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Why Preventing Partnerships with High-Stakes Prohibited Businesses Matters?

01 July, 2025

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The cost of overlooking a prohibited business isn’t just regulatory, it’s operational, reputational, and strategic. The compliance teams are expected to do more than verify documents. 

They must understand who they’re dealing with, what kind of business is being conducted, and whether any part of that entity’s ownership, operations, or affiliations falls into a prohibited category.

It’s no longer sufficient to rely on clean registrations or basic company data. From unlicensed money transmitters to businesses linked to sanctioned jurisdictions or unclear UBOs, the risks are embedded deep in ownership structures and operational models.

That’s why identifying prohibited businesses isn’t just about checking a box; it’s about protecting your business from enforcement actions and irreparable damage.

The Hidden Threat Behind a Clean Appearance

Consider a scenario where a payment company starts doing business with what seems like a logistics and warehousing provider operating out of a free zone in Central Asia. Clean paperwork, active operations, and no sanctions on the company itself. 

But further scrutiny reveals that its UBO is also a director in another entity, one previously caught supplying dual-use goods to sanctioned regions. 

What appeared to be a legitimate warehousing business turns out to be part of an illicit arms supply chain. The onboarding fintech now finds itself complicit in violating the Wassenaar Arrangement and facing export control breaches.

This is why business verification is no longer optional. And this is where understanding prohibited businesses comes in.

What are Prohibited Businesses? 

Prohibited companies or businesses are entities whose core activities are illegal or banned under administrative or international law. They usually fall under the category of high-risk businesses for legal and ethical partnerships.

Moreover, these are not simply “risky” businesses. They’re outright barred from operating in many jurisdictions and are red-flagged by regulators, banks, and watchdogs globally.

Different companies can be labelled as prohibited businesses. For instance, in the United States, these companies are Marijuana-related businesses (MRBs). Even though marijuana is legal in many U.S. states, it is still considered illegal under federal law. 

This creates a problem for banks, as they can’t legally provide services to MRBs without violating federal laws, like the Bank Secrecy Act and the Controlled Substances Act.

Besides this, the Financial Crimes Enforcement Network (FinCEN), requires banks and financial firms to report any suspicious transactions involving MRBs, even if the business is legal under state law.

What are the Common Types of Prohibited Businesses 

Some of the common types of prohibited businesses include:

  • Shell companies hiding UBOs
  • Crypto mixers or anonymizing services
  • Firms linked to sanctioned states, individuals, or entities
  • Human trafficking, arms dealing, wildlife smuggling, etc.
  • High-risk gambling operations, especially online.
  • Unlicensed money transmitting businesses

Under U.S. law, operating a money transmitting business without proper registration with FinCEN and appropriate state licensing is considered a prohibited activity. 

One example of how illicit funds flow through informal channels is the trade in conflict minerals, specifically tin, tungsten, tantalum, and gold (commonly known as 3TG), from conflict-affected regions like eastern Congo. 

Section 1502 of the U.S. Dodd-Frank Act was enacted to curb the funding of armed groups through the global supply chains of these minerals. It requires U.S. publicly-listed companies to conduct supply chain due diligence and report to the SEC if their sourcing of 3TG could be linked to conflict zones.

Additionally, in many parts of the world, if an entity or a business helps move money for others (like sending money or exchanging crypto), the law says they are required to:

  1. Have a license from their state, if the state requires one. 
  2. Register with FinCEN (a government agency that watches for financial crimes).

If they don’t do both, they are breaking the law. This type of business is not permitted and is considered a criminal activity. 

One of the examples includes crypto exchanges and peer-to-peer money-transfer apps, which must register as Money Services Businesses (MSBs) and comply with anti-money laundering (AML) regulations. If they skip this step, they’re running an illegal business.

What are High-Risk Businesses? Are They Different from Prohibited Businesses?

In the context of KYB and AML compliance, “high-risk businesses” usually refers to a broader term that encompasses restricted businesses, also known as “prohibited businesses.” 

These businesses are generally more vulnerable to AML risks as well as financial, legal, or operational misconduct. Some of the primary examples of high-risk businesses include:

  1. Extended warranty providers
  2. Trade in oil products
  3. Trust services
  4. Real estate firms dealing in cash-heavy transactions
  5. Gold and precious metal dealers
  6. High-value luxury goods resellers
  7. Stamp and coin sellers
  8. Pharmaceutical business
  9. Services related to digital assets
  10. Offshore financial institutions

What Global Watchdogs Like FATF Say on Prohibited Businesses and High-Risk Activities

What Global Watchdogs Like FATF Say on Prohibited Businesses and High-Risk Activities

The Financial Action Task Force (FATF) is the global organization for AML/CFT regulations.   According to FATF Recommendation 28, every country must have laws to stop and punish money laundering and terrorist financing. 

This is especially important when it comes to prohibited or high-risk businesses like those that are illegal or very risky. These laws should make sure that such illegal financial activities are not allowed, especially in sectors that are more likely to be used for crime.

In another, FATF Recommendation 10, financial institutions must apply EDD when dealing with clients, businesses, or transactions that pose a higher risk of money laundering and terrorist financing. It also includes dealings with PEPs (Politically Exposed Persons), entities in high-risk sectors, and entities with complex ownership structures. 

Consequences of Hidden Prohibited Companies 

A third-party logistics provider or any supplier may seem legitimate until a company finds out their subcontractor is owned by a firm in a sanctioned jurisdiction. 

This is how the risk of sanctions by extension can appear indirectly, through hidden layers of ownership and control. In many cases, businesses are unaware that they’re exposed to it.

Today’s businesses are global and layered, which increases the risk of unintentionally onboarding prohibited entities through:

  • Complex supply chains
  • Offshore affiliates
  • Layered subcontracting hierarchies. 

Even a single link in the supply chain, financial institutions, or any other business tied to criminal networks can jeopardize compliance, violate sanctions, and result in reputational and financial loss.

What are the Red Flags of Prohibited Businesses That Require Immediate KYB Checks

To prevent financial, reputational, and compliance damage, the need for prohibited business verification is essential. Let’s explore some of the primary red flags of restricted businesses that may pose a challenge to their partners and clients.

  • Links to sanctioned jurisdictions
  • Use of nominee directors
  • Opaque or layered ownership structures
  • Mismatch between declared business activity and actual transactions
  • Frequent changes in address, management, or legal structure
  • Use of some shell companies registered in offshore jurisdictions.

How The KYB Helps You Prevent Partnerships with Prohibited Businesses

In a world of global partnerships and public scrutiny, your business is judged not only by what you do but by who you associate with. It is not adequate for organizations to merely avoid actual misconduct; they are also expected to prevent the conditions that can lead to illegal misconduct.

The KYB is a modern, real-time solution that protects businesses from onboarding prohibited or suspicious entities. It ensures that the business is not just ticking boxes but actively defending itself from regulatory, financial, and reputational threats.

The KYB due diligence can detect shell companies with false or incomplete data, helping FIs and other businesses facilitate transactions or avoid engaging with prohibited businesses in certain jurisdictions.

Additionally, it cross-checks entities against 200+ global sanctions and watchlists. The KYB also includes domestic administrative sanctions that are often missed by traditional tools. Contact us or book a demo from the website.

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