Know Your Business - What You Can Do to Combat Business Fraud

Happy Small Business Month! That means it is a great time to revisit the importance of small business relationships in supporting market growth. Unfortunately for those looking to build relationships with those small businesses, we’ve also seen a growing issue: fraud.  

No longer are fraudsters simply creating fake identities or taking over a consumer’s identity. Over the past several years, fraudsters have found opportunities to take over legitimate businesses or even create their own to commit any number of unlawful activities, such as:  

• Money laundering and corruption

• Account take-over

• Fictitious business registrations 

• Financial statement fraud

• Illegal or counter-terrorist financing

…and much more.

A Growing Problem: The Rise in Small Business Fraud

New businesses are popping up every day. Data from the U.S. Census Bureau shows that an average of 430,000 new business applications were submitted per month in 2024.¹ That’s a LOT of new businesses. And since the business application process has transitioned to a largely digital format with little emphasis on fraud detection, more and more nefarious business applications are slipping through the cracks. 

Similar to synthetic identity fraud on the consumer side, fraudulent business “owners” may steal information from legitimate businesses in order to set up new business entities. They may also use (or claim connection to) an existing legitimate business as a cover for their own illegal activity. Needless to say, there are endless paths to committing fraud within the small business marketplace.

The U.S. government is also greatly impacted by fraudulent businesses. During the COVID-19 pandemic, it is estimated that the Small Business Administration disbursed over $200 billion in COVID relief funds or loans to small businesses that were potentially conducting fraudulent activity.² This begs the question: might your business be impacted by a fraudulent entity? Are you adequately protecting yourself from unknowingly avoiding forming relationships with fraudulent entities?

The Key: Quick Access to Accurate Business Data

Let’s say you want to onboard a company for a new relationship with your business. Perhaps this company needs a loan. Or wants to lease supplies from your business. Or they have some other need that is a good fit for your products or services.

Before you sign the dotted line to seal the agreement or spend the money for credit checks, you need to Know Your Business (KYB). It is imperative to perform a bit of due diligence to better understand exactly who you are doing business with. At a minimum, you should know:

• If the company information provided to you is legitimate

• If the business owner is who they say they are

• That you are meeting any applicable regulatory guidelines

Taking your due diligence a bit deeper can help prevent losses down the road. For example, do you know:

• Are the owners associated with other businesses? Is the person you are speaking with connected with another company?

• Have there been past negative events, such as bankruptcy or judgements against them?

You don’t want to slow down the process to onboard new companies and potentially lose a new revenue stream to a competitor. But, you also don’t want to begin a relationship that could negatively impact your business either.

A comprehensive Business Verification Solution that gives you near real-time access to current and accurate business data is the answer. As a baseline, it provides robust profile data about your prospective (or current) customer and its business owners. And it can help you confidently know whether the information provided to you matches verified data from trusted sources. 

Let’s circle back to some of the intricacies of preventing fraud. There are additional checks that you can take to more thoroughly assess if a company is legitimate. For example:

• A fraud alert index can help show a business’ overall prior ability to meet financial obligations. 

• Or, a TIN Match (Taxpayer Identification Match) option can help validate the status of a company’s EIN (Employee Identification Number) with existing IRS data. 

These are both key elements that your business can incorporate into your KYB efforts to mitigate risk. And avoid potentially time-consuming and expensive losses in the future. 

A business verification check gives you the optimal outcome. It can help you speedily and confidently form relationships with new companies. Plus help you easily detect suspicious activity that can save your business the hassle and cost of dealing with illegitimate companies in the future. And they can help you verify that your current business customers are legitimate. Review a sample business verification report to see how these checks can work for your company.

Sources:

1. Time Series and Trend Charts, U.S. Census Bureau, 2024

2. Small Business Administration, June 2023