Regulated firms exposed without new business verification checks image credit: shutterstock

Regulated firms that take on new business clients are leaving themselves exposed to serious red flags. Specifically, they are not completing critical verification checks on the people running the business, according to research released by SmartSearch.

59% of the regulated firms questioned by SmartSearch said that they do not always carry out these essential checks. This is despite the clear regulatory requirement to do so in every instance.

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Among those firms, 40% said they ‘often’ identify the owners and the directors of the business, rather than every case.

Property firms, including estate agents are most likely to skip this critical step. Some 65% of firms admit they do not always carry out verification checks on new business clients. The remaining firms across the legal, finance and accountancy sectors all reported similar results. Around 58% of respondents do not always verify identities.

Moreover, only 37% of regulated firms actually identify the ultimate beneficial owners (UBOs). This represents a drop from more than half (53%) in the previous year’s survey. This is despite the fact that all regulated firms are required under the UK’s anti-money laundering (AML) regulations to determine the ultimate beneficial owner of any business they have dealings with.

The importance of UBO checks and robust KYB procedures

It comes as criminals continue to hide behind complex corporate structures and shell companies to clean illegitimate funds through a seemingly legitimate business. Without such checks, businesses face the risk of enabling this activity and the fierce regulatory action and significant fines that comes with it.

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The importance of UBO checks and robust Know Your Business (KYB) procedures has been amplified recently. Research from Moody’s Analytics revealed that the UK is number one in the world for shell company-related risks, with nearly five million red flags. This is considerably higher than China, in second place, and the US in third.

KYB: often the most complex part of compliance

Martin Cheek, MD, SmartSearch said: “There’s no question that KYB processes can be the most complex part of compliance. But given the significant red flags businesses are exposed to, it is also one of the most critical. Given the clear requirements of regulators, advancements in technology can help streamline this process considerably and help firms complete such checks. Now is the time to take action to not only protect the business from serious financial crime, but prevent any intervention from the regulator.

“By implementing a digital compliance strategy, regulated firms can start to build a proper picture of the businesses they are working with and truly assess any risks posed.”