KYB - A Pillar of Fraud Prevention for Payments

The rapid growth of digital payments has created new opportunities for businesses, but it has also opened doors for fraudsters looking to exploit vulnerabilities. Fraud and money laundering are increasingly sophisticated, with criminals using weak onboarding processes to gain access to payment networks. Without proper KYB procedures, payment service providers (PSPs), fintechs, and financial institutions risk onboarding fraudulent businesses, high-risk merchants, and shell companies designed to move illicit funds.

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Why KYB is Critical for Payment Companies

KYB is the process of verifying the legitimacy of a business entity before allowing it to access financial services. It ensures that payment providers understand who they are doing business with and whether those entities pose a financial crime risk.

KYB plays a crucial role in:

• Preventing payment fraud and financial crime by stopping bad actors from entering the payment system.
• Ensuring regulatory compliance with global AML laws such as PSD2, 6AMLD, FATF, and FinCEN guidelines.
• Reducing reputational and financial risks associated with fraud-related fines and penalties.

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Common Fraud Schemes Enabled by Weak KYB

• Transaction Laundering - Fraudsters create front companies that appear legitimate but process illicit transactions in the background. Without robust KYB, payment processors may unknowingly facilitate money laundering through seemingly legitimate merchants.
• Fake or High-Risk Merchants - Some businesses misrepresent their industry or risk level to gain access to payment services. For example, a business claiming to sell consumer electronics may actually be involved in illegal gambling or counterfeit goods.
• Synthetic Identities in Business Onboarding - Criminals use a mix of real and fake data to create synthetic business identities. These fake entities can pass weak KYB checks and gain access to the financial system for fraudulent activities.
• Chargeback Fraud & Money Mules - Fraudsters exploit chargeback mechanisms to conduct “friendly fraud” or use mules to launder money through a web of small, seemingly unrelated transactions.

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Key KYB Checks to Prevent Fraud in Payments

Business Identity Verification

• Cross-checking official business registration details with government databases.
• Ensuring consistency across multiple data sources to detect anomalies.

UBO Screening

• Identifying individuals who ultimately control a business entity.
• Uncovering hidden connections to sanctioned or criminal actors.

Sanctions, PEP, and Adverse Media Checks

• Screening businesses and their owners against global sanctions lists.
• Identifying Politically Exposed Persons (PEPs) linked to financial crime.

Financial Risk Analysis

• Assessing the financial history and transaction behavior of newly onboarded businesses.
• Flagging abnormal transaction patterns that may indicate fraudulent activity.

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How Payment Companies Can Strengthen KYB

• Automating KYB with AI - AI-powered solutions help analyze vast amounts of business data in real time, detecting inconsistencies and risk indicators faster than manual processes.
• Using Real-Time Data Sources - Leveraging real-time business verification tools can help payment companies validate business legitimacy instantly, reducing fraud risks.
• Implementing Risk-Based Onboarding - A risk-based approach allows payment providers to apply different levels of scrutiny based on a business’s risk profile, ensuring that high-risk merchants undergo enhanced due diligence (EDD).
• Continuous Monitoring Beyond Onboarding - KYB should not be a one-time process. Ongoing monitoring of businesses helps detect evolving risks, such as changes in ownership or suspicious transaction patterns.

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How to Choose the Best KYB Solution for Payments

The right KYB solution is critical for payment companies looking to enhance fraud prevention. Look for solutions that offer automated business verification, real-time risk scoring, UBO identification, and seamless integration with existing compliance workflows. Scalability, accuracy, and regulatory alignment should be key factors in decision-making. To help you navigate the process, Dotfile has created a comprehensive KYB Buyer’s Guide, which outlines the must-have features and best practices for implementing an effective KYB strategy. Download it now!

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A Proper KYB Is Key Fraud Prevention for Payments Companies

Weak KYB processes create entry points for bad actors, exposing payment companies to money laundering, regulatory penalties, and reputational damage.

By automating business verification, using real-time data, and continuously monitoring merchant activity, payment providers can strengthen their fraud prevention strategies and ensure compliance with global AML regulations. Let’s talk about how Dotfile can help you prevent fraud with comprehensive KYB.