Failing to enforce robust KYC and KYB measures allowed bad actors to exploit the platform for money laundering and other illicit activities. As a result, the SEC sued Binance in June 2023 for breaking U.S. securities and anti-money laundering (AML) laws, as well as for operating an unregistered securities exchange and commingling customer funds.

Binance’s failures illustrate how inadequate compliance processes not only harm a company’s reputation but also jeopardize its ability to operate in key markets—and why businesses must prioritize KYB, KYC, and Know Your Customer’s Customer (KYCC) procedures to avoid such consequences. Below, we explore in more detail what these crucial due diligence practices involve and how they protect businesses from financial crime.

KYB vs. KYC vs. KYCC

Designed to mitigate risks like money laundering and terrorist financing, KYB and KYC are foundational components of customer due diligence (CDD). Though less widely implemented, KYCC takes compliance and security further by looking at who your business clients do business with. 

For more clarity, here’s a breakdown of the three protocols:

• KYB (Know Your Business): Focuses on verifying corporate customers by collecting and screening information about businesses. This process ensures that companies you work with are legitimate and comply with regulations.
• KYC (Know Your Customer): Targets individual customers, verifying their identity to ensure they are who they claim to be. This involves collecting details like their full name, date of birth, and address.
• KYCC (Know Your Customer’s Customer): Extends due diligence to the customers and partners of your business clients. This process ensures that your clients aren’t engaging with shell companies or high-risk entities potentially involved in financial crimes.

In short, KYB, KYC, and KYCC are fundamental anti-money laundering compliance measures centered around processes like identity verification, risk assessment, and ongoing monitoring.

Why are KYB, KYC, and KYCC important?

Neglecting KYB, KYC, or KYCC can lead to severe consequences, as demonstrated by the Binance case. By implementing these due diligence protocols, businesses can strengthen their customer risk management practices and reduce their exposure to financial crimes.

For one, regulatory authorities may impose significant fines on companies that fail to meet compliance standards. These scandals can tarnish a company’s brand and may even result in license revocations or operational restrictions that limit global market access. Consider how Binance’s lapses in meeting AML compliance requirements have led to it getting banned from several countries, including Canada, the UK, and the Netherlands.

Furthermore, KYCC is increasingly becoming a standard expectation in compliance frameworks, even though it’s not yet universally regulated. For example, recent EU Directives and U.S. regulations, such as FinCEN’s Final Rule, reflect a growing emphasis on risk and compliance. Given this momentum, it’s fair to expect more regulations around KYCC compliance in the near future, especially for businesses in high-risk industries like finance.

Who should implement KYB, KYC, and KYCC?

Compliance with KYB, KYC, and AML measures is legally required for financial institutions and other regulated industries, such as banks, law firms, accountants, estate agents, and high-value art dealers. These businesses must implement due diligence checks when onboarding new customers and more generally, throughout the ongoing management of existing portfolios. 

That said, even companies not directly regulated should consider adopting these practices to build a reputation for trustworthiness. Businesses that adopt robust due diligence practices demonstrate a proactive stance in AML compliance.

Key Compliance Requirements for KYB and KYC

Both KYB and KYC processes involve collecting, verifying, and monitoring data, such as legal documentation and identity information, to ensure compliance with regulatory requirements. However, while KYB focuses on vetting businesses, KYC centers on individuals. Nonetheless, the principles of due diligence and risk assessment are foundational to both. 

Below are the key requirements for each:

KYC Checks

• Customer Identification Program (CIP): Financial institutions must verify a customer’s identity using government-issued documents such as a photo ID, passport, or driver’s license. They are required to collect four key pieces of information: the customer’s legal name, date of birth, address, and identification number. They must also confirm the address with supporting documents like utility bills or bank statements.
• Customer due diligence: Institutions must identify and verify the identity of customers and any beneficial owners holding 25% or more of a legal entity. They must also assess the nature and purpose of the business relationship while monitoring transaction patterns, especially for higher-risk individuals like politically exposed persons or those in cash-intensive businesses.
• Enhanced due diligence: High-risk customers necessitate deeper investigations, which can involve gathering detailed information on business operations, ownership, and financial background. Additional security measures, such as multi-factor authentication or biometrics, may be required to reduce the risk of fraud or illegal activities.
• Ongoing monitoring: Institutions must maintain up-to-date customer profiles by continuously tracking their activities and transactions. Automated systems can be used to detect unusual patterns, and periodic audits or reviews must be conducted to ensure compliance with regulatory standards.

KYB Checks

• Business verification and registration: Institutions must collect and confirm the business’s legal name, operating address, and taxpayer identification number (TIN) or employer identification number (EIN). They must also ensure the business is registered in its stated jurisdiction and in good standing with the Secretary of State, and check if the business holds the necessary local, state, or federal licenses required for its operations.
• Ownership structure and beneficial owners: Institutions must identify shareholders with 25% or more ownership, verify their name, address, and government-issued identification, and ensure they are not on sanctions lists or associated with illegal activities.
• Ongoing monitoring: Institutions must continuously update customer information and monitor the business and its activities for changes or risks.

Many organizations partner with third-party experts like Business Screen to streamline and strengthen their KYB and KYC processes. Outsourcing these processes not only ensures compliance with evolving regulations but also allows companies to focus on other business priorities.

KYB and KYC Checks with Business Screen

KYB, KYC, and KYCC are essential for mitigating financial crime risks and ensuring regulatory compliance. These processes protect businesses from legal repercussions, preserve their reputation, and build trust with customers and partners. As regulatory expectations increase, businesses must view KYB, KYC, and KYCC not just as legal obligations but rather, as strategic imperatives.

Companies like Business Screen specialize in creating consistent, reliable systems for due diligence and AML compliance. By leveraging external expertise, businesses can implement robust procedures that minimize operational disruptions while providing accurate and up-to-date information. To learn how Business Screen can support your compliance efforts, reach out today.

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