Why a Good Standing Certificate Matters in Legal Verification and Compliance

“Would you partner with a company that doesn’t officially exist anymore?”

That’s exactly the risk businesses take when they skip verifying a partner or supplier’s Certificate of Good Standing. CoGS is the first line of defense in ensuring that the company is legitimate, legally compliant, and authorized to operate. Moreover, it assists in combating the risk that comes with the business while making a deal.

CoGS may seem like a piece of paper, but they serve as proof of legal existence, active status, and compliance with regulatory laws. All of this lays the foundation for a reliable business relationship.  Read on to uncover more details on CoGS

Good Standing Certificate | A Baseline of Legal Verification

A Certificate of Good Standing (CoGS) is a legal document that certifies an organization is properly registered and authorized to do business in a given jurisdiction. It is the official proof that the business exists as a valid entity and is up-to-date with the required regulatory requirements.

Distinct regions and bureaus may refer to this document by alternate names, including:

• Certificate of Existence 
• Certificate of Status
• Status Certificate
• Certificate of Authorization

However, all of them serve a similar purpose. Some jurisdictions refer to it as a Certificate of Compliance or Certificate of Fact, emphasizing that the company has fulfilled its legal obligations. A certificate of good standing generally contains key identifying details:

• Business Legal Name 
• Entity type
• State or country of formation 
• Statement of good standing(includes date of issuance and its validity)

Therefore, a Good Standing Certificate is essentially a “health check” for a business’s legal status.

Is CoGS the First Legal Step in Business Verification? 

Verifying that companies exist and are in good standing is a crucial step in any thorough due diligence or Know Your Business (KYB) process. Before exploring who owns the company or assessing financial risk, businesses need to confirm they’re dealing with a real, active entity. 

In fact, a comprehensive due diligence checklist requires validating the Certificate of Good Standing from the jurisdiction where a company is based (and any other state or country where it’s registered to do business) as a baseline verification step. 

For example, under European Union (EU) law, companies opening a branch in another Member State must typically present a CoGS from their administrative jurisdiction. In general, EU member states follow similar rules requiring a CoGS or equivalent when a non‑resident company seeks to register locally.

Think of the CoGS as the business equivalent of a business identity document. Just like any ID card validates an individual’s identity, the CoGS verifies a company’s identity and its compliance with AML and other regulatory requirements.

Repercussions of Not Verifying a Certificate of Good Standing

Failing to verify a partner’s or client’s Certificate of Good Standing can expose an organization to fraud, financial loss, and heavy regulatory penalties. 

History is replete with cautionary cases highlighting why this basic step should never be skipped.  One major factor in these cases is the misuse of shell companies, which are often inactive or entities with no real operational activities, thereby facilitating crime.

In August 2023, Singapore’s police carried out coordinated raids dismantling one of the country’s largest money laundering operations involving shell companies and opaque financial structures.

Authorities arrested 10 individuals and froze over S$1 billion in assets, with the total value of assets involved eventually soaring to S$3 billion.

The scheme relied largely on shell companies that appeared legitimate but were nothing more than paper entities with no real business activity.

Therefore, such shell companies have been at the center of numerous global money laundering scandals. Their primary purpose is to conceal the true ownership structures and the source of funds. 

If basic due diligence checks (like verifying the company’s existence and status) are overlooked, fraudulent entities can slip through.

In other words, skipping the Good Standing Certificate verification can mean not realizing that a “company” is just a facade or any impersonation of any other business. It will eventually lead companies to transact with a phantom or a criminal-controlled entity, unknowingly.

Why is a Good Standing Certificate Critical in Partners & Suppliers Due Diligence?

In B2B businesses, whether onboarding a new supplier, partnering with another firm, or extending a contract with a client,  the CoGS plays a critical role in risk mitigation and regulatory compliance.  It answers a fundamental question: Is this entity legally permitted to do business? 

From a regulatory compliance perspective, verifying a supplier’s good standing is often necessary to fulfill Know Your Supplier (KYS) or vendor management requirements. 

Many industries, including finance, real estate, state-owned enterprises, and the supply chain, mandate that entities confirm their business partners are properly registered and not barred from operating. 

In the context of UBO and company control in partner businesses, Recommendation 24 of the Financial Action Task Force(FATF) states that countries are required to use methods to get information about who actually owns the company. It will help in making sure the details are accurate, up to date, and easy for the authorities to access.

