Corporate KYC: Guide to Authenticate Businesses

TL;DR:

• Corporate KYC authenticates corporations by verifying the legitimacy of businesses and their stakeholders.
• Corporate KYC verifies key individuals in the company, ownership structures, and checks for connections to sanctioned or high-risk entities.
• The process involves verifying business legitimacy, conducting due diligence on stakeholders, and assessing overall risk.
• However, data inaccuracy, complex corporate structures, and high time and resource demands are some challenges hindering KYC processes' efficiency.
• AI-powered solutions can help solve bottlenecks in performing Corporate KYC and automating the process to reduce operational burdens and enhance accuracy and compliance.

Today, nearly everyone has undergone a KYC process to avail a product or service. KYC (Know Your Customer) Guidelines were set up to protect customers and organizations from money laundering and financial fraud.

Evolving fraud techniques have made KYC even more important.

Onboarding a customer without KYC translates to exposing the organization to risks. When there are corporations involved, the risks are even greater, requiring more rigorous verification and authentication measures. That is where Corporate KYC comes into the picture.

What is Corporate KYC?

As KYC is for individuals, Corporate KYC is for businesses and the involved stakeholders (owners, board members, etc.) to forge a relationship with a financial institution. This check ensures financial institutions aren’t engaging with Politically Exposed Persons (PEPs) and companies that have been penalized or sanctioned by regulators.

Why Corporate KYC is Important

Company KYC or Corporate KYC is a relatively new term, especially when you’re relating it to traditional KYC checks. It is important for combating money laundering and financial crimes. During a G7 summit in 1989 held in Paris, the Financial Action Task Force (FATF) was established. Its mandate was further expanded post-9/11 attacks. India too then proposed the Prevention of Money Laundering Act (PMLA) in 2002 to curb terrorist financing.

Missing regulations around KYC led to growing concerns about money laundering. One of the most notable examples is Pablo Escobar’s Medellín Cartel infiltrating the global financial system. It wreaked so much havoc that it became one of the motivating factors for establishing the FATF. With a fortune of $8-30 billion, Escobar is one of the wealthiest criminals in the world — a significant part of this success is attributed to sophisticated money laundering tactics.

Industries Required to Conduct Corporate KYC

Financial institutions must carry out Corporate KYC checks. However, there are several other industries that are mandated and encouraged to conduct it due to the risk of financial fraud and complying with certain regulations.

The regulations vary by country but a few are universal. There are universal measures that require all companies to avoid conducting business with high-risk entities, such as those found on international sanctions lists.

The Difference Between Corporate KYC and KYB (Know Your Business)

Corporate KYC and KYB (Know Your Business) are often used interchangeably in the compliance and regulatory landscape. Both processes aim to verify the legitimacy of a business entity and understand the risks involved in engaging with it.

Both involve conducting due diligence on a business, verifying the company's registration details, understanding its ownership and control structure, identifying beneficial owners, and ensuring that the business is compliant with relevant laws and regulations.

Depending on the nature of the partnership and the involved risks, it could also include checking the company’s legal status, financial health, cash flow, and more. These checks also confirm that a business is not a shell company or involved in illicit activities. In essence, both Corporate KYC and KYB aim to achieve the same objectives.

Process for Conducting Corporate KYC

The process for conducting Corporate KYC can be divided into three phases.

Phase 1: Verification of Business Existence and Legitimacy

The first phase involves confirming that the business is a legally recognized entity operating within the confines of the law. This establishes confidence in the legitimacy of the potential partner's financial activities.

1. Collecting Company Information: Verify the business name, physical address, registration number, and corporate documents like the Certificate of Incorporation and Articles of Association.
2. Reviewing Corporate Documentation: Examine official documents to ensure the company is duly registered and not a shell corporation.
3. Assessing Legal Compliance: Verify that the business operates in accordance with relevant laws and regulations, indicating lawful operations.

Phase 2: Due Diligence on Key Individuals

After confirming the company's legitimacy, the next phase focuses on the individuals who own or control the business. This helps minimize legal or reputational risks associated with the partnership.

1. Gathering Stakeholder Data: Collect the personal information of UBOs (Universal Beneficial Owner: 25% or greater ownership stake in the company) and key stakeholders, including names, dates of birth, addresses, and identification numbers.
2. Verifying Identities: Confirm that each UBO and key individual is real and not involved in fraudulent activities.
3. Screening Against Watchlists: Check these individuals against global and local watchlists or sanctions lists to avoid exposure to bad actors.

Phase 3: Risk Assessment and Decision Making

The final phase involves evaluating the overall risk and determining whether to proceed with the business relationship.

1. Verifying Collected Information: Cross-check all gathered data for accuracy and consistency to complete the due diligence process.
2. Assessing Risk Levels: Evaluate the potential risks based on the company's industry, geographic location, ownership structure, and any adverse findings from the previous phases.
3. Weighing Benefits and Risks: Consider the potential advantages, such as access to new markets or services, against the identified risks.

It may be true the objective of Corporate KYC is legal compliance and risk mitigation, but it also provides insights that help make informed decisions about the corporation itself.

Key Challenges in Performing Corporate KYC

If you compare Corporate KYC with one that is for individuals, the risks are greater, and performing the checks require more time and resources. Thus, performing Corporate KYC comes with several challenges.

• Data (Accessibility & Inaccuracy)

When it comes to data, financial institutions face two challenges: accessibility and inaccuracy. Accessing accurate and up-to-date information can be challenging, especially in regions with limited transparency. Moreover, you cannot avoid discrepancies in company registration records, filing history, and other documentation. Since Corporate KYC is aiding you in making data-driven decisions, inaccurate data can be disastrous.

• Complex Corporate Structures & Global Operations

Large corporations may have intricate ownership hierarchies with multiple subsidiaries and layers, making it difficult to identify ultimate beneficial owners. On the other hand, companies operating across different jurisdictions may be subject to varying regulatory requirements, complicating the KYC process.

• Time & Resources

We mentioned earlier that Corporate KYC is more resource-intensive than regular KYC, and it can indeed be a great bottleneck. Firstly, it is burdensome for the organization conducting the check. More importantly, due to the extensive time and effort, potential prospects may drop off, leading to a loss of business and revenue.

How to Automate Corporate KYC with AI

Automating Corporate KYC can solve challenges related to time and resources and perform more exhaustive checks to mitigate data and complex organization structures and regulations. It can reduce the drop-off rates and make the process more efficient.

You can automate Corporate KYC by combining a range of solutions, such as AI-powered onboarding, intelligent document processing for fraud detection, transaction anomaly detection, financial statement analysis, and more. The right combination of technology also depends on the industry and the level of scrutiny you aim to do.

How Arya AI Can Help

Arya AI offers AI-powered solutions to automate and optimize the Corporate KYC process. We offer AI onboarding solutions, document fraud detection, intelligent document processing solutions, and more. For the AI APIs such as Corporate KYC, you can simply integrate them to your existing workflows.

However, if you require bespoke onboarding workflows, get in touch with our team. Essentially, partnering with Arya AI solves Corporate KYC procedures and allows organizations to mitigate risks and focus on building secure business relationships.