KYB (Know Your Business) is an important process as part of wider AML procedures in legal firms that involves verifying the identity and background of their corporate clients, suppliers, and partners.
In order to comply with Anti-Money Laundering requirements, law firms must conduct thorough background checks on all parties involved in legal cases or matters. This enables firms to make informed decisions during client, matter, and case evaluations, and mitigate risks associated with money laundering, fraud, and other financial crimes by ensuring they fully understand the entities they are dealing with.
Why is KYB important for legal firms?
Primarily, a robust KYB process ensures regulatory compliance with laws such as the UK’s Money Laundering Regulations 2017 and guidance issued by the Solicitors Regulation Authority. These regulations mandate that legal firms verify the identity of their business clients and ensure sufficient risk assessment of the matter at hand to prevent illicit activities such as money laundering, financial crime, and terrorist financing.
🔗 A complete guide to anti-money laundering regulations in the UK
By conducting thorough KYB checks, legal firms can identify and mitigate risks associated with engaging in business with potentially fraudulent or high-risk entities.
Additionally, KYB helps protect the firm’s reputation and maintain client trust by ensuring that all business relationships are transparent and lawful. Failure to implement effective KYB processes can result in severe legal consequences, including fines and other penalties, a stark reminder of its importance in the legal sector.
In this article, we take a look at some of the challenges related to the KYB process in legal firms and share some practical solutions in order to overcome these.
KYB challenges for legal firms
Naturally, no company wants to fall foul to non-compliance with KYB requirements. However, conducting comprehensive KYB checks are, by their very nature, complex. These checks must be sufficiently in-depth, and rigorous enough for compliance teams to effectively track and understand intricate corporate structures, verify the legitimacy of the people controlling them (PSCs), and identify the ultimate beneficiaries (UBOs) of their financial activities.
Challenge #1: Identifying and verifying UBOs
Identifying and verifying Ultimate Beneficial Owners (UBOs) presents significant challenges for KYB processes in legal firms due to the complexity of some ownership structures. Many businesses, especially large corporations and multinational companies, have intricate ownership frameworks with multiple layers of subsidiaries and holding companies.
This complexity is often exacerbated by the use of illicit shell companies and other entities designed to obscure the true ownership, making it difficult to trace the actual individuals who ultimately benefit from the business. Bad actors tend to employ sophisticated methods to conceal their identities and beneficial ownership, such as using nominee shareholders or trusts so that Politically Exposed People (PEPs), sanctioned or blacklisted people, and criminals can hide in multi-layered complex companies. Without KYB processes, it would be difficult to spot these dubious characters. The rise of financial crime, including money laundering, terrorism financing and fraud, adds to this complexity, as legal firms must ensure they are not inadvertently facilitating illegal activities.
How can you solve this?
Together, these challenges combine to make identifying and verifying UBOs a daunting task. However, solutions do exist.
Automated KYB technology can handle much of the heavy lifting by scouring global databases, registries, and corporate data sources to streamline the identification and verification of UBOs. These platforms can automatically gather and analyse vast amounts of information from various sources quickly and accurately.
This not only saves valuable time and effort compared to manual research but also enhances overall compliance and risk mitigation efforts. This automation accelerates the process of identifying UBOs by rapidly analysing large datasets, flagging discrepancies or risk factors, and uncovering hidden relationships that might contribute to increased risk.
Challenge #2: Managing the client onboarding process
One of the key challenges in the KYB process for legal firms is the client onboarding process. Often involving the collection and verification of vast amounts of information from clients, including their identification documents, business registration details, financial statements, and sources of wealth, the challenge lies in efficiently managing this process while ensuring accuracy and compliance with regulations.
How can you solve this?
To overcome this, legal firms should evaluate KYB tools to streamline and centralise the collection and verification of corporate client information. These systems can automate data extraction, document verification, and risk assessment, reducing the time and effort required for client onboarding.
Additionally, implementing a risk-based approach via these tools can help your team to prioritise high-risk clients, ensuring that the necessary due diligence is performed while expediting the onboarding process for low-risk clients.
By implementing automated workflows as part of the client onboarding process, your firm can reduce the manual workload and administrative burden on fee earners to conduct KYB checks and minimise the risk of human error contributing to non-compliance.
Challenge #3: Managing international clients
Conducting KYB checks on international clients can be challenging due to varying regulations, language barriers, and difficulties in accessing reliable data.
What’s more, jurisdictional differences in corporate transparency and regulatory requirements mean that obtaining consistent and reliable ownership information from across the globe can be challenging. Stringent privacy laws in certain regions also limit access to beneficial ownership information, creating further obstacles for legal firms.
As a result, verifying the identities and backgrounds of all relevant entities and individuals for KYB due diligence can be time-consuming and complicated.
How can you solve this?
Firms can address the challenges of onboarding and managing international clients through the use of automated KYB software that streamlines the identification and verification process.
🔗 How automated KYB checks can help mitigate risk in your business
By integrating multiple global databases, automatically processing complex corporate structures that map ownership chains, identifying UBOs and screening individuals, KYB software performs deep research and analysis in a matter of moments, flagging any risks associated with international clients which need to be mitigated before clients can be safely onboarded.
Challenge #4: Dealing with high volumes of client information
With an increasing number of regulations and compliance requirements, legal firms are tasked with verifying the identity of their clients while ensuring the accuracy and completeness of the information provided. This can include client information, financial records, and other relevant data that needs to be collected, validated, and analysed.
Manual KYB processes often struggle to keep pace with the sheer volume of data, leading to delays, errors, and potential compliance risks. Moreover, the manual review of large datasets is labour-intensive and time-consuming, diverting valuable resources away from other critical tasks within the firm.
What’s more, tackling disparate systems to carry out KYB is not only inefficient, but increases the risk of human error or oversight. When KYB processes are spread across multiple systems, sources, and databases, processes are slowed down, delaying client onboarding and compliance checks. Multiple systems often mean multiple points of data entry and management, increasing the likelihood of discrepancies and inconsistencies, which can lead to inaccurate risk assessments and flawed compliance decisions.
How can you solve this?
To overcome this challenge, legal firms can integrate technology solutions such as NorthRow’s WorkStation into their onboarding processes that can streamline data collection, validation, and analysis, reducing the manual effort required.
Automated KYB software streamlines the verification process and enhances accuracy and efficiency. Automated KYB software can swiftly analyse vast amounts of client data, cross-referencing it against various databases and sources to verify identities and assess risk levels. With a central, all-in-one platform that unites client and compliance data in one single platform, firms can eliminate the fragmentation of data across multiple systems, ensuring all relevant information is easily accessible in one place.
This not only reduces the burden on legal professionals but also ensures consistent compliance with regulatory requirements – and removes the need for multiple contracts with different software vendors and data providers!
What’s more, automated KYB software can provide real-time monitoring and updates, enabling legal firms to adapt quickly to changing regulations and mitigate potential risks proactively.
Adopting automated KYB software enables legal firms to efficiently manage high volumes of client information while maintaining compliance and optimising resource allocation.
