Rising regulatory challenges propel the necessity for robust entity verification

Rising regulatory challenges propel the necessity for robust entity verification

In today’s intricate business environment, understanding the entities with which companies conduct business is becoming increasingly vital.

A recent study by Moody’s emphasizes the critical role of Entity Verification in risk management, highlighting how essential it is for businesses to authenticate the credentials of entities during onboarding or ongoing business relationships to circumvent regulatory penalties and protect their reputation.

The study by Moody’s reveals that the landscape of business risk is becoming more complicated, as evidenced by a substantial increase in the entities and individuals listed on sanctions watchlists—a 14% rise in the past 14 months alone. Additionally, the frequency of cyber-related risk events has almost doubled year over year, and incidents of human trafficking have surged by 22%.

These growing risks underscore the necessity for firms to diligently screen and report potential threats to comply with regulations across various jurisdictions. Failure to comply can result in severe financial penalties and reputational damage, a concern for 64% of the surveyed risk and compliance professionals who cite the complexity of regulatory compliance as a major challenge.

The importance of Entity Verification is also underscored by various international regulations such as the German Supply Chain Due Diligence Act and the UK’s Economic Crime and Corporate Transparency Act, which impose strict compliance requirements on businesses. Starting in 2025, the European Union’s anti-money laundering regulations will expand to include entities like professional football clubs and crypto asset service providers, further highlighting the necessity for stringent Entity Verification processes.

According to the global study from Moody’s, 90% of respondents consider Entity Verification either ‘essential’ or ‘important’. This process is primarily employed for customer onboarding, ongoing risk monitoring, and enhanced due diligence, with its significance anticipated to grow over the next two years.

However, despite its growing importance, challenges persist. Many firms struggle with data silos, high operational costs, and issues of data inaccuracy and timeliness, with only a minority of firms describing their data governance strategies as ‘advanced’. Nonetheless, those with robust data governance practices report significant benefits such as improved data quality and accuracy, enhanced risk management, and operational efficiencies.

The study also explores the concept of a ‘golden record’—a definitive, accurate dataset for each entity—which remains elusive for many firms. Only a fraction of the companies have achieved what is known as a ‘single customer view’, a comprehensive dataset that facilitates better decision-making and operational efficiency.

Keith Berry, General Manager of Compliance and Third-party Risk Management Solutions at Moody’s, reflects on the findings, stating, “Who are you doing business with?’ is a deceptively simple question that can be very complicated to answer. In today’s ever-evolving business landscape, economic and geopolitical uncertainties, stringent compliance rules, and the challenges of data management have heightened the need for robust Entity Verification practices. Our study demonstrates the growing significance of Entity Verification not only to manage financial crime and prevent fraud, but also to drive operational efficiencies and improve customer experiences.”

Moody’s surveyed 310 risk and compliance professionals from 50 countries and conducted 30 one-to-one in-depth interviews to gather these insights, emphasizing the global relevance and critical nature of Entity Verification in contemporary business practices.

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