FinTech Firms Combine KYB With KYC For Identity Verification

With the fifth European Union (EU) Anti-Money Laundering Directive (AMLD 5) coming into force and raising a concern over the fourth AMLD, beneficial ownership is becoming front-and-center for financial firms. “This whole beneficial ownership aspect of a transaction is only becoming more and more important,” Global Data Consortium (GDC) Co-Founder Charles Gaddy told PYMNTS in an interview.

Forex companies, in particular, move money as they change it from different currency types. So the idea that the money laundering directive in Europe would mandate beneficial ownership as a part of enhanced customer due diligence “is, in some ways, the logical next step,” Gaddy said. GDC, for instance, started out with a solution set for know your customer (KYC) in an eCommerce use case where the company was conducting high-velocity ID verification. Then the fourth money laundering (4MLD) directive came out, which started to mandate more and more in the realm of customer due diligence, so the company added a compliance check.

In that case, the company checks two different sources in a given country with two different rule sets. That procedure can be described as a two-by-two check, and is geared toward verifying individuals on two sides of a transaction. Through the new standards, however, the idea is to also check for the beneficial owners of companies involved in a transaction. Those entities are part of a monetary transaction contingent on purpose, velocity and volume and own a portion — 25 percent, for example — of an organization. (The percentage may vary in different markets.)

When firms have no reason to question its validity, they can rely on the information provided by the customer or corporate officers. But regulators are now requiring firms to use risk-based policies and procedures to determine a customer’s risk scores and to use risk scores to establish a baseline for transaction and relationship monitoring. At the same time, the fourth anti-money laundering directive expands the idea of customer due diligence to enhanced customer due diligence (eCDD) — a set of compliance regulations to which financial firms must adhere when doing business with consumers and corporate banking clients.

That framework assesses potential risks, such as money laundering and terrorist financing, that firms face in relationships with specific customers. More detailed eCDD — especially for business accounts, trusts and high-net-worth (HNW) accounts — has become a focus for regulators, governments and agencies. The Panama Papers, for instance, have provided a behind-the-scenes view into the legal practices and transaction structures used by some corporations and high-profile individuals to avoid regulatory reporting requirements.

With these factors in play, FinTech firms are evolving their offerings to keep up with the new regulatory challenges. FinTech startups like GDC are seeking to evolve with the times, combining these know-your-business (KYB) checks with know your customer (KYC) and underlying technology to provide an application programming interface (API). Financial firms can then consume the API call and sign off on it regardless of country or use case, which means foreign exchange firms can exchange money with more velocity — or maintain the same speed as before the regulations.