How Can a Good Standing Certificate Help in UBO Verification

One might wonder what a company’s good standing status has to do with identifying its owners or checking for financial crime risk. 

Understanding the ownership hierarchy is crucial, as businesses may find that the company is a subsidiary of another parent company or has affiliates. It’s necessary to understand this structure because a parent or holding company could pose a different risk profile than the entity with which the business is directly dealing. 

A good standing certificate also clarifies the ultimate ownership hierarchies of a business. Listed below are the points that highlight the role of CoGS in UBO verification:

Verify the Entity is Active

By confirming the company’s existence and active status using CoGS, businesses can ensure they are investigating the correct entity. This prevents mistakes such as chasing down owners of a similarly named dissolved company or flagging irrelevant records. 

Map the Shareholding Structure

Once a company’s good standing is confirmed, comprehensive due diligence maps out its ownership structure. The Know Your Business (KYB) process cross-checks shareholder information from official sources. 

The CoGS itself might not list the owners. Still, it often provides or confirms the business registration that allows businesses to get additional documents (such as incorporation documents or shareholder lists) from the official registry.

Identify Ultimate Beneficial Owner

With the shareholding, holding, or subsidiaries structure in hand, the goal is to identify the natural persons who ultimately own or control the company. These individuals might be hidden behind layers of holding companies or trusts. 

Only by mapping out all these ownership stakes can KYB process pinpoint who the UBOs are. For instance, Alice owns 30% via her personal holdings, and Bob owns 70% through another holding company. 

Identifying these individuals is crucial, as AML laws are designed to prevent bad actors from hiding behind corporate structures.

Screen UBO Against Sanctions, Watchlist, PEP, and Adverse Media 

Once the UBOs (the key individuals) are identified, each of them are checked against international sanctions lists – such as the U.S. OFAC list, the EU and UN sanctions lists, the UK’s OFSI sanctions list, as well as PEP (Politically Exposed Persons) lists and negative news (adverse media) sources. 

This will protect the business partner from falling into the hands of a sanctioned or any illegal entity.

The Need for a Good Standing Certificate in KYB and AML Compliance 

Regulators worldwide have raised the bar on business and associated entities’ due diligence. Know Your Business (KYB) and AML rules mandate that organizations take steps to verify a company’s identity and its shareholders, UBOs, and other legal entities.

In practice, most AML compliance programs for businesses include obtaining essential documents as part of the due diligence process. Neglecting this aspect can have serious consequences. Compliance programs, therefore, make legal document checks a necessity. 

The KYB provides automated solutions to businesses by fetching good-standing and authoritative data as part of their due diligence check.

This not only helps satisfy regulatory requirements that businesses have taken “reasonable steps” to verify their suppliers or investors, but it also guards the organization’s assets by avoiding partnerships with non-compliant or impersonating businesses.

It’s evidence that businesses verified the suppliers, partners, and investors at onboarding and ideally monitored their status periodically, since a company’s standing can change if they fall out of compliance.

Verify Partners with Confidence | The KYB Has You Covered

Checking CoGS is a necessary component of KYB/AML due diligence as it fulfills regulatory requirements to verify business entities. It helps prevent abuse, including bribery, terrorist funding, and money laundering by shell companies. Moreover, it provides peace of mind that businesses are dealing with authentic entities.

In the RegTech, FinTech, and state-owned enterprises, the challenge is to perform all these checks thoroughly yet efficiently so that bad actors are screened out without hindering business growth. This is where The KYB platform comes in as a game-changer.

The KYB provides a strong and accurate business verification for instant access to company and shareholder data from official business registries. Businesses can obtain all sorts of documents fetched from official state sources to ensure the legitimacy of their partner entities.

Additionally, the integrated AML screening feature clarifies the complex layers of subsidiaries and associated UBOs, shareholders, and company controls. 

Frequently Asked Questions

What is a Certificate of Good Standing?

 A Certificate of Good Standing is an official document confirming that a company is legally compliant and active, with all required filings up to date.

How to Get a Certificate of Good Standing?

To obtain a Certificate of Good Standing, a business must request it from the relevant government or business registries of the state.

Is a Certificate of Good Standing Required?

While not always required, a Certificate of Good Standing may be necessary for certain business transactions, such as securing financing or entering into partnerships.