Know Your Business (KYB) verification follows a structured process that transforms an application—often just a business name and address—into a verified, risk-assessed customer record. This article walks through each stage of the KYB process, from initial data collection through ongoing monitoring.
Stage 1: Data Collection
The KYB process begins with collecting information about the business applicant. The goal is to gather enough data to identify and verify the legal entity and its ownership.
Business Details:
- Legal business name (as registered)
- Trade name / DBA (if different from legal name)
- Business address (registered and operating)
- Entity type (LLC, corporation, partnership, sole proprietor)
- State/jurisdiction of formation
- Tax identification number (EIN or SSN for sole proprietors)
- Date of formation
- Industry / nature of business
Ownership Information:
- Names of beneficial owners (25%+ ownership or significant control)
- Ownership percentages
- Contact information for UBO verification
Collection Methods
- Self-service forms: Customer-facing applications
- API integration: Automated data submission from partner systems
- Document upload: Supporting documentation (certificates of formation, operating agreements)
Best Practices
- Request the legal name exactly as registered—variations cause matching failures
- Collect both registered address and operating address (they often differ)
- Make EIN collection mandatory for entities likely to have one
- Provide clear guidance on beneficial ownership thresholds
Stage 2: Entity Verification
Entity verification confirms that the business legally exists and is in good standing. This is the foundation of KYB—everything else depends on first confirming the entity is real.
Primary Verification Source
The Secretary of State (or equivalent state authority) is the authoritative source for entity existence. Verification checks:
- Entity exists: The named entity is registered
- Status is active: Not dissolved, suspended, or administratively inactive
- Details match: Legal name, entity type, formation date align with application
- Registered agent: Current registered agent is on file
Entity Resolution Challenge
Applicants often provide names that don't exactly match state records:
Joe's Coffee Shop: JRM Holdings LLC
Acme Auto Repair: ACME AUTOMOTIVE SERVICES, INC.
Green Thumb Landscaping: GTL Services LLC
Entity resolution bridges this gap by matching applications to authoritative records despite name variations, abbreviations, and trade name differences.
Verification Outputs
- Match confidence: How certain is the match to the legal entity?
- Entity status: Active, inactive, dissolved, suspended
- Filing history: Recent annual reports, amendments
- Red flags: Address changes, name changes, status lapses
Stage 3: Ownership Identification
After verifying the entity exists, KYB identifies who owns and controls it. This stage maps the ownership structure to identify ultimate beneficial owners.
Ownership Thresholds
The standard beneficial ownership threshold is 25%—individuals who own 25% or more of the equity interests must be identified. However:
- Some regulations require lower thresholds (10% or even 0% for certain high-risk categories)
- "Control" matters too: individuals who exercise significant control (CEO, CFO, managing member) may qualify as beneficial owners even without ownership stake
Ownership Structure Types
Simple ownership: One or a few individuals directly own the business
- Straightforward to verify
- Applicant-provided information can be confirmed against state records (for corporations with public shareholder records)
Layered ownership: Business is owned by another business, which is owned by another business
- Requires tracing the ownership chain to natural persons
- Each layer must be verified
- Business graph data structures help navigate complex ownership
Trust ownership: Trust holds ownership interest
- Settlor, trustee, and beneficiaries may all be relevant
- Adds complexity to UBO identification
Ownership Data Sources
- Application data: Self-reported by applicant
- State filings: Some states require ownership disclosure (varies significantly)
- Commercial data: Business intelligence providers aggregate ownership information
- Direct outreach: Request documentation (operating agreements, cap tables)
Stage 4: UBO Verification
Identifying beneficial owners isn't enough—their identities must be verified. This is where KYB meets KYC: applying individual identity verification to each beneficial owner.
KYC on Beneficial Owners
For each identified UBO, verify:
- Identity: Name, date of birth, address, government ID
- Relationship to business: Ownership percentage, role, control exercised
- Screening: Sanctions, PEP status, adverse media (see Stage 5)
Verification Methods
- Documentary: Government-issued ID, proof of address
- Non-documentary: Database verification, credit bureau matching
- Biometric: Selfie matching, liveness detection (for high-risk cases)
Challenges
- Uncooperative owners: Some beneficial owners resist providing personal information
- International owners: Foreign nationals may have documents that are harder to verify
- Nominee arrangements: Stated owners may be nominees for undisclosed beneficial owners
When UBO verification cannot be completed, the application typically cannot be approved—beneficial ownership verification is a regulatory requirement, not optional.
Stage 5: Risk Screening
Risk screening checks the business and its beneficial owners against watchlists, sanctions lists, and adverse information sources.
Screening Categories
Sanctions Screening
- OFAC SDN List (US sanctions)
- UN, EU, UK sanctions lists
- Country-specific sanctions programs
PEP Screening
Adverse Media
- News sources for negative information
- Financial crime, fraud, regulatory actions
- Reputational risk indicators
Watchlist Screening
- Law enforcement wanted lists
- Regulatory debarment lists
- Industry-specific exclusion lists
Match Handling
Screening hits require disposition:
- True positive: Actual match to sanctioned/listed party—typically requires rejection or escalation
- False positive: Name similarity but different person/entity—document and clear
- Potential match: Requires additional investigation to determine
Stage 6: Decision and Approval
All verification and screening results feed into a decision: approve, decline, or escalate for manual review.
Decision Framework
Auto-Approve (Straight-Through Processing)
- Entity verified with high confidence
- All UBOs identified and verified
- No screening hits
- Risk score within acceptable threshold
Auto-Decline
- Entity doesn't exist or is dissolved
- Confirmed sanctions match
- Known fraud indicators
- Prohibited business type
Manual Review
- Low-confidence entity match
- Screening hits requiring disposition
- Complex ownership structures
- Missing required information
- Risk score in gray zone
Risk-Based Approach
The risk-based approach applies different verification depth based on assessed risk:
- Lower risk: Established businesses, transparent ownership, low-risk industries may qualify for simplified due diligence
- Standard risk: Full verification process as described
- Higher risk: Enhanced due diligence adds source of funds, deeper ownership investigation, senior approval
Stage 7: Ongoing Monitoring
KYB doesn't end at onboarding. Businesses change—ownership transfers, statuses lapse, sanctions designations occur. Ongoing monitoring catches these changes.
Monitoring Activities
Periodic Re-Verification
- Annual or risk-based refresh of entity status
- Confirm continued good standing
- Update ownership information
Continuous Screening
- Real-time sanctions list monitoring
- Adverse media alerts
- PEP status changes
Transaction Monitoring
- Unusual activity patterns
- Deviations from stated business purpose
- Velocity and volume anomalies
Trigger-Based Review
- Significant transactions
- Customer-initiated changes
- Negative information alerts
Event-Driven Updates
Changes that should trigger re-verification:
- Business files amendment (name change, registered agent change)
- Ownership change reported
- Address change
- Adverse media or sanctions hit
- Unusual transaction activity
Putting It Together
The complete KYB process transforms limited application data into verified, monitored customer records:
- Collect business and ownership information
- Verify the legal entity exists via authoritative sources
- Identify beneficial owners through ownership chain analysis
- Verify each UBO's identity through KYC processes
- Screen entity and UBOs against watchlists and adverse media
- Decide based on verification results and risk assessment
- Monitor for changes throughout the relationship
Each stage builds on the previous. Skipping stages or accepting unverified information creates gaps that bad actors exploit.
