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Business Verification - Complete Guide to Verifying Business Legitimacy

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Business includes all kinds of risks. Whenever you choose to do business with a new vendor, supplier, customer, etc., you evaluate the risk that the relationship could introduce. If your company operates in one of the many highly regulated industries, you must conduct business verification checks regularly to remain compliant. A business verification is designed to prevent fraud, money laundering, and terrorist financing, among other crimes. Conducting routine business verifications can help you avoid risk and ensure your business's safety.

Business verification is a critical process that helps companies verify the legitimacy and credibility of potential business partners, ensuring they are genuine entities and not fake companies designed to commit crimes. Some bad actors set up facade companies to shield themselves from authorities.

The main goal of a business verification is to fully understand the identity of your business partners and evaluate the risks associated with the target company. Determining whether they are engaged in money laundering or other financial crimes before signing any contracts is crucial. A business verification is often referred to as 'Know Your Business,' which is a critical risk management process.

What is Business Verification?

Business verification is a process used by companies to verify the legitimacy and credibility of a business, ensuring it is a genuine entity and not a fake one designed to commit crimes. Some bad actors set up facade companies to shield themselves from authorities.

The main goal of a business verification is to fully understand the identity of your business partners and evaluate the risks associated with the target company. Determining whether they are engaged in money laundering or other financial crimes before signing any contracts is crucial. A business verification is often referred to as 'Know Your Business,' which is a critical risk management process.

Why is Business Identity Verification Important?

Business identity verification is crucial for preventing fraud, enhancing security, ensuring regulatory compliance, and building trust with customers and partners. It helps businesses verify the legitimacy of individuals and other companies they interact with, protecting against financial losses, data breaches, and reputational damage.

Many industries, particularly financial services, are subject to regulations like Know Your Customer (KYC), Know Your Business (KYB), and AML (Anti-Money Laundering). Identity verification is essential for meeting these requirements and avoiding legal penalties.

Identity verification ensures that only authorized individuals have access to sensitive information and systems, reducing the risk of data breaches and unauthorized access. Demonstrating a commitment to identity verification enhances your business's credibility and public reputation. Identity verification is a fundamental practice for companies operating in today's digital world, offering protection against fraud, ensuring compliance, and fostering trust with customers and partners.

  • Fraud Prevention – Verifying the legitimacy of a company through its ownership structure can help prevent fraud. Fraud prevention is particularly crucial in the financial or investment industries, where the consequences could be dire.
  • Risk Management – Business verification is another crucial aspect of your risk management process that helps keep your company safe and avoid financial crimes, as well as damage to your reputation or violation of regulations.
  • Regulatory Compliance – Many regulatory agencies require companies like yours to perform customer due diligence and verify the accuracy of the information about the company and its legitimacy. Non-compliance can result in steep fines or other legal complications.
  • Preserving Reputation – Verifying business identities not only helps prevent fraud and compliance with laws, but it also preserves your business reputation, which can be drastically damaged if you associate with any fraudulent companies.
  • Better Decision-Making – The more information you have about a customer or partner, the better your decision-making will be. Learn as much as you can about them before signing any contracts.

How Business Verification Works

One of the biggest concerns when working with a new partner, customer, vendor, or supplier is whether or not any of the owners or people associated with the business are involved in financial crimes or may become so in the future. Part of the process of a business verification is obtaining information on the organization's Ultimate Beneficial Owners (UBOs).

The way to do this is to investigate who holds the most significant stock investment or has prioritized voting rights to make decisions. These individuals could be managers, directors, board members, or others involved in the business. This process will also eliminate those who manage day-to-day operations but lack direct involvement in making the high-level business decisions.

Examining the background of beneficial owners is similar to Know Your Customer (KYC) practices, and it verifies that the people are who they claim to be and that they do not pose any risks to your company. Another aspect is evaluating if any of the UBOs are known to be Politically Exposed Persons (PEPs) or involved with anyone or on sanction or watch lists.

Business address verification is another essential component where you verify that the company's physical address is actually real and that the business is located there. You then verify their business license and registration with government officials to ensure the company is properly licensed and registered as a legal entity. Check multiple sources to make sure the information is consistent.

What Types of Companies Need to Verify Businesses?

Although legally not every company needs to verify businesses, all of them should have at least some type of due diligence process for onboarding new customers, vendors, suppliers, or partners. The level of evaluation will depend on the relationship and the potential risk it may pose.

