The Importance of Identity Checks in Business Transactions

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In late June 2022, a prominent bank released a newspaper ad about an e-auction of a property to recover nearly Rs. 93 crores lent to a company called “the Great Indian Nautanki Company Pvt Ltd”. The company’s name was enough to induce curiosity among journalists, and soon many acts of the drama came to the fore. It was revealed that three banks had extended loans to this company on the back of guarantees by the Great Indian Tamasha Company Pvt Ltd. Further investigations showed a host of companies operating from a single address in New Delhi, all beginning with ‘Great’ in their names. The list of promoters is almost the same, and these companies have been giving guarantees to one another to raise bank funds.

If only the lenders had this information prior to lending, some of these bad loans could have been avoided. Performing identity checks before conducting business transactions helps provide you with information about the real identity of your counterparty and its promoters before you conduct business.

What is a Business Identity Check?

An identity check is a step in the due diligence process that a company performs on all counterparties that it proposes to deal with. It helps identify and verify the legitimacy of the counterparties with whom the company has relationships and is a crucial component of risk mitigation; information about the counterparty, its ownership structure, promoter background, and compliance track record help prevent companies from dealing with firms that do not legally exist and/ or are involved in money laundering, tax frauds, and other financial crimes.

Steps for an Effective Identity Check

  • First and foremost, the counterparty has to fill out a basic form and questionnaire about itself along with its ownership details.
  • Thereafter, the counterparty needs to supply the documents related to its registration or its tax documents. This could include the PAN Certificate, GST Certificate, Certificate of Incorporation, etc. These documents are then validated against various statutory databases as part of the Identity Check.
  • Then comes the Ultimate Beneficial Owner (UBO) identification and verification. According to the Financial Action Task Force, the Ultimate Beneficial Owner (UBO) refers to the natural person who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is conducted. The definition of a UBO differs in different jurisdictions, but generally, a UBO is an individual who holds a minimum of 10% to 25% of capital or voting rights in the underlying entity.
  • All UBOs should be subjected to document checks and Anti-money Laundering (AML) and Politically Exposed Person (PEP) screening.

While the identity check process ends with this, credit or supplier risk assessment, continuous monitoring, review of information, and assessment of transactions are also necessary to reduce counterparty risks.

Who Needs Identity Checks?

Any company involved in either buying or selling products or services to another firm must undertake this exercise to mitigate the risk of fraud. Here is a look at some sectors that benefit from conducting counterparty identity checks.


As per the RBI, Indian banks reported a 23.7% increase in frauds in FY22, up from 7,359 in FY21 to 9,103 in FY22. It only emphasises the need for banks to better understand their customers. It is a no-brainer that banks must know who their borrowers are, given that they deal with money coming from all across the world. They need to know who is moving this money and whether such companies are legitimate. A Know Your Customer (KYC) check is also mandatory as per the AML directives set by the Reserve Bank of India (RBI). It also helps if banks go a bit further and perform a KYC on their B2B accounts. KYC stands for Know Your Customer’s Customer, and this exercise helps banks project how a borrower will perform depending on the riskiness of the firms that it is dealing with.


India is considered to have one of the biggest lending markets in the world. The proliferation of Digital Lending is only going to expand this market further. According to Fintech Association for Consumer Empowerment (FACE), fintech lending companies doubled digital lending in the FY 2021-22, disbursing a total of 2.66 crore loans worth Rs 18,000 crores. Remote working triggered by the COVID-19 pandemic is providing further fillip to this new-age lending system. In digital lending, all processes related to loan origination, approval, disbursal, and recovery are done online and remotely, mostly through mobile apps. In such a scenario, the importance of conducting identity checks and due diligence when lending to a firm cannot be emphasized enough. They help identify the owner, directors, partners, and decision-makers of a company, assess their backgrounds, trace any past cases or offences registered against the company, and unearth any other data that may aggravate the risk of lending. Lenders providing business loans need to ensure that the funds are not diverted for personal purposes or siphoned off to shell companies.

SMEs/Merchant Onboarding

How often have we heard stories of customers ordering high-end items through eCommerce platforms and receiving soap bars and bricks? Such incidents get highly publicised due to social media and, in some cases, police action. Every time, such an incident comes to light, the trust quotient of eCommerce marketplaces falls. This is a major threat to their growth, as eCommerce has become a major channel of buying for customers.

In FY2021, Amazon India earned Rs 7,555 crore in revenue by offering its marketplace services to sellers, compared to Rs 4,949 crore a year earlier. This scorching pace of growth also comes with the huge responsibility of upholding customer trust by ensuring that every single one of its 400,000-plus sellers is genuine. It is pretty much the same situation for Flipkart, Snapdeal, and other eCommerce aggregators, where they all have to combat problems related to the sale of fake products or the non-delivery of orders.

A big issue that these aggregators face is that it is very easy to fake an online storefront through professional-looking websites. Therefore, in-person site visits, social media presence, verification of business authenticity by checking licenses and registration details, background checks of owners, and analysis of financial records can help identify fraudulent sellers and shell companies.

Similar problems are faced by corporates in their distribution and supply chains. Fake distributors and dealers pose a financial and reputation risk for companies; fraudulent suppliers can send fake raw materials and components, impacting the quality of the company’s finished goods. Therefore, identity checks of distributors, dealers and suppliers are critical and must be carried out at the time of onboarding to lower the risk of potential fraud.


As per Indiaforensic, Indian insurers lose more than $6.25 billion annually to fraudsters. Genuine customers are caught in the crossfire and end up having to pay higher premiums. B2B fraud in the insurance sector could be a fraud committed by a policyholder, wherein the policy-holding organization indulges in fraud while buying, executing, or claiming insurance or through identity theft.

Further, insurance fraud can be hard, where a policyholder intentionally destroys property with the intent of collecting the policy, or soft, when there is an exaggeration of a valid claim or there is an omission of information or misrepresentation while purchasing a policy to enjoy a lower premium.

Conducting identity checks before selling an insurance product to an organization can help minimise both hard and soft risks. It helps weed out the problems related to forged documents, withholding of critical information, filing false reasons for claims, and staging of accidents. It also reduces the time taken for investigation when the customer applies for a claim.

Challenges in Performing Identity Checks Manually

Manual identity verification takes time as well as effort, not to mention that it carries the risk of missing some crucial information.

This manual identity verification process is often a frustrating experience for a customer or supplier, who may not have the patience to wait for the process to be completed.

A manual process means that costs are higher due to the deployment of additional and skilled manpower. Moreover, it is not very easy to detect money laundering or tax evasion through manual checks, as the payment chain is complex with the presence of several intermediaries all functioning in different payment jurisdictions.

The process of identity checks is quite complicated if the counterparty has overseas business interests or foreign ownership.

The Legal Entity Identifier (LEI) as a Tool for Identity Checks

The financial crisis of 2007-08 brought home the realization that there is no easy way for regulators to validate the identity of parties involved in complicated financial transactions. Thus, the Legal Entity Identifier (LEI) system was born in 2011 with the blessing of the G20.

The introduction of LEIs changed the landscape of global financial transactions because it made it easier to identify the transacting parties. It also made it easy for organizations that had the LEI to take their business to the global stage. The transparency around ‘who is who’ and ‘who owns whom’ aided regulators in the accurate identification of market participants and their counterparties anywhere in the world. With one common identifier for entities of all forms, types, sizes, and jurisdictions, the confusion around verifying their identities was considerably reduced.

  • The Legal Entity Identifier is a global reference code that uniquely identifies every legal entity or structure that is a party to a financial transaction, in any jurisdiction.
  • It is a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO).
  • It connects to key reference information that enables a clear and unique identification of legal entities participating in financial transactions. Each LEI contains information about an entity’s ownership structure and answers the questions of ‘who is who’ and ‘who owns whom’.
  • The LEI data pool can be regarded as a global directory that greatly enhances transparency in the global marketplace.

The LEI simplifies the KYC/ and identity checks process because the identity of an entity with an active LEI has already been validated and verified against statutory identity documents, such as tax identity numbers, incorporation certificates, etc., by the Local Operating Unit (LOU) in a jurisdiction, before issuing the LEI.

Currently, banks globally may use many different identifiers while onboarding new clients; this KYC process can take a couple of days. It can sometimes lead to inconsistencies that need to be resolved resulting in considerable cost overhead and an adverse impact on customer service. However, all that time, money, effort, and goodwill can be saved by using the LEI as the identifier in the KYC process.

Overcoming Identity Verification Challenges Through Technology

Though LEI adoption is increasing rapidly in India, there is still a long way to go before it becomes ubiquitous among Indian businesses. The good news though is that, with regulations getting increasingly stringent, KYC and identity checks are becoming necessary steps in the compliance process of companies. Technology plays a key role in identity verification in today’s environment.

Companies, banks, and insurers can deploy technology to handle identity check tasks internally through AI-powered verification systems in their onboarding process. Proprietary Application Program Interfaces (APIs) can easily retrieve company information from government registries, reliable sources of information, and verified databases. They can even cross-reference the data within a short time frame. Besides this exercise can be outsourced to third-party, digital risk management platforms that offer identity checks and verification solutions that are efficient and cost-effective.

It is imperative for businesses of all kinds to implement identity checks so as to confidently conduct business with their counterparties.

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