What a $13 Million DOJ Case Reveals About B2B’s KYB Problem

The next frontier of know your business (KYB) may have surprisingly little to do with knowing whether a business exists. Instead, the governance and operational advantage is shifting to how a business has changed since Firm A last engaged with Firm B, or C or D, and so on.

A federal case announced Wednesday (Sept. 9) by the U.S. Attorney’s Office, Central District of California, involving an executive at tax compliance startup ComplYant provides a timely lens into the issue. Federal prosecutors have charged the platform’s former CEO with securities fraud, wire fraud, bank fraud and money laundering, alleging materially false representations about matters including company revenue, customers, subscriptions and cash reserves were made while raising at least $13.3 million from investors.

While the indictment is built atop allegations, and the CEO is presumed innocent unless proven guilty, the case is notable because of what allegedly could have been misrepresented: nearly every signal that outsiders use to understand what a private company actually is.

Read more: How Smarter B2B Onboarding With Digital Identities Drives Faster Time-to-Value  

As B2B Finance Speeds Up, KYB Is Becoming the Bottleneck

Traditional KYB performs an essential function. Financial institutions and platforms need to establish that an entity exists, identify its beneficial owners and understand who controls it, among other compliance and risk considerations. But legal identity and economic identity are not exactly the same thing.

After all, KYB infrastructure has historically been designed to answer a static question: Is this a legitimate business entity? Today, however, financial institutions need infrastructure capable of answering a more dynamic one: Does the business being presented today remain consistent with the business its operating data describes?

A modern company’s operating footprint can extend across corporate registries, bank accounts, payment processors, payroll systems, invoices, tax records, suppliers, customers, subscriptions and subsidiaries. No single dataset necessarily describes the whole enterprise. The challenge is reconciliation.

An entity-verification system might establish that a company is incorporated, identify its owners and confirm its registered address. An economic-verification system could potentially go further, using permissioned data to assess whether the financial footprint surrounding that entity remains consistent with the profile on which a financial relationship was established.

Businesses are messy. Revenue can be seasonal, customers churn, companies pivot, and bank relationships change. As a result, fast-growing businesses can look radically different from one quarter to the next.

Read also: 24/7 Money Means Treasury Needs to Figure Out Its Weekend Plans

Business Verification Has a Half-Life in the Digital and Global Commerce Landscape

The traditional onboarding model implicitly treats verification as an event. But after that point-in-time verification, businesses are almost guaranteed to open new bank accounts, add subsidiaries, enter new markets, change executives, lose major customers, hire employees, replace suppliers or alter how they accept and send payments.

In that environment, verification has something resembling a half-life: the further an institution moves from the original onboarding event, the greater the possibility that today’s business differs from the original profile. That is why continuous KYB is potentially more important than simply more KYB.

Banks already understand this principle in other contexts. Transaction monitoring does not assume that passing an initial check means every future transaction deserves identical treatment. Cybersecurity systems similarly authenticate users at entry while continuing to evaluate behavior afterward.

According to “Early Detection: Why Top-Performing Firms Focus on Fraud Before It Starts,” a PYMNTS Intelligence and Plaid report based on a survey of 60 payments executives at U.S. middle market companies, most firms are still catching fraud too late. Fifty-seven percent said they typically detect fraud or nonclearance only after settlement — when the financial damage, across accounts receivable, is often already done.

The next generation of business verification may be less about repeatedly asking whether a company exists and more about maintaining a current, evidence-based understanding of the economic entity behind the name. Because as money becomes easier to move, the scarce resource may increasingly be confidence in exactly whom it is moving to.

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