6 Reasons Why Skipping a Company Check Could Cost You Everything

Signing a deal with a promising partner has its risks. This calls for the crucial need for financial institutions to prioritize company verification. A company check comprises comprehensive Know Your Business (KYB) procedures to understand its background covering all the aspects of its operations.

An investigation in 2020 unveiled a huge fraud, where there were fake companies that were scamming businesses out of millions during the COVID-19 pandemic. The increase in counterfeit PPE is one of the prime examples of serious consequences just because the verification was overlooked. Governments and companies that were desperate for medical equipment entered into agreements without proper verification, which ultimately resulted in losses of millions of dollars and unmet critical supply needs.

In this blog, discover the importance of comprehensive company checks and learn how overlooking them can cost you everything!

What is a Company Check and What’s the Need for It?

Company checking tries to discourage illegal activities and financial crimes such as fraud, money laundering, and financing of terrorism. Financial institutions have a duty under the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) laws to screen the corporate entities against relevant databases. Numerous sources can serve as references for verification, but some of the key ones include public business registries, sanctions lists, and watchlists.

A company that goes unchecked could be exposed to multiple threats. Corporate checks safeguard a business and its persons by ensuring they are compliant with all the standard regulations. Overlooking a company check can lead to serious repercussions such as financial loss, reputational loss, and even legal penalties.

Before learning about a company check, let’s delve into why it is needed.

Preventing Fraud

Shell companies are the most common ones used to launder money or commit fraud. A company check on fraudulent businesses reveals fake addresses, unverified ownership, financial discrepancies, etc. All these red flags help protect your business from committing fraud.

Ensuring Regulatory Compliance

A business needs to adhere to some set protocols, rules, and regulations such as anti-money laundering (AML), Know Your Business (KYB), among others. The company check ensures that the business meets all the set standards of regulatory requirements and saves on fines and lawsuits.

Reducing the Reputational Loss Risk

A business association with an untrustworthy or non-compliant business may taint your company’s reputation due to unethical involvement. Verification through a comprehensive company check ensures transparency and reduces reputational exposure to such mishaps.

Building Trust

Company checks help establish trust because your partners or clients become credible, which improves collaboration and long-term relationships. Business verification sources such as comprehensive risk assessment, business registries, AML databases, and UBO identification simplify the verification and, ultimately, the onboarding.

Avoiding Financial Disruptions

Company background checks verify a company’s financial condition and operational stability, which ensures you avoid disruptions, including unpaid invoices, bankruptcies, or service delays.

6 Critical Risks of Skipping Company Checks

• Financial Fraud

Skipping due diligence exposes companies to financial fraud. Criminal organizations, for instance, may use partnerships for illicit purposes like embezzlement, fake billing, or Ponzi schemes. This can lead to immediate financial loss, cash flow impairment, and recovery costs. For instance, scams involving fake suppliers or nonexistent service providers are often the result of a lack of due diligence.

• Legal and Regulatory Penalties

Associations with non-compliant companies or organizations involved in money laundering or other illegal activities may lead to fines, lawsuits, and sanctions. Global regulators like Financial Action Task Force (FATF) and Office of Foreign Assets Control (OFAC) demand verification of the partners’ adherence to AML laws and compliance with sanctions from businesses. Failure to do so can lead to severe consequences, such as suspension of business or millions of dollars in penalties.

• Reputational Damage

Brand reputation is tarnished with unreliable or unethical business affiliations. Customers, stakeholders, and investors lose their confidence in the company when scandals or non-compliance surface. For example, where there is an unethical practice among supply chain partners, the backlash is always spread to the ecosystem. The brand reputation takes years and a lot of money to repair.

The KYB’s company check solution helps identify any red flags, such as past fraudulent activity or associations with criminal entities. It lets you verify the legitimacy of a business in seconds so that you can make informed decisions before signing a deal with your potential partner.

• Security Breaches

According to the report by the EINSA European Union Agency for Cybersecurity, in 2021, 62% of supply chain cyber attacks resulted from inadequate due diligence of vendors. Unchecked partnerships can expose an organization to cybersecurity risks. Fraudulent companies or vendors may exploit the vulnerabilities through lax security protocols to steal data or breach systems.

• Financial Instability

Dealing with companies facing financial distress or hidden risks of insolvency may cause disruptions to your company operations. Missed payments, delays in projects, or surprise shutdowns from partners or suppliers can really hamper your growth plans and impact financial stability. Such errors can be avoided through a thorough financial assessment while running checks on companies.

• Non-Sustainable Partnerships

Skipping the KYB checks may lead to partnerships that are unsustainable in the long term. A misaligned value system, goal, or operational standard leads to frequent conflicts, inadequate performance, or early termination of the agreement, thus wasting resources and harming growth prospects.

How to Check if a Company is Legit

In the present complex landscape of businesses, where internet-based businesses are on the increase, legitimacy is a major cause of concern. It has so become relatively easy to set up an online business, but thereby increasing the risk of eventual fraud. For this reason, checking the legitimacy of a company is crucial. Below are the essential steps to follow for a company check:

• Check the company’s official/registered name.
• Examine registration documents.
• Verify online presence. Look up the company’s official website and confirm important information such as contact number, email, and address.
• Search for negative news against the business.
• Review financial and compliance records.
• Run a Know Your Business (KYB) check on a company.

Suggested Read: How to Check If A Company Is Legit?

Streamlining Company verification with The KYB

A company check helps to reduce financial fraud, reputational risk, regulatory fines, or bad business relationships that could be unsustainable. It is most critical for industries in finance, real estate, and supply chain management. The KYB empowers businesses to onboard their business partners more confidently by helping them verify their legitimacy. Our experts offer the most accurate, fast, and cost-friendly solutions to verify a company. With instant access to real-time company data across 250+ countries and states, we help you overcome challenges such as accessibility issues, inconsistent data, and the hassle of data retrieval from multiple platforms by providing you with legal and authoritative company data instantly under one platform.

Contact us today to verify a company with our KYB services and onboard securely and confidently.