In a world where trust is paramount, and security is non-negotiable, law firms are facing increasing pressure to ensure they’re working with legitimate and reliable businesses. This is where ‘Know Your Business’ (KYB) checks come into play. But KYB isn’t just about ticking boxes; it’s about building a foundation of transparency and safeguarding your firm’s reputation, and this is a factor in how law firms approach KYB. As regulations tighten and technology advances, the way we approach KYB is changing.
However, the constant changes in regulations and advancements in things like technology mean a law firm’s approach to KYB will slightly differ from the more traditional approaches of yesteryear. Firms are adapting to new changes because the demands of regulators and clients themselves are becoming more excessive, so it’s essential firms are quick to act and find an approach to KYB that suits their firm.
Let’s explore this shift and uncover how law firms approach KYB and how you can adapt to meet the demands of today’s legal landscape.
What is KYB?
Know Your Business (KYB) is a due diligence process aimed at confirming the identity and legitimacy of business entities. Similar to Know Your Customer (KYC) procedures that verify individual identities, KYB checks help organisations assess the authenticity and trustworthiness of other businesses.
The KYB process involves gathering and verifying essential information about a business, such as its legal name, address, registration number, and ownership details. This information is then compared against reliable sources to ensure compliance with regulatory requirements and to minimise the risk of engaging in fraudulent or illicit activities.
The processes are meticulous, beginning with information beyond individual identities, such as the company’s physical location, source of funds, varying registration documents, and the business hierarchy, establishing the ultimate beneficial owner (UBO) and potential partnerships that can sometimes obscure the proper ownership structure.
KYB plays a crucial role in business-to-business interactions. It goes beyond KYC processes, focusing on authenticity, compliance, and risk assessment of business entities. When institutions engage in financial transactions, the inquiries become more comprehensive and detailed.
What Factors Have Contributed to a Change in How Law Firms Approach KYB?
The traditional methods of completing KYB checks have evolved with more regulatory pressure, law firms are much more meticulous in their approach, and numerous factors have contributed to this new approach, including:
– Risk Mitigation – Law firms are much more proactive, on the front foot to combat financial crime. Taking a risk-based approach has impacted how firms handle KYB, given processes are much more thorough in ensuring details are correct and will not impact their business.
– Compliance With Ever-Changing Regulations – Regulation bodies like the Solicitors Regulation Authority (SRA) are continuously monitoring and changing the regulations in place, and with the pressure on firms to meet compliance demands increasing, firms are placing emphasis on ensuring all checks, including KYB, are compliant.
– Safeguarding Reputation – As well as meeting the rigourous demands, your reputation is valuable, and any tarnishing of that could have consequences that are hard to recover from. Fines and sanctions will catch the attention of potential clients, meaning they will likely go elsewhere, so it’s essential your reputation for being an outstanding firm remains intact.
– Building Strong Relationships – Ensuring you can complete effective checks and due diligence helps you maintain and build good relationships with current and future clients. This will come into the thinking when approaching KYB given the importance of clarifying who you are working with.
– Evolving Technology – Traditional manual checking processes are becoming a thing of the past as evolving technology within the legal sector is helping firms validate client and business information at a much faster pace. Legal technology offers more avenues and abilities to streamline entire processes and give firms peace of mind when it comes to pressing challenges like AML and compliance.
KYB Has Become An Integral Element of the Onboarding Process
Law firms have changed their approach to KYB because it has become such an important check during the onboarding process. The approach to KYB undoubtedly has changed given the constant regulation updates, increased pressure to meet compliance obligations and protecting your business from potential threats with criminals finding more sophisticated methods.
