Key Know Your Business Risk Factors You Should Always Consider

Major incidents like the Panama Papers leak in 2016 pulled back the curtain on how thousands of companies were used to conceal huge sums of illicit funds. At the heart of this world scandal wasn’t just tax evasion but rather the failure of Know Your Business (KYB) procedures in determining business ownership.

Contrary to the common misconception about KYB checks, they are not limited to regulatory compliance and regulations. In today’s fast-paced world of businesses, it is incumbent upon businesses to identify and assess the risks associated with their potential and existing partners. And this mainly involves conducting due diligence on them to know whether they are legitimate and if the company structure is transparent enough that there is no link to financial crime history, such as money laundering or terrorist financing.

Additionally, each time a business is onboarded, it is essential to conduct a KYB check, not only to meet regulatory requirements but also to support the organization’s long-term interests by enabling effective risk analysis of business partners and customers.

However, this process may look easy, but there are many KYB risk signals that need to be considered. Even if your process is fully automated, having a detailed risk management strategy and comprehensive due diligence is still needed for effective KYB compliance and mitigating the risks associated with counterparties.

But what are the essential risk factors that need your attention? And how can you ensure these checks are thoroughly carried out?

KYB Risk Factor: What Is It?

A KYB risk factor is basically anything about a business that may raise red flags, including the jurisdiction, complex ownership structure, or suspicious financial history. Understanding and identifying these elements can enable a business early on to avoid any potential risk of fraud and stay compliant.

Based on the type of KYB risk factor, there could be several risk signals indicating that there might be a certain level of risk involved with the business you are onboarding or may be working with. Sometimes, there may be an anomaly, and the data you get against a specific business may not be the same as in official records or filings. This calls for additional and full scrutiny of the company data, ensuring that there is nothing hidden and that it is duly checked.

What Are Some Risk Signals to Watch For

There could be multiple dimensions in which a business can pose a risk. Therefore, to prioritize the due diligence efforts and ensure the correct risk assessment, KYB risk signals are categorized into

Overall Risk Signals

Entities that are subject to KYB and AML compliance will want to check these risks in order to ensure transparency and reduce the risk of fraud. This type of risk assessment is very basic. For example, it is typically about verifying business information such as ownership structure from the authoritative data from official registries. This general approach to risk calculation helps companies make the final decision about their potential business partners.

Business Registration Number

Most businesses receive a business registration number when they are enrolled with a national registry. You can use this number to verify the legitimacy of a company by checking it against the official database. In case the number doesn’t exist or is not found, or the business registration number doesn’t match with the other credentials,it may suggest that the business is not registered or could be a fraudulent identity.

Real-Time Company Status

A legitimate corporate presence requires a company to be registered with the official business registry. For example in the US, Sec businesses should be registered with the Secretary of State to operate fully. An inactive status might suggest that the entity is either defunct or sanctioned due to failure to meet regulatory requirements.

Key Business Filings

When a company is registered, it is required to file formal documents such as Articles of Incorporation, Articles of Association, Certificate of Incorporation, Business Licenses, and Tax Identification Number or VAT registration. These filings include essential business information about the business and its ownership structure. Therefore, as part of the KYB check, you can get these documents to verify the legal status of a company.

Business Address Details

There are multiple ways to verify a business against the potential risk factors during due diligence. In many cases, established businesses usually operate from commercial addresses. However, it’s not unusual for small businesses or sole proprietorships to use residential addresses that may still be valid.

Type of Business

A core step in KYB compliance is determining the ownership structure of a company. This starts with identifying the type of entity, such as sole proprietorship, LLC, partnership, or corporation. Each structure has different implications. For instance, sole proprietorships are owned by one person, while entities like corporations are owned by multiple owners.

Ownership/UBO Risk Signals

When conducting due diligence, verifying the legitimacy alone isn’t enough. Verifying the risk of real people running a business is also equally important. Ultimate beneficial owners (UBOs) are checked as part of the KYB process.

