In today’s legal landscape, compliance with Know Your Business (KYB) regulations is not just a statutory requirement but a strategic imperative. KYB measures are crucial in ensuring that legal firms engage only with legitimate entities, thus preventing fraud, money laundering, and other illicit activities.
For compliance teams in legal firms, navigating the complexities of KYB can be challenging. In this article, we outline some practical strategies for legal firms to mitigate KYB risks effectively.
Understand KYB requirements
Compliance teams in legal firms need to have a strong understanding of KYB regulations. These regulations are designed to prevent money laundering, terrorist financing, and other illegal activities by ensuring that businesses are properly identified and verified.
One important aspect of understanding KYB regulations is identifying the types of businesses that pose a higher risk and taking a risk-based approach to each matter. This could be based on factors such as the industry they operate in, their geographical location, their ownership structure, and their reputation. By recognising and evaluating businesses which pose a higher risk, legal firms can implement additional due diligence measures where necessary to ensure compliance and reduce the risk of financial crimes.
What’s more, mitigating KYB risk also requires teams to keep up to date with any changes or updates to regulations while having a deep understanding of the required documentation, verification methods, and risk thresholds for different types of businesses at varying levels of risk.
Implement comprehensive customer due diligence (CDD) processes
One of the key strategies for mitigating KYB risks is implementing robust customer due diligence (CDD) processes. Compliance teams should establish thorough procedures for verifying the identities of businesses and their owners to ensure that only legitimate businesses with an acceptable risk profile are onboarded and maintained as clients.
This may involve requesting and reviewing various documents, such as business licences, articles of incorporation, financial statements, and identification documents of the owners.
🔗 How often should we undertake customer due diligence (CDD) for a client?
What’s more, legal firms should also conduct ongoing monitoring of their clients to detect any changes in their profile or business activities that may fall outside of your firm’s risk appetite. This can include monitoring for any unusual transactions, changes in ownership or management, or significant changes in the nature of their business. By continuously monitoring clients, legal firms can promptly identify and address any potential risks or compliance issues.
Establish robust beneficial ownership identification processes
Identifying the beneficial owners of a business is a critical component of KYB. Beneficial owners are individuals who ultimately own or control a company, and ensuring transparency in this area helps prevent financial crimes. Compliance teams must conduct thorough investigations that go beyond surface-level checks by scrutinising organisational structures to uncover the actual individuals behind a business.
And yet, some companies may present complex and layered ownership structures, making it difficult to identify who is truly in control. Therefore, compliance teams need to be diligent in their efforts, using external databases and publicly available registers and other resources to verify the ownership claims provided by clients.
The UK’s People with Significant Control (PSC) register, for example, provides information on individuals who hold significant control over companies. By cross-referencing client-provided information with public records, compliance teams can verify the accuracy of ownership details and ensure that they are not being misled by false or incomplete information.
This step is crucial for maintaining the integrity of the KYB process and protecting your firm from potential legal and reputational risks associated with engaging with suspiciously complex corporate entities.
Use automated KYB technology for compliance
KYB compliance can be an administrative burden, especially when carried out using manual, labour-intensive processes. But, when automated using the best KYB technology, it can significantly improve operational efficiency and alleviate much of the manual workload.
By automating and streamlining KYB processes, legal firms can reduce the time and resources spent on manual checks. Modern KYB solutions can perform these checks quickly and accurately, freeing up valuable time for legal professionals to focus on more strategic tasks.
🔗 Safeguarding the legal profession: Navigating the compliance landscape
Technology is a cornerstone of effective KYB compliance. With advanced KYB solutions like NorthRow’s WorkStation, firms can streamline and automate the compliance process, making it more efficient and less prone to human error. These solutions can integrate seamlessly with existing systems, providing a holistic view of client data and facilitating real-time monitoring and analysis.
By using technology, compliance teams can improve the efficiency and accuracy of KYB compliance, reducing the risk of manual errors and fraudulent activities. Additionally, technology can provide real-time alerts and notifications for any suspicious activities or changes in the status of businesses, enabling prompt action to be taken.
