Risks for financial institutions that don't have a robust KYB process
Know Your Business (KYB) to protect your own business
Know Your Business (KYB) helps financial institutions know who they’re doing business with and mitigate any risk of fraudulent transactions. It can be both for regulatory compliance and to secure your business against risk.
KYB involves verifying the identity and legitimacy of a business. This includes but is not limited to checking the business registration documents, the ultimate beneficial owners (UBOs), and the nature of the business. It also involves conducting due diligence on the business's reputation and any associated risks.
KYB helps businesses to identify potential risks associated with their customers and to mitigate them before they become a problem.If you don’t identify your customers properly, you might be setting yourself up for being defrauded by dishonest corporate identities.
It’s important for all types of companies to make sure they don’t unintentionally deal with shady clients and expose themselves to fraud or unethical business practices.
Who is affected by fraud?
When talking about fraud, we are talking about inflicting damage to someone, and that someone isn’t always your own business. Your customers, suppliers or society might end up taking a hit.
Risk to your financial institution
Credit risk is a typical form of risk that can cause damage to your own business. Without performing proper checks, you can more easily end up providing services to a client who then isn’t able to pay you back.
Risk to your end customers
If someone steals an existing customer’s identity, you might end up providing a loan to the wrong customer. Another way a customer might be damaged is if the service you provide them isn’t in the interests of that customer.
For example, a bank grants their customer a very large loan. If the customer won’t be able to pay it back (or paying it back puts them through a lot of pain), you might end up damaging both parties.
Another risky scenario could be that the bank provides their customer an investment account even though the customer isn’t a professional investor. Since the customer isn’t fully aware of the risks, they can suffer huge financial damage.
Risk to your business suppliers
Suppliers can also be affected, for example, through reputational damage. If you as a company are not compliant with regulations, your suppliers will also face reputational damage for being associated with you. This can lead to them severing business ties between the two of you.
All these risks can be mitigated using secure agile technologies and business processes. When you know who your customers are, you adhere to regulations and reduce your business risks.
What are the risks of not doing KYB properly in Africa
In a typical corporate customer onboarding process, you need to first collect data and then make a risk assessment.
Without a clear, robust KYB process in place, financial institutions in Africa face a number of risks that affect their own business and might even threaten their survival. These risk
Here are the key risks you should account for when building your CDD and KYB processes:
1. Entity risk
A very complex ownership structure in a company can led you to accept more risk if you don’t know exactly who you’re dealing with.
2. Country risk
Dealing with people or businesses from different countries poses a different level of risk. For example, sanctions and other regulations directed at the country they are from can make it harder or impossible to do business with them.
3. Business risk
There are certain types of industries and business activities that have a higher risk of being involved in money laundering. A company might not have much legitimate business dealings, but they are instead used for creating fake revenue by feeding them with criminally obtained money.
4. Product risk
Some products might pose an AML risk. Someone could ask for a product that is inconsistent with their expected behaviour. For example, a private citizen asking for a business account in uncommon foreign currency could indicate a higher risk.
5. Sanction risk
Persons under sanctions along with PEPs create a sanction risk. The risk of a PEP being involved in corruption varies from country to country.
6. Risk to your business' reputation
If you deal with customers who have a bad reputation, e.g., they have been fined or sanctioned before, you might risk your own reputation and business.
7. Lack of attribution in data sources
The data you gather might form a risk. Receiving a very bad quality copy of a passport creates a bigger risk than if you get the passport information digitally. A digitally signed document is almost impossible to manipulate. Your data sources matter.
Mitigating these risks is important to conducting business successfully. Some mitigation is mandated by the government, and some is voluntary. For example, MiFID is a regulation that forces a company who provides investment services to check if their customer can understand the risks of those investments.
Then there’s other scenarios when compliance isn’t required by the government, and the responsibility is put on you. When there’s no specific regulation to compel you, it’s purely for your own interest to do the proper checks.
With the proper processes and secure technologies in place, you can catch the bad apples before they (intentionally or not) get a chance to hurt your business.
And if you operate in a regulated industry like financial services, keep in mind that regulations change over time, so you want a partner who diligently also adapts to changes.
How automated KYB helps businesses reduce their exposure to risks?
By implementing automated KYB verification, financial institutions can optimise their operations, offer superior experience to their customers and massively reduce their risk to fraud.
KYB solution by Laboremus is used by leading banks, insurance companies and other financial institutions in Uganda and Africa,
The benefits our customers experience with Laboremus KYB solutions are:
- Time-efficient onboarding: Automated KYB checks expedite onboarding, drastically reducing the time and effort required to verify business entities and stakeholders. Instead of manually sifting through piles of documents and databases, our automated system swiftly gather and corroborate information from various trusted sources.
- Enhanced accuracy and reliability: A key advantage of automation is reducing human error. By relying on cutting-edge technology, automated KYB checks ensure precise data gathering and verification. The system cross-references information from multiple sources, leaving no room for oversights or inaccuracies. This accuracy builds trust between firms and their clients and helps analysts make well-informed decisions based on reliable data.
- Compliance with regulatory standards: Automation ensures firms adhere to various AML/CTF regulatory requirements by central banks and regulatory authorities in Uganda and Africa. By streamlining the compliance process, financial institutions avoid potential legal repercussions and safeguard their reputation in the market.
- Resource optimisation: By reducing the time and effort spent on traditional verification processes, automated KYB checks allows financial organizations to redeploy their compliance teams’ expertise to higher-value tasks, such as improving customer experience or developing innovative products and services. This enhances overall efficiency and leads to cost savings in the long run.
Learn more about automated KYB by Laboremus here: www.laboremus.ug/solutions/kyb