By Choon Hong Chua, Head of Financial Crime Practice Group, Asia-Pacific and Middle East, Moody’s
Organizations face all imaginable forms of risk, most of them interconnected and with the ability to grow exponentially. The notion that the risk-mitigation responsibility lies exclusively with the legal, risk or compliance functions is now outdated as companies increasingly grapple with complex threats throughout the business.
It is essential for leaders to answer the question: Do you know with whom you’re doing business? Leaders need to address whether they have the data and platform capabilities to assess a counterparty’s overall risk profile—a counterparty that could be their customer, supplier or even supplier’s supplier. Are they exposed to any form of risk throughout their supply chain? How can risks be mitigated or accounted for early to minimize the impacts on business operations? What type of data-governance standards should be in place to harness a combination of internal and external data effectively for this purpose?
Enter entity verification, an increasingly non-negotiable component of an enterprise risk management (ERM) framework. While it tends to be within the purview of the compliance function, a recent Moody’s study on this topic1 revealed that finance and accounting departments are the most likely owners of entity verification in non-financial companies, with some common non-compliance use cases being sales and marketing, supply-chain management and trade-credit assessment.
Whether it’s for know-your-customer (KYC) screening or mitigating supply-chain risks, one thing is clear: It’s imperative to understand with whom you’re doing business and enact the appropriate safeguards for your risk exposures.
Where entity verification meets compliance
Verifying that customers are who they say they are is central to upholding anti-money laundering and countering the financing of terrorism (AML/CFT) requirements.
As part of the customer due diligence (CDD) process, institutions are tasked with understanding beneficial ownership and the ultimate beneficial owners (UBOs) of their clients. Determining the beneficial ownership and UBO of an entity may not be straightforward. During onboarding, an institution may deal with a business entity with convoluted ownership chains that obscure the extent of an individual’s ultimate control. Financial criminals often use different means—corporate vehicles, complex ownership chains or indirect control—to exert influence over key decisions, so accurate UBO discovery becomes instrumental to a company’s due-diligence efforts.
Financial institutions must make a judgment call on their next course of action. Should they trigger enhanced due diligence or proceed with the KYC process if there are no explicit markers of suspicious activity? Compliance teams will need to strike the right balance between operational efficiency and effective risk management.
Global developments in AML regulations • The United States passed the Corporate Transparency Act in 2021, mandating companies to collect and file beneficial-ownership information with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). • The European Council adopted the comprehensive AML Package (the Anti-Money Laundering and Anti-Terrorism Financing Package) in 2024, which covers additional guidance on beneficial ownership. The updated guidance clarifies that institutions should look at two aspects of beneficial ownership independently: ownership interest and control. • The Parliament of Singapore passed two bills in July 2024 with the intention of enhancing the regulatory regime for corporate service providers and improving the beneficial-ownership transparency of companies and limited liability partnerships. • The United Arab Emirates (UAE) government approved a new AML/CFT strategy to enhance a framework of regulatory reforms to improve AML efforts.
Global watchdogs are cognizant of growing financial-crime risks. Recent updates to AML/CFT regulations emphasize the importance of institutions having the correct measures in place for transparency and improved beneficial-ownership information reporting. The Financial Action Task Force (FATF) also sets global guidelines and standards for beneficial-ownership reporting. However, the onus remains on financial institutions to demarcate acceptable thresholds according to their risk appetites and operationalize the extent of CDD required to satisfy internal risk policies aligned with regulations.
A unique challenge the Asia-Pacific (APAC) region faces is the fragmentation of regulatory regimes, which financial criminals can exploit for illicit activity. Jurisdictional differences ultimately increase the complexities and costs of compliance as organizations navigate varying regulatory environments. Businesses with an APAC footprint may need to adopt a tailored approach to entity verification, compliance and data governance for each country in the region.
Harnessing the benefits of entity verification
Increasing pressure to perform entity verification for compliance is being felt across sectors—our research highlights that 88 percent of organizations globally deem entity verification essential or important. Leaders have acknowledged the growing risks and threats to compliance and the importance of maintaining high due-diligence standards.
Most businesses understand the importance of entity verification but may not be equipped to synthesize vast amounts of data to create holistic pictures of risk. More than half of our study respondents cited fragmented or inconsistent data as significant challenges to effective data usage.
The advantageousness of an organization’s entity verification can hinge on the quality of information and data received, which are determined by data maturity and data governance. Our research determined that the top three barriers to data maturity are data fragmentation and internal silos, high costs of data management and compliance, and challenges to updating data in a timely manner.
Effective entity verification underpins holistic risk-mitigation efforts, which ultimately safeguard a company from reputational risk. This provides a timely opportunity for organizations to elevate entity verification and embed it into their wider master data management (MDM) strategies. A successful MDM program helps businesses streamline decision-making processes, increases the efficacy of compliance and regulatory screening, and breaks down silos by reducing interdepartmental friction.
MDM best practices
The following practices form part of a successful MDM program, allowing organizations to harness the strength of data-driven decisions for effective compliance and risk management.
- Interoperable master data: Establish a centralized data repository to improve risk visibility across internal functions. Organizations must consider how they can leverage valuable data flowing in from one part of the business to drive intelligent, risk-aware decisions in another. This framework for interoperable data ensures that accurate, consistent customer data is readily accessible for enriching and generating meaningful business insights for informed decisions.
- Ongoing data cleansing: Conduct regular quality checks and data cleansing to maintain entity-verification integrity. Start by establishing data-quality metrics based on industry standards and organizational requirements. Then leverage data-cleansing techniques—such as deduplication, standardization and enrichment—to enhance and maintain clean data records.
- Leveraging advances in KYC technology: Integrate the latest technologies, such as artificial intelligence (AI) and machine learning (ML), into entity-verification processes to strengthen your overall risk framework. Intelligent KYC and AML solutions reduce manual effort for compliance teams by automating screening workflows, conducting ongoing risk monitoring and analyzing large volumes of data to filter out false positives. Compliance teams can dedicate limited resources to client profiles that require enhanced due diligence by streamlining certain screening processes with technology.
An enabler for AI
Our recent research shows that organizations are embedding AI into their risk-management processes to varying degrees. Compared to the results from our study on the use of AI in compliance last year2, a greater proportion of respondents are now piloting AI (29 percent, up from 21 percent) and actively utilizing AI (11 percent, up from 9 percent) for compliance and risk management.
When it comes to entity verification, 77 percent of all respondents agreed on the positive role of entity verification in enhancing the accuracy and effectiveness of AI technologies, particularly in compliance and risk management. In comparison, 93 percent of APAC and Middle East respondents concurred, a sentiment reflecting the region’s more sophisticated, technology-led approach.
It’s clear that strong data quality and accuracy, both crucial to entity verification and MDM, will be key to unlocking AI’s potential.
Conclusion
Entity verification, the foundation of risk mitigation, is an invaluable tool to help navigate this era of exponential risk. Leaders will need to implement adaptive, flexible compliance frameworks that can respond to shifts in geopolitical dynamics, supply-chain disruptions, cybersecurity and financial crime, among other factors.
Navigating today’s risk landscape is a huge undertaking. Organizations that prioritize strategic investments into a unified view of risk will gain a competitive advantage and the confidence of knowing with whom they are doing business.
References
1 Moody’s: “Who are you doing business with? A Moody’s study into Entity Verification,”, 2024 report.
2 Moody’s: “Navigating the AI landscape: Insights from compliance and risk management leaders,”, 2023 report.