UBO Identity Verification

The collection of documents for Know Your Business verification includes collecting and validating government-issued ID, proof of their address, and ownership history. This is done to confirm that all the people with ownership aren’t a part of any illegal activity. It is a crucial step to ensure regulatory compliance. It also protects the company from reputational, financial, and legal risks.

UBO verification involves checking company ownership details from official government registries and combining them with third-party sources to screen individuals against sanctions lists, adverse media, and regulatory enforcement records.

To meet KYB compliance, companies need to capture and validate key information points such as company name, official address, business registration number, and UBO information.

Under the Corporate Transparency Act (CTA), FinCEN requires certain companies to report UBO identities to a centralized registry through its Beneficial Ownership Information (BOI) Reporting Rule. This information may be collected via electronic forms or document exchange (e.g., email) to support internal due diligence and ensure timely compliance with reporting obligations.

To maintain transparency within the legal framework of a company, the Financial Action Task Force (FATF)’s recommendations are as follows:

Countries should take measures to prevent the misuse of legal persons and arrangements from being misused for criminal purposes, including by:

• Assessing the risks associated with legal persons and legal arrangements
• Making legal persons and legal arrangements sufficiently transparent, and
• Ensuring that accurate and up-to-date basic and beneficial ownership information is available to competent authorities in a timely fashion.

Shell Companies and Ownerships

Nominee arrangements, whereby persons are appointed directors or shareholders in their name on behalf of others, can serve to conceal the actual controllers of a company. Although such arrangements are legal in certain jurisdictions, they tend to raise suspicions in case of KYB checks, particularly in the absence of transparency regarding actual beneficial owners.

These structures can be abused for illegal activities such as tax evasion, money laundering, or sanctions evasion. That’s why it’s so important to examine nominee relationships and require full disclosure of the ultimate beneficial owners (UBOs) as a part of a proper business verification procedure.

Financial History Risk Signals

These risk indicators pertain to a company’s past and present financial activities. This KYB risk factor helps you assess the company’s viability and reliability, which is crucial for businesses evaluating creditworthiness or deciding to extend financial services.

Appearance in Third-Party Financial Records

As part of KYB, identifying KYB risk factors, you may want to confirm that your potential business partner has engaged in actual transactions and that they are safe to collaborate with. For example, a logistics aggregator should assess the financial stability of its carrier partners: whether they have outstanding debt, signs of insolvency, delayed vendor payments, or any financial inconsistencies that could disrupt delivery operations or lead to service defaults

Business Credit Reports

Businesses have credit reports containing information that can be used to calculate the associated risk. If a business credit score is low, you may not want to work with that business, as this may indicate that continuing business with this entity may not be beneficial in the long run.

Geopolitical Risk Signals

Sanctioned Entities

The location of a business where it operates and its ties to other countries are other important KYB risk factors to consider. This is because a country may be affected by war or international sanctions. For example, after the Russian-Ukrainian war, many Russian companies faced heavy financial sanctions; some were even cut off from international banking systems, which led them to struggle to meet their financial obligations.

What this means is that doing business with entities based in or connected to such regions can expose you to multiple risks, such as delayed payments, contracts falling through, and even, in some cases, your business violating international compliance regulations.

The KYB’s Risk Assessment for Fraud Prevention and Business Onboarding

Scrutinizing a business for KYB compliance requires you to consider a number of different KYB risk factors. While a business may seem legitimate with no risk factors from above, lack of accuracy in risk evaluation or inefficient due diligence may negatively impact your company and lead to major consequences. At The KYB we ensure all important checks for identifying potential risks through a unified platform. Our platform connects you directly to the official registries and sources, helping you identify the risks associated with a business with which you are looking to partner.

Effective risk assessment starts with access to the right data. The KYB delivers this by offering:

Authentic, registry-sourced information Ensures every business entity is verified using official, up-to-date records from over 250 jurisdictions.

Complete ownership transparency Helps identify UBOs and map group structures to uncover hidden control, even across borders.

Real-time risk alerts Lets you stay ahead of compliance threats with instant updates on changes in ownership, sanctions status, or adverse media.

Sanctions, watchlist, and adverse media screening Detects red flags early with integrated AML screening to assess reputational and compliance risks.