Know Your Business (KYB)

I. Understanding Know Your Business (KYB)

What is Know Your Business (KYB)?

Know Your Business (KYB) is a regulatory framework requiring financial institutions to verify the legitimacy, ownership structure, and operational integrity of business entities before establishing commercial relationships. KYB processes ensure that credit providers aren't inadvertently doing business with shell companies, fraudulent entities, or organizations used to conceal criminal activity.

KYB emerged to close a \compliance gap where bad actors could hide behind legitimate-appearing businesses to launder money, finance terrorism, or commit fraud. By requiring verification of both the business entity and the individuals who ultimately control it, KYB makes it harder for criminals to exploit corporate structures for illicit purposes.

How does KYB relate to Know Your Customer (KYC) and Anti-Money Laundering (AML)?

KYB operates as an extension of Know Your Customer (KYC) principles within the broader Anti-Money Laundering (AML) framework. While KYC focuses on verifying individual customers, KYB addresses business entities and their ownership structures. Both serve the same goal: preventing financial crimes through transparency.

In practice, KYB and KYC work together. Once a credit provider identifies the Ultimate Beneficial Owners (UBOs) of a business through KYB, those individuals typically undergo KYC verification. This layered approach ensures that both the business entity and the people controlling it meet compliance standards.

What types of financial institutions must comply with KYB?

KYB requirements apply to financial institutions that provide services to business entities. Banks, credit unions, commercial lenders, and business lending platforms must verify business customers. Payment processors, merchant service providers, and fintech companies facilitating B2B transactions face similar obligations.

The scope extends beyond traditional financial services to professional service firms that help form or manage business entities, real estate agencies handling commercial transactions, dealers of high-value goods, and crowdfunding platforms connecting investors with businesses.

Who enforces KYB requirements?

The Financial Crimes Enforcement Network (FinCEN) established specific KYB requirements through the Customer Due Diligence (CDD) Final Rule in 2016. FinCEN maintains primary enforcement authority and can impose civil monetary penalties or pursue criminal referrals against individuals who willfully neglect KYB obligations.

Federal banking regulators oversee KYB compliance for institutions under their supervision. The Office of the Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Corporation examine KYB programs during compliance reviews. State regulators also enforce KYB requirements for state-chartered institutions.

II. Key requirements and components

Business identification and verification

Credit providers must collect and verify core business information including legal business name, any trade names or DBAs, physical business address, registration or incorporation documents, and tax identification numbers. Financial institutions must obtain proof of legal existence through official documentation like articles of incorporation, business licenses, or regulatory filings.

Verification extends beyond accepting documents at face value. Credit providers should cross-reference information against multiple authoritative sources, including government business registries, corporate databases, and public records to identify discrepancies that might indicate fraudulent entities or shell companies.

Ultimate Beneficial Ownership (UBO) identification

A cornerstone of KYB compliance is identifying Ultimate Beneficial Owners—individuals who own 25% or more of the business entity or exercise significant control over it. Credit providers must collect identifying information for each UBO including name, date of birth, physical address, and identification number. At least one individual with significant management responsibility must also be identified if no single person meets the 25% ownership threshold.

UBO identification prevents criminals from hiding behind complex corporate structures or nominee arrangements, making it significantly more difficult for bad actors to use shell companies to conceal their identities and launder illicit funds.

Business Due Diligence levels

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KYB due diligence operates at different intensities based on risk assessment:

• Simplified Due Diligence applies to low-risk businesses with transparent ownership structures, established operational histories, and straightforward business models in low-risk industries.
• Standard Due Diligence represents baseline verification for typical business relationships, including standard ownership verification, basic business activity assessment, and routine monitoring.
• Enhanced Due Diligence (EDD) is required for high-risk businesses, including those in high-risk industries, businesses with complex ownership structures, entities operating in high-risk jurisdictions, or businesses with connections to politically exposed persons.

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Ongoing monitoring of business relationships

KYB obligations continue throughout the business relationship. Credit providers must monitor business customer activity for transactions or patterns inconsistent with the business's expected profile, including sudden changes in transaction volume, unusual cross-border activity, or business operations that don't align with the stated purpose of the relationship.

Monitoring intensity should correspond to the business's risk rating, with high-risk businesses requiring more frequent reviews. Credit providers must also update business information periodically, particularly when significant changes occur in ownership, business structure, or operational focus.

Recordkeeping and reporting requirements

Financial institutions must maintain comprehensive records of KYB verification processes, including copies of identification documents, UBO information, verification methods, and risk assessments. When monitoring reveals suspicious activity involving business customers, credit providers must file Suspicious Activity Reports with FinCEN.

III. Compliance and Common Violations

Common KYB violations and inadequate practices

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Rather than intentional misconduct, creditors often stumble into KYB violations through operational gaps:

• Incomplete or inaccurate business data collection that fails to gather all required corporate documentation, omits key ownership information, or accepts incomplete UBO disclosures without proper follow-up.
• Relying on single data sources for verification, particularly using only customer-provided documents without cross-checking against independent business registries or government databases.
• Failure to identify Ultimate Beneficial Owners, especially when complex corporate structures involve multiple layers of ownership or when nominees obscure the true controlling parties.
• Insufficient screening against sanctions and watchlists, neglecting to check both the business entity and its principals against Politically Exposed Persons lists, sanctions lists, and adverse media sources.
• Inadequate ongoing monitoring of business relationships, treating KYB as a one-time onboarding check rather than a continuous process that tracks changes in ownership, business activities, or risk profiles.

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Penalties and enforcement consequences

Financial penalties for KYB violations can reach hundreds of millions of dollars for institutions with systemic failures to properly verify business customers.

Beyond fines, credit providers face consent orders requiring expensive compliance overhauls, restrictions on business expansion, and enhanced regulatory supervision. In cases involving willful KYB violations, executives and compliance officers can face criminal prosecution and imprisonment. 

How lenders can ensure KYB compliance

Successful KYB compliance requires systematic processes and appropriate technology. Credit providers should implement clear written policies documenting KYB requirements, including specific procedures for collecting business information, verifying UBOs, and conducting risk assessments.

Technology solutions can then make those written policies the default. Automated verifications can cross-check corporate data against multiple registries simultaneously, while screening software flags businesses or principals appearing on sanctions lists. Risk-based approaches that adjust due diligence intensity optimize resource allocation, and regular reviews of existing business relationships ensure ongoing compliance.

IV. Bottom Line

KYB represents a critical component of financial crime prevention, helping credit providers avoid relationships with fraudulent entities and shell companies that facilitate money laundering. Within an evolving regulatory framework that increasingly emphasizes corporate transparency, KYB requires sophisticated verification systems and ongoing vigilance.

LoanPro's platform supports KYB compliance through features that help document business verification processes and maintain detailed records of business customer relationships. If you're looking to strengthen your KYB approach or streamline business customer verification, reach out to us. We'd love to discuss your strategy and what's worked well for our clients.