The KYB checking process can be challenging, so it’s essential you can spot signs that could be problematic. In other words, spotting those KYB red flags could have a detrimental effect on your firm if your checking process isn’t up to the regulatory standards.
KYB checks are important elements of due diligence, and dissecting all that information and validating whether it is correct can be complicated. There are things to look out for, so taking a risk-based approach to these red flags is vital to protecting your staff and firm.
There are plenty of red flags that firms need to be aware of, and this latest feature will give you a deeper look into the common KYB red flags, why they are red flags, and what they mean for your firm.
The KYB Red Flags
Let’s start by looking at some of the common KYB red flags that may potentially present themselves when you attempt to validate business information. Completing due diligence on businesses is essential, given you must meet your legal obligations while also protecting your firm from potential risks that these red flags may present. There are numerous red flags that can present themselves, including:
– Complex corporate structures – A business with multiple complex corporate structures poses red flags because it can be very difficult to determine who exactly controls the company, and it can be a method of hiding illicit activities.
– Use of nominees or third-party agents – This red flag is based on connections and relationships. If a chosen nominee or third-party agent has little to no connection to the business activities or lacks expertise within the business industry, it potentially points to said person being the face of the company without owning it.
– Use of offshore accounts – If a business owns subsidiaries in offshore tax havens, particularly where the ultimate beneficial owner information doesn’t have to be disclosed is a red flag as this could be hiding illicit activities and funds.
– Use of shell companies – Similar to offshore accounts, the use of shell companies that are based in other countries and places that are coined as ‘tax havens’ where particular information doesn’t have to be confirmed can be a concerning sign.
– Frequent changes in ownership & management – Constant changes in management and management structure can present concerning signs if there isn’t clear business sense as to why there are changes. This is a red flag because it could suggest a person involved is trying to evade verification and involvement in business.
– Financial anomalies – Any concerns around the finances of a business are an instant red flag. Suspicious activity within the finances and financial anomalies are usually a sign of criminal activity, such as money laundering.
– Unusual business activity – Business activities out of the ordinary are usually a red flag. Activities that are inconsistent with the usual business operations or transactional patterns are also inconsistent, likely need investigating when you are validating business information.
Politically exposed persons (PEPs)—A PEP who is found to be the ultimate beneficial owner of a business is a significant concern and a major red flag. You must complete enhanced due diligence to ensure you validate all the information presented so you can protect your business.
– Reluctance to share information – If a business is reluctant to give you all the information you need to validate their company, it suggests they have something to hide. It is a red flag for your firm as it seems the business you are working with is trying to conceal information which could relate to things such as finance and beneficial ownership.
Vitally Important to Spot Red Flags Early
Your firm must be on the front foot, be proactive and complete all due diligence obligations when validating business information. It is imperative to take a risk-based approach to protect your own interests and ensure your firm isn’t at risk of potential fines and sanctions from the regulation bodies.
Spotting red flags and managing those effectively will help you complete checks quicker and confirm if it’s safe to work with the business. Red flags can be hard to navigate, but spotting them early gives you a better chance of reporting criminal activity and ensuring your firm is completely protected from any threats the business will pose.