Businesses in the financial, investment, securities, and commodities industries are legally required to follow specific practices like Know Your Customer, Know Your Business, and Anti-Money Laundering (AML), Customer Due Diligence (CDD) programs. They cannot begin a new relationship with a client without running at least some preliminary tests to verify the business.

The reason these regulations exist is that the financial industry significantly impacts our society as a whole and our economy. If these industries were to be corrupted, the damage could be catastrophic, thus the need for compliance regulations.

Per the FinCEN's CDD rule, the following types of organizations are legally required to verify businesses before they do any business with them or begin a relationship.

  • Banks (Including Online Banks):

    Financial institutions that handle deposits, loans, and other banking services must verify businesses before establishing relationships.

  • Investment Dealers:

    Companies that buy and sell securities on behalf of clients must conduct thorough business verification.

  • Future Commission Merchants:

    Entities that trade futures contracts must verify the legitimacy of their business partners.

  • Commodities Brokers:

    Brokers dealing in commodities like oil, gold, or agricultural products must verify business entities.

  • Money Services Businesses:

    Companies that provide money transfer, check cashing, or currency exchange services must verify businesses.

  • Mutual Funds:

    Investment companies that pool money from multiple investors must verify business partners.

  • Stockbrokers:

    Individuals or firms that buy and sell stocks must verify the businesses they work with.

  • Other Financial Institutions:

    Various financial service providers must comply with business verification requirements.

  • Other Investment Businesses:

    Companies in the investment sector must verify business legitimacy.

  • Government Entities:

    Government agencies must verify businesses before entering into contracts or partnerships.

  • Insurance Firms:

    Insurance companies must verify businesses to assess risk and prevent fraud.

  • Supply Chain Companies:

    Companies in supply chain management must verify their business partners.

  • Investors:

    Individual and institutional investors must verify businesses before making investments.

These organizations are legally required to implement comprehensive business verification processes to comply with federal regulations and prevent financial crimes.

How to Verify a Business

There are many avenues to verifying a business. Some involve manual steps, and others technology and AI to make the job easier. Depending on whether or not your company is legally obligated to perform verifications, the depth of the background check may vary. However, some general steps include:

  1. Collect Business Information – Gather company names, registration numbers, the physical address, phone number, and names of important players to begin your evaluation.
  2. Verify the Business Registration – In most states in the U.S., companies must register their legal entity with the Secretary of State. You can contact this agency (or other governing body) to request copies of the organizational structure documents to verify the legitimacy of the company. You can also verify this through third-party information. Check to ensure that the registration is up-to-date and in good standing.
  3. Check Business Licenses – Many industries require licensing through the state government office. Examples include doctors, accountants, insurance companies, and realtors. Verify that these companies have the proper licenses and are authorized to operate in that location.
  4. Confirm Ownership and UBOs – Collect information on all the major players within the company. This includes major stockholders, managers, directors, and board members. You can extend this step to cover key employees who have significant control over critical business aspects.
  5. Verify Financial Details – A crucial step in business verification is to verify the company's financial position to look for any issues like excessive debts, bankruptcy filings, or lawsuits. Check bank records, financial statements, and credit reports of all essential parties and the company itself.
  6. Check Sanctions and Watchlists – Check the company and all UBOs against published sanctions and watchlists.
  7. Evaluate the Company's Operations – Conduct interviews with customers, employees, and other partners of the target business to verify their credentials, reputation, and that they do indeed sell the products or services they claim to. Visit their physical location to witness day-to-day operations in person.
  8. Document Business Verifications – Document everything in your business verification process and archive the results. Keep them on file for the duration of the relationship. You never know when the information will come in handy.
  9. Ongoing Maintenance/Monitoring – Monitor your customers, partners, and suppliers closely and update their files with new information as changes occur and personnel changes.

Different Methods of Verifying a Business

You can choose to employ one or multiple methods of verifying a business. Each comes with its own advantages and challenges. Some of the most common ways to accomplish this are as follows:

  • Video Verification:

    In this digital age, video is becoming very common for everything, including business verification. You may ask your new partner to record a video of the company's location, equipment, operations, and management team.

  • Postcard Verification:

    Another standard (old-school) method is to use a postcard, which you send to the company's physical address. The card has a unique code on it. Once the customer receives it, they call you to supply the code, and you enter it into a business profile to complete the process.

  • Phone Verification:

    Phone verifications are typical where you call the business's registered phone number and give them a code, which they then have to enter into an online system to complete the business verification. It's a method of proving that the phone number belongs to the business.

