Fraudulent companies are on the rise. As fraudsters use tools like GenAI to carry out increasingly sophisticated schemes, it’s becoming more and more difficult to spot the difference between a real company and a fake one.
That’s why it’s critical to verify the companies you associate with to make sure they’re legitimate. Below, we explain how bad actors use fake companies to commit different types of fraud, how to check if a company is legit, and why it’s worth incorporating Know Your Business (KYB) into your business fraud prevention strategy.
The risk of engaging with fraudulent companies
The consequences of unknowingly engaging with a fake company can be severe. Not only can you lose a significant amount of money, you may also have to spend valuable business time doing damage control. Plus, fraud often leads to lawsuits and regulatory fines.
Working with a fake company can also damage your brand’s reputation. Let’s say, for example, that you partner with a business that ends up compromising your customers’ data — in that case, you can lose loyal customers and credibility.
Types of fraud
Fraudsters use fake companies for a multitude of reasons: to launder money, scam customers and investors, secure loans, move assets, and evade taxