Merchants Beef Up KYB as FinCEN Plays Hardball on Beneficial Ownership Rules

The challenge for banks and supply chains of doing business online comes at the point of onboarding — the moment a relationship with an enterprise, particularly a small business, is struck.

It’s at that point that fake merchants, false storefronts and money laundering can wreak financial havoc, undermining trust within B2B relationships and commerce ecosystems. Due diligence depends in part on relying on, and verifying, the documentation provided, detailing the business identity of the merchant or supplier.

In the age of digital applications, uploaded data and advanced technologies that help fraudsters set up convincing websites and fake storefronts, artificial intelligence is a key tool that can fool even the most cautious consumers and enterprises. The use of AI in malicious ways has been so rampant that fake images of real people are popping up on “nudity” sites, “60 Minutes” reported Dec. 15.

The PYMNTS Intelligence report “Reframing Anti-Fraud Strategy: Developing a Proactive Approach to Fraud Risk Management” found that 98% of B2B firms reported fraud attacks, losing 3.5% of their annual sales revenues on average to scams that included fake merchant ruses. Small businesses lost even greater shares — as much as 5% — due to fraud-related issues. In some cases, fraudsters set up storefronts and merchant accounts to sell stolen goods or collect money without delivering what an unwitting consumer or enterprise thought they had paid for.

The United Nations Office on Drugs and Crime estimated that the money laundered globally in one year is equivalent to 2% to 5% of global GDP, or as much as $2 trillion.

Providing Certainty

In the bid to improve know your business (KYB) efforts, beneficial ownership is critical. Having insight into the individuals who have stakes in, and control of, a company means having insight into who owns what, where and how much of a firm — and whether the entity might be a ruse for something else.

However, ultimate beneficial ownership (UBO) can be hard to ascertain, especially for companies that operate internationally. The verification of UBO is also a key component of complying with anti-money laundering (AML) regulations.

Recent events surrounding deadlines for reporting beneficial ownership have underscored some of the challenges of that level of reporting. Since 2024 drew to a close, many small businesses have had more time to file beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN), by a period of a few weeks into January.

The Corporate Transparency Act (CTA), which took effect at the beginning of last year, requires businesses to register beneficial ownership information with FinCEN, which operates as part of the Treasury Department. In a lawsuit filed by the National Small Business United against the Treasury Department, plaintiffs alleged: “Tens of millions of people are affected, including countless Americans who set up entities under state laws every day for lawful purposes. Meanwhile, the bad actors the CTA seeks to target will either ignore it or provide false information.”

AI Aids the Vetting Process

Vetting is crucial. Companies such as Markaaz have been constructing global business identity networks. Separately, to help small businesses meet the deadline, identity and compliance platform Palm introduced an AI filing tool in November for firms, dubbed the Beneficial Ownership Information (BOI) Filing Assistant.

The PYMNTS Intelligence report “Instant Impact: AI’s Role in Advancing Real-Time Payments” revealed last summer that manual AML checks challenge banks, with 75% of financial institutions relying on outdated, labor-intensive processes. By automating identity verification and fraud detection — and with robust data collection and analysis — AI can reduce onboarding times, from more than 11 minutes to less than 8 minutes by 2028.

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