13 March 2023
Legislative requirements for the prevention of money laundering andterrorist financing, along with the general development of awarenessof business risk management, are encouraging companies to adoptmore effective approaches to verifying customers and businesspartners. The proliferation of digital services and the use oftechnology everywhere are changing consumption patterns, commu-nication, and business transactions. Potential customers andsuppliers increasingly want to conduct business remotely, whichmeans introducing new technological approaches to verify individualsand entities that appear in business relationships.
Globally, one of the most common approaches to remote verificationof potential business partners is the so-called KYC. This replacesphysical verification of individuals and manual collection andprocessing of business documents with automated digital procedures.The result is faster partner registration, with more reliable, accurate,and secure verification.
1. What does the process of KYC (Know
Your Customer) mean?
Getting to know your customer (KYC) means the process of verifyingthe identity of your customers, assessing their risk level, andregularly reviewing and updating their data. The process has its rootsin the financial services industry and falls within the wider frameworkof regulations on the prevention of money laundering and thefinancing of terrorism. Essentially, it involves verifying the identitiesand suitability of partners and the risks associated with maintaining abusiness relationship with a customer. Recently, information solutionshave become particularly relevant, enabling remote identityverification, for example, through the use of facial biometricidentification and video verification of the liveliness of personsappearing in registration processes.
Today, companies of all sizes use KYC procedures, ensuring thattheir potential customers, representatives, advisors, distributors, orsuppliers comply with regulations, or that they are actually who theyrepresent themselves to be. Conducting the KYC process is anecessary step in ensuring compliance with anti-money launderingrules, especially if required by law (ZPPDFT-2).
For example, banks must conduct KYC checks when someone wantsto open a bank account remotely, as otherwise they cannot confirmwhether the potential customer is who they claim to be. Similarly,reliable identity verification must be provided by providers of gamblinggames and providers of various non-financial services where a highlevel of trust is required. It is increasingly becoming apparent thatsome companies also find it useful to carry out KYC checks on theirbusiness partners in B2B transactions, in order to determine theactual owners or persons controlling the potential customers.
2. Is the KYC process mandatory for all companies?
Only entities that are subject to regulations in the field of anti-mon-ey laundering and combating the financing of terrorism, such as thefifth and sixth Anti-Money Laundering Directive and consequently theZPPDFT-2, as well as the EIDAS Regulation, are actually requiredto carry out KYC checks. These include companies such as finan-cial institutions, auditors, accountants and tax advisors, lawyers andnotaries, real estate agents, providers of gambling services, custodi-an service providers and companies dealing with high-value goodssales. All these obligated parties must carry out KYC checks to en-sure that they only do business with trustworthy entities. However, anincreasing number of companies are already conducting KYC checkseven though they are not legally required to do so, as this protectsthem from financial and cybercrime.
Customer due diligence processes help B2B companies to under-stand and monitor the risks associated with each customer. On theone hand, they protect them from dealing with entities involved inmoney laundering or terrorism financing, and on the other hand, theyprevent threats that come from the organization’s cyber space, suchas online fraud, CEO fraud, intermediary attacks... Furthermore, aswe have already seen, KYC verification is a necessary step in en-suring compliance with anti-money laundering regulations, and it canalso be used within the NIS2 regulation for cyber security.
3. How do KYC verification processes help
reduce risks in B2B transactions?
Before starting to do business with a new partner, you have to en-gage in endless email communication, check documents, assessrisks, and use many other time-consuming steps. By digitizing sucha process, companies in all industries increase productivity, reducecosts, eliminate bureaucracy, and shorten waiting times. These pro-cedures can be shortened from a few weeks to a few minutes!
Using KYC, as we already know from customer verification in B2Cbusiness, in inter-organizational business actually means expandingthe process with a set of documents that define the existence of acompany and its responsible persons. The process can be linked tovarious registers that store data on companies and responsible per-sons, as well as lists of risky individuals.
This process, also known as KYB (Know Your Business), involvesa more thorough examination of a potential business partner androughly follows this path:
Using KYC vefirication with artifical intelligence the inclusion of a part-ner company - supplier or buyer - into the system can be completedin less than 10 minutes. In addition, such verification is precise andsecure. By automating the manual work of collecting and verifyinginformation, you not only save time, but also reduce the number oferrors and lower costs.
Speed is crucial in the digital age of business and global competition.If you do not allow your partner to establish a relationship quickly andeasily, they will look for other sources. This can mean direct revenueloss or problems with maintaining uninterrupted business oradditional costs. In addition to legal obligations, business efficiency iscertainly the incentive that will attract a wider range of companies touse KYC procedures.