  • Email Verification:

    Email verification works the same as the phone verification, except that it sends an email to the business email address with a code that someone must receive and enter into a system to complete the verification process.

  • Instant Verification:

    You can also use completely automated systems that verify a business identity instantly through AI and machine learning. If the customer, partner, or vendor enters enough information to verify, the system can automatically, instantly review, compare, and approve it.

Business Verification Red Flags

When performing business verifications, you may find things that instantly indicate a potential problem. Many of these indicators suggest that the company may be fake or operating illegally. At the very least, it may be someone who has set up an illegal operation without properly registering it. Some red flags to watch out for include:

  • Phone Number – If the company has no legally registered phone number that you can call to verify, this could be a sign of trouble.
  • No Legal Registration – If you check with the state agency and the company is not registered as a legal entity and does not have an Employer Identification Number (EIN) with the IRS, then you should investigate further and ask questions.
  • No Physical Address – A company that has no physical location or business address is one to watch out for.
  • Lacking a Privacy Policy – Companies without an obvious privacy policy on their websites indicate a red flag you shouldn't ignore.
  • Complicated Company Structure – If the legal structure is buried under too many subsidiaries or joint venture arrangements, that could indicate that the owners are trying to hide themselves and their true activities. Businesses with too many bank accounts also indicate potential irregularities.
  • Complex Business Transactions – If you examine the company's financials and see too many complex business transactions or transfers between many accounts, you might want to tread lightly. It could indicate they are trying to hide the source of the money or its destination.
  • Back-Dated Adjustments – Another big red flag is changes made to previous years' financials, indicating that someone is 'cooking the books' and trying to alter business transactions after they have occurred or after an audit.

Challenges to Business Verification

Many things make performing business verifications difficult. You may experience various challenges, but it's important to forge ahead anyway and try to collect as much information as possible to make safe, well-informed decisions. Some of the challenges you may encounter include:

  • Cross-Border Challenges – When working with companies in other countries, you may encounter language or cultural barriers that make business verification checks more challenging or time-consuming. You may have trouble interpreting or translating legal documents in another language or where laws vary significantly from the U.S. This can lead to inaccuracies or misunderstandings. Another issue is that other countries have different legal and compliance regulatory frameworks that they must follow. These can differ widely from U.S. laws. For example, the EU uses the GDPR (General Data Protection Regulation), but the U.S. does not have a comparable federal-level privacy law.
  • Access to Information – Accessing the information you need for business verification can be tricky with U.S. and international clients. Some companies have rules about limiting access to records or restrictive policies that can make it very challenging to find out what you need to make a decision.
  • Company Buy-In – If everyone in your company, from the top down, is not invested in business verification, you may find it challenging to get staff to follow proper procedures and conduct thorough background checks. The solution is proper training and stressing the importance of this program.

How EntityCheck Helps with My Business Verification

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EntityCheck delivers comprehensive business data that we have compiled from government, public, and private sources. Our reports include multiple sections with dozens of data points. You'll find detailed Secretary of State records, such as Articles of Incorporation, annual filings, ownership changes, and entity classifications. UCC filings that cover equipment, vehicles, inventory, accounts receivable, and real estate. License status and expiration details are included if a business requires professional licensing, such as in law, real estate, dentistry, or skilled trades.

Court-related data is also available, including lawsuits, bankruptcies, liens, judgments, and federal cases. You can also see information about trademarks, patents, company officers, employees, and their background information.

EntityCheck reports include data in the following categories:

  • Secretary of State Filings:

    Complete records of business registration, annual reports, and entity status.

  • UCC Filings:

    Detailed information about secured transactions and collateral.

  • Bankruptcy Filings:

    Comprehensive bankruptcy records and financial distress indicators.

  • Judgments & Liens:

    Legal judgments and financial liens against the business.

  • Lawsuits:

    Active and historical litigation involving the business entity.

  • Employees:

    Employee information and organizational structure details.

  • Agents & Officers:

    Key personnel and management information.

  • Business Owners:

    Ownership structure and beneficial owner details.

  • Trademarks:

    Intellectual property and brand protection information.

  • Patents:

    Innovation and intellectual property assets.

  • Professional Licenses:

    Industry-specific licensing and compliance status.

  • And More:

    Additional comprehensive business intelligence data.

With EntityCheck's comprehensive business verification reports, you can make informed decisions about potential business partners, customers, and vendors while ensuring compliance with regulatory requirements and protecting your business from fraud and financial risks.

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