How to verify companies and how far to go: a practical guide from fraud management company BASIS ID

When your company is a financial institution and your customers happen to be legal entities, it may sound somewhat complex to onboard these companies. Of course, when it’s a promising client who wants to get their hands on business, the length of a bureaucratic Know-Your-Business (KYB) process can be rather frustrating.

Indeed, AML laws and guidelines are very tough on applicable requirements for verifications, especially when it comes to beneficial ownership, however remain silent on its practical side of implementation. And, what you are left to think about is how to guarantee the compliance of your financial institution and, at the same time, not to lose the client and their satisfaction with your service.

It’s not gonna be as complex as you might think. You see, legally speaking, you have follow “ESAB scheme”, as we call it, and bear in mind these four words:

It means that you have to prove that the company is existent, inspect its structure, check whether the person has the representation power and ensure you have determined beneficial ownership.

In order for you to find out that the company really exists, you have to start with collecting basic information about the company (name, number, address) that will allow you to perform basic searches against the databases. Think about resources. Probably, you won’t be able to run any searches without access to the databases. When you are onboarding domestic companies, it’s relatively clear. When it comes to foreign companies, you probably want to look for third party service providers.

You also need to ask the legal form of the company (e.g whether it’s a sole proprietor, limited company by shares etc), as it might indicate the level of risk (e.g see here). Then, you will proceed with asking the document that proves the existence of such company, such as certificate of incorporation, certificate of good standing or certificate of registration. You have full authority to decide, what document exactly will you accept.

Within this step you also should understand the structure of the company. If the documents that you’ve already required don’t tell you anything about shareholders, management board and beneficial owners, request this information from the company in a separate document.

When you have checked the validity of the company and now you have to make sure that physical persons behind the company have the power of representation. For this, you might want to ask either article of association, memorandum, or authorisation power. If, suppose, the person applying for verification is not listed in articles of association, you will need to ask an additional document proving their right to act on behalf of the company

You can see that the verification of a legal entity (KYB) gradually flows into verification of the natural person (KYC). Of course, the structure of the company may be really complex, and have many people on the board and in the ownership. As a regulated financial institution, you don’t have that much of a time and resources to investigate into every little detail of the corporate structure. On the other hand, you still have certain responsibilities. What you need to do, is to fully verify the person acting on behalf of the company and the beneficial owner (s). You don’t need to perform CDD on executives, directors, and shareholders, if they don’t interact with you on behalf of the company — it’s sufficient to collect their names.

Beneficial owner is the person who ultimately owns the legal person or legal arrangement. Mostly, the ownership is defined by the percentage of shares owned, typically 25%, or of the real control of the company. If the information on the beneficial ownership is unavailable in public resources or from the documents the company has provided, you can ask for a declaration of a beneficial ownership from the company. The example of such declaration can be found here. And from there, again, you should verify UBO’s identity. There might be cases when no natural person is identified under UBO’s — according to FATF, financial institutions should identify and take reasonable measures to verify the identity of the relevant natural person who holds the position of senior managing official.

It’s important to make sure the whole process won’t harm your customer flow being logical and clear to the prospective customer. Being risk & fraud management provider for regulated institutions, BASIS ID offers a helping hand in that.
To optimise your KYB and KYC flow, reach us at support@basisid.com.