Verification vs Validation | What’s More Important for Your Business?

Verification vs Validation,  frequently confused but critically different from each other. Global sectors, including Supply Chain, RegTech, FinTech, and other financial organizations, usually confuse verification and validation during the business onboarding process. 

There are too many organizations that treat these terms as interchangeable or focus on one while neglecting the other. Eventually, it results in exposing the business to significant compliance and risk management failures.

A cautionary example is the case of Wise, formerly known as TransferWise, a prominent fintech, which was fined $360,000 by Abu Dhabi’s financial regulator in 2022 for AML breaches. 

The fine stemmed from a flawed Know Your Business (KYB) approach that favored basic business checks over comprehensive validation of high-risk entities.

This case emphasizes a broader industry lesson that verifying a partner business’s existence is not the only necessary step; businesses are also required to validate that the company is safe to work with. 

Validation Vs Verification in KYB | Key Differences

A company can be properly registered and “verified” by giving away the required documents, yet still be a bad actor or high-risk partner in reality. 

It is crucial to clarify that the concept of verification and validation is essential as they apply to KYB and business partner onboarding.

Verification confirms that a business is truly who and what it claims to be. This phase occurs early in the partner’s onboarding process, which focuses on authentic business identity checks. 

On the contrary, Validation is the process of making or declaring an entity legally or officially acceptable. It ensures the compliance of submitted information with relevant administrative and global regulations as well as contractual obligations. Moreover, validation provides a formal confirmation of legitimacy or compliance.

In simpler words, verification answers the question: “Is this entity exactly who they say they are?” and validation answers: “Is this business genuine, trustworthy, and operating within legal and ethical boundaries? And are there any risks in continuing to work with them?”

Consequences of Not Validating a Partner Entity

Focusing solely on verification and neglecting validation can lead the business to severe repercussions. They may face fines when a business fails to validate its partners or suppliers comprehensively. The business exposes itself to compliance violations, financial crime vulnerabilities, and reputational harm.  

Moreover, verifying a company’s existence and documents is not enough.  Validating its broader legitimacy and risk factors serves as a critical step. 

It prevents companies from being exposed to sanctioned entities that slip through, shady owners hiding in the background, and high-risk relationships that can later escalate. 

Some of the fundamental repercussions include:

• Onboarding Prohibited/Shell Companies or Sanctioned Businesses
• Missing PEPs or High-Risk entities in KYB Checks
• Partnering with Hidden or Risky Owners

Therefore, if one fails to validate ownership or business entities against necessary watchlists and regulatory enforcements, a business can onboard a company that later brings legal troubles, asset freezes, or scandals.

What Makes the Know Your Business (KYB) Process Complicated?

If validating business partners is so clearly important, why do so many firms struggle with it? The reality is that Know Your Business compliance is complicated and encounters practical challenges. 

• Incomplete and Fragmented Business Registries

Unlike the relatively standardized way of examining and confirming an entity’s ID, verifying inconsistent data hinders companies across jurisdictions. Every country and even regions within countries maintain their own business registries, which vary in terms of accessibility, data quality, and granularity. 

Therefore, many official registries around the world are incomplete, not digitized, or not easily searchable, specifically across borders. 

• Multi-layered Ownership Hierarchies and Shell Businesses 

The design of the modern corporate ownership hierarchies can be exceedingly complex. It is normal to encounter multi-layered structures where a business is owned by another company, which in turn is owned by several other entities, possibly in different jurisdictions. 

Therefore, criminals and sanctioned entities exploit these loopholes by using shell companies and intermediaries to obscure their involvement.

• Constantly Evolving Sanctions, Regulations, and Geopolitics

Sanctions lists and PEP lists are constantly updated, reflecting real-world scenarios and political developments. If KYB processes depend on static databases or scattered checks, they are likely to become outdated and fail to flag new risks in time. 

Therefore, geopolitical shifts, such as sanctions or trade restrictions, as well as changes in a partner’s status, necessitate continuous validation updates.

• Data Silos and International Barriers

KYB often includes gathering and verifying information from distinct internal and external sources that are available locally and globally. It includes business registries, sanction databases, audit reports, and news media. 

These hurdles add friction to the KYB process. Additionally, it creates delays and increases the possibility of errors if not appropriately managed.

The Importance of Real-Time Data and Proper Due Diligence

Given the complexity outlined above, real-time and accurate data, along with thorough due diligence, are the fundamentals for a proper verification and validation process. 

Conventional KYB approaches that are dependent on static data or manual document collection often fall short in both efficiency and reliability. 

Accessing up-to-date, authoritative information, ideally through automated means, enables businesses to check entities faster and validate risks more reliably. 

This provides accuracy in verification, as real-time access to official data sources can accelerate the verification step. The dynamic risk assessment and comprehensive due diligence flags the suspicious company directors, UBOs, or any business entity subject to sanctions or adverse media. It ultimately assists businesses in their onboarding process.

Additionally, real-time data sourced from the state’s official registries improves the precision of compliance decisions. It eliminates the uncertainties and gaps that plague static or outdated information. 

Why The KYB Can be Your Go-To Solution for Proper Due Diligence?

The real-world case scenarios have repeatedly shown that “verify but not validate” is a recipe for compliance disaster. Therefore, with all the challenges of knowing your business (KYB), companies require a purpose-built platform. 

The KYB is designed to perform verification and validation as an all-in-one solution in RegTech, FinTech, supply chain, and real estate sectors. It makes sure that the company doesn’t have to choose between trust and authenticity in compliance. 

The KYB’s authoritative data, sourced from official business registries, offers up-to-date business information. This means when a business needs to verify a company, its UBO, or any other entity, the data is immediately retrieved from the official sources. 

Furthermore, The KYB’s integrated feature of AML screening validates the entity’s legitimacy against watchlists & regulatory enforcement, PEP lists, along with adverse media. Additionally, it screens businesses, including subsidiaries, holding companies, and parent organizations locally and globally.

Notably, the thorough due diligence of The KYB by using authoritative data reduces false positive rates and flags shell companies hiding suspicious or high-risk entities. 

Therefore, for the majority of businesses, investing in a solution with verification and validation is vastly cheaper than the cost of learning the hard way why it matters. Contact The KYB’s team and book a demo today!