After the AML5 directive entered into force on July 9, 2018, the need for business verification services became necessary for startups tackling online fraud challenges. As of today, KYB plays an important role in verifying companies and creating affective compliance processes.
Understanding startup fraud risks
Startups, by their nature, focus primarily on survival, considering that as many as 90% of companies stop operations after 1 year in business. To maximize the likelihood of success, usual shortcomings are taken into account: cheap outsourcing abroad, outdated compliance processes, lack of audits and certification, and questionable reputation of the origin of the incorporation.
Such an attitude poses a potential risk to businesses and their partners by creating shaky business ties that are prone to failure at later stages. Imagine partnering with an outsourced development company that presents fraudulent shareholders and directors and has ties with potential online fraudsters. Not only is the quality of the software questionable, but the likelihood of API loopholes also increases considerably.
To ensure that the startup is legitimate, business verification services are utilized to showcase potential red flags unseen from the first glance.
KYB offers a detailed company breakdown
Automated Know Your Business (KYB) services are primarily responsible for two parts: information collection and verification. Typically, the startup is requested to fill in company information, including address, director, or attorney, share company incorporation documents, and filling a questionnaire according to your compliance processes. Additionally, you need to request a breakdown of the shareholders' structure and, if necessary, identify key stakeholders (having 25% or more ownership of the company).
A second step is verifying the provided information. That’s where it is crucial to verify actual data across government registry data or by utilizing third-party data: up-to-date credit bureaus. Information from official registries includes ongoing director details, shareholders (depending on the country), and regular information, e.g., an address. If there are mismatches between the provided incorporation details and the data from registries, it already poses a red flag on the onboarded partner, requiring further due diligence.
KYB instills effective ongoing monitoring
Another crucial aspect of business verification is ongoing monitoring. Even if the onboarded startup did not pose any potential regulatory issues, it does not guarantee that it will continue to stay in this way, forever. A more practical example is partnering with law or financial institutions, where the director becomes a sanctioned or politically exposed person due to his relative's political affiliation. The following partner could potentially interfere with your business by receiving influence from your competitors via political ties.
With the correct KYB procedure, automated software will immediately notify whether the company or shareholders have started appearing on international watchlists. The ongoing monitoring will work in the following way:
1. First, it will scan all global and local watchlists, including OFAC-SDN, the World Bank, Interpol, the United Nations, the FBI, and others.
2. Then, it will navigate through all included monitoring subjects, and whenever a new finding is made, that subject will be marked as suspected.
3. Consequently, a compliance officer can conduct further due diligence.
Business verification services help to meet regulatory compliance.
The primary requirement for the business verification services posed by both AML5 and AML6 directives is the identification of the company UBOs (Ultimate Beneficial Owners) and verifying business information. Usually, the following data points are collected:
- The company’s legal name.
- The company’s operating address. Remember that a business operating address might not match the registered address.
- The current legal standing of a business entity indicates whether it’s authorized to conduct business activities.
- Verifying licenses and permits that a business entity requires to operate legally in a particular jurisdiction.
Even though a company has to operate in a regulated industry (financial, crypto, gambling), conducting KYB checks in a non-regulated environment is beneficial due to potential policy changes or unforeseen expansion. Aside from conducting proper due diligence, all startups should comply with standard regulations around conducting business activity. Below are examples of business changes involving LLCs and corporations that can trigger compliance actions: Change of business name or address, Change of ownership, Hiring employees, Adding new products and services, Expanding to a new location within or outside your home state, Changing your business entity type, Merger or acquisition. For example, if you change your business name or move to another state in the US, you must:
- Files Articles of Amendment with the state
- Notify the IRS
- Update business licenses and permits
- Submit an updated BOI report to FinCEN (Note: If there are any changes in the information reported about the company or its beneficial owners, an updated report must be filed with FinCEN within 30 days.)
Conclusion
As the startup ecosystem continues to grow and evolve, the importance of mitigating fraud risks cannot be overstated. Companies should have correct laws instilled in their policies. Then, KYB service can serve as a crucial tool in this endeavor, providing businesses with the means to verify the legitimacy of their partners and protect against potential fraud.
