There are substantial financial and legal consequences which businesses face due to non-Financial Crime Compliance, which can lead to litigation, bankruptcy, damaged reputation and loss of investor confidence. Chris Denbigh-White, CISO at Next DLP, highlights the importance of Know Your Business (KYB) processes in mitigating these risks. He explores how the various methodologies and technologies can help.
Financial Crime Compliance (FCC) encompasses a set of policies, procedures and practices established by financial institutions to prevent and detect financial crimes. Intended to keep the financial system trustworthy, they do so by enforcing laws and getting rid of unethical practices like terrorist financing, money laundering and fraud.
According to a study conducted by Forrester on behalf of LexisNexis in November 2023 titled, True Cost Of Financial Crime Compliance Study, 2023 United States And Canada, the total cost of FCC was US$61 billion. This puts a massive financial strain on businesses – and if it keeps up – it could lead to lawsuits and even bankruptcy for those involved.
Non-compliance also brings legal consequences from the government, regulatory bodies and affected parties like customers, employees and competitors. It doesn’t just result in financial penalties. Lengthy and expensive legal battles can ensue, leading to costly settlements or court orders that further drain the company’s resources.
Non-compliance can also completely wreck the reputation of a business – as customers and partners lose trust and pull their support. When legal issues and financial threats come up, business activities slow down, hurting efficiency, income and overall finances in the long-term. Over time, shareholders will start to lose faith in the business as lawsuits from non-compliance continue. They will become upset if they don’t see a return on their investment due to court cases and penalties. As the business’s value drops, investors will pull out in large numbers.
While most would agree that it goes without saying – this is an important reminder of just how business-critical it is to pay attention to compliance and regulatory measures. If you don’t and if you’re lucky, it will result in some very time-consuming and highly expensive bumps. However, if you are not lucky, and follow in the footsteps of others who failed to pay compliance its due, it could lead to the total collapse of your business.
It’s time to KYB (Know Your Business)
One way to prevent this kind of situation is through KYB. But, to really see how beneficial it is, we need to understand what KYB involves.
Since its inception over 50 years ago, KYB has helped create a safer financial system through customer verification. However, the initial framework focused mainly on individuals, leaving out businesses entirely. It likely comes as no surprise that criminals exploited this loophole – using shell companies or legitimate businesses to launder money. In 2006, the US watchdog, Financial Crimes Enforcement Network (FINCEN), took a significant step to tackle this issue by including KYB regulations in the Enhanced Customer Due Diligence Requirements aimed at identifying illegitimate businesses.
Today, KYB is essentially like playing detective – checking if a business is legal by looking at things like who owns the business, legal status, financial records, etc. However, KYB can be time-consuming, expensive and even prone to human error.
However, this process gets even more efficient and scalable when it’s automated. With an automated KYB verification system, users are provided with real-time data to verify business registration details, regulatory compliance, financial records and other essential information, ensuring the establishment of a legitimate business without compromise. Today, there are automated KYB verification systems that are able to test and confirm business legitimacy by connecting to over 180 global business registries from more than 120 countries and accessing credit and financial reports worldwide for over 160 countries.
The role of KYB in reducing financial penalties and litigation
Automated KYB can extract and validate information from public datasets, company registries and other trusted APIs (Application Programming Interfaces). This makes data collection a great deal faster and accurate.
Then, to kick it up a notch – Optical Character Recognition (OCR) technology can pull relevant information from scanned documents and verify their authenticity with techniques like watermark detection and hologram recognition. ID verification speeds up even further, and the risk of fraud is dramatically reduced even more.
Through KYB, organisations can access global sanctions lists and use advanced algorithms to screen corporate entities in real-time. It triggers an alert for further review, if there’s a match on the sanctions list, so businesses can deal with the potential compliance risks quickly and effectively.
By connecting to data sources that give real-time updates on ownership changes, legal status, financial performance, regulatory actions and negative media coverage, KYB can also provide continuous monitoring of companies. KYB can alert businesses to important changes or red flags this way, enabling timely interventions and risk mitigation.
Enhancing KYB with Machine Learning (ML) and Artificial Intelligence (AI)
Some of today’s automated KYB solutions are now starting to use ML and AI to analyse various data points, such as financial indicators, market trends, news articles and social media sentiments, to generate risk scores for corporate entities. Businesses can make informed decisions efficiently and avoid mistakes that could hurt their finances – because this data-driven approach makes risk assessments more accurate and consistent.
Automating KYB gets rid of human errors, boosts compliance and makes workflows smoother by using technologies like Optical Character Recognition (OCR), up-to-date regulatory watchlists and an automated system for quick decision-making.
KYB = financial success
KYB helps businesses avoid financial penalties and also keeps the trust of partners, stakeholders, investors, customers and employees. Whereas, non-compliance suggests a lack of commitment to ethical practices and regulatory standards. The trust of those that matter is preserved, as KYB reduces doubts and boosts confidence in the company’s integrity and reliability.
Moreover, the negative publicity that comes from non-compliance lawsuits, regulatory violations and sanctions is virtually eliminated with KYB. In other words… no need to worry about bad news spreading through traditional media, social media and online forums, potentially harming the brand and business reputation.
And customers? When businesses fail to comply with KYB obligations, customers may lose confidence in the brand, especially if they feel their data is not protected or their financial information is at risk. However, relationships with customers are fortified, because KYB improves how people see the company’s trustworthiness and commitment to data protection.
Regulatory scrutiny is reduced, with KYB, and it handles the serious non-compliance issues that could damage the company’s reputation as a reliable business partner. And, for investors this is a powerful message – demonstrating that the business’s public reputation is actively monitored and managed.
KYB – not just a compliance strategy, a proactive approach for safeguarding your business and staying competitive
So, KYB is essential for businesses for several reasons:
- Improves decision-making – KYB utilises advanced technologies like OCR and ML to streamline processes and enhance the accuracy of data collection, leading to better-informed business decisions
- Prevents fraud – By thoroughly verifying business details and maintaining updated records, KYB reduces the risk of fraud and financial crime, ensuring a safer business environment
- Reduces financial penalties – KYB helps businesses avoid costly fines and penalties associated with non-compliance, which can be financially devastating
- Mitigates risks – KYB provides continuous monitoring and real-time alerts for any changes or red flags, allowing businesses to address potential issues quickly and effectively
- Builds trust – KYB helps maintain the trust of partners, investors, customers and employees, which is crucial for long-term success, by ensuring regulatory compliance
- Enhances reputation – Regularly verifying business legitimacy protects your company’s reputation by preventing associations with fraudulent or unethical activities
- Drives competitive advantage – A strong compliance framework, supported by KYB, helps maintain a positive public image, giving businesses a competitive edge in the market
The bottom-line, KYB is not just about meeting regulatory requirements – it is a proactive strategy that safeguards your business, enhances its reputation, builds trust and ensures long-term competitiveness in the market.
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