Business Risk of Ineffective Business Verification

By Steve Craig on March, 4 2024
Business Risk of Ineffective Business Verification
Steve Craig
Steve Craig

Today’s top digital marketplaces and ecommerce platforms understand that identity verification is the cornerstone of trust. Many of these organizations have robust, automated processes for verifying the personal identities of their customers but lack the same sophistication when verifying business identities on their platforms.


Manual, inefficient, or in the worst case, no business verification processes, can lead to serious business risks such as financial losses, reputational damage, or fines.

Business Entity

According to the US Census Bureau, a record-breaking 5.4 million new businesses were started in 2023. Determining if a business is actually a registered business entity is the first step in establishing business trust. Entity types include: sole proprietorship, partnerships, limited liability companies, and corporations. Each business entity type has unique formation procedures that vary by state and locale. Just because a business claims to be a business doesn’t mean they’ve taken the necessary steps to be legitimate in the eyes of the law.


ProTip: When onboarding a new business into your ecosystem, always collect the business name, business address, state of formation, and tax identification details. This information should be verified against authoritative sources such as state registries and departments of state.


Government licensing boards exist to ensure service providers operate according to state and federal guidelines. Imagine onboarding a business that lacks the necessary licenses to operate in their trade or industry. Or, the business previously possessed the license but it expired or was revoked. Not only can it create risks for your customers, but it can also lead to legal troubles if your business is found complicit in working with unlicensed entities. Service providers, including general contractors, must also ensure their subcontractors possess valid, unexpired licenses. Failure to do so can result in financial penalties for the general contractor or your business ultimately damaging to your brand's credibility and reputation.


ProTip: Always verify the licenses of businesses in your platform directly with official databases or using third-party verification services. Ideally, establish routine screening or automated alerting to catch lapses in licenses.


Insurance plays a vital role in mitigating business risks while also ensuring consumers can be adequately compensated for negligence or wrongdoing. If your marketplace onboards business entities that are either underinsured or not insured at all, you are putting your customers at risk. At the minimum, a business should have general liability coverage. In some cases, it may be important for the business to have workers’ compensation coverage, a business owner’s policy, contractor license bonds, or other coverage to provide financial recourse. Like licenses, insurance policies can change, expire, or be revoked so it is important to continually monitor coverage limits and status.


ProTip: Make sure you understand the different types of insurance policies that are applicable for the types of businesses you’re onboarding in your marketplace. Require proof of insurance such as certificate of insurance (COI) as part of your verification process and ensure that the coverage is comprehensive and up-to-date.


In the US, OFAC, a department of the US Treasury, is responsible for creating and managing economic and trade sanction lists. These lists contain the names of individuals and businesses that your marketplace cannot do business with. Many organizations incorrectly assume sanctions only apply to regulated financial institutions as part of anti-money laundering programs. Onboarding or conducting transactions with business entities that are on sanctions lists can have dire consequences, including fines and restrictions on your business operations. 


ProTip: Sanctions lists are public record but it can be challenging to keep up with updates, especially in a turbulent geopolitical environment. It is best to leverage a third-party service provider that specializes in business risk ongoing monitoring for any changes in sanctions status.


Sophisticated fraud and financial crime is a booming business. Bad actors, scammers, and fraudsters are always coming up with creative ways to steal or launder money. According to the US Small Business Administration, nearly $200 billion in Paycheck Protection Program (PPP) funds were potentially fraudulent. These nefarious behaviors also extend into marketplaces. Criminals set up fake business profiles to sell fake goods or services backed by fake reviews. Fraudsters rely on the manual verification processes to slip through the cracks. 


ProTip: Establishing strong business entity verification practices is your best line of defense. Be sure to educate your team and your marketplace customers about common fraud attacks and schemes. Deploy third-party services to detect judgments, litigation, bankruptcy filings, and liens and set high standards for your marketplace.


Whether you’re building your supply side of businesses in your ecommerce platform or providing access to a network of licensed service providers, ineffective business verification practices can lead to a range of potential business risks for your marketplace. The first step in mitigating business risks is to have a better understanding of the potential pitfalls of poor verification practices.


Sometimes, limitations in budget, time-size, or knowledge can hinder your organization’s ability to create the right environment of trust. Fortunately, the state-of-the-art in business verification is advancing rapidly and leveraging a third-party solution provider can bolster the effectiveness of your business entity verification process.  


In my next guest blog post, I’ll cover common fraud and scams found in marketplaces.


This guest post was written by Steve Craig,  Founder & Chief Enablement Officer at PEAK IDV.  Steve is on a mission to enable 10,000 people to become experts in digital identity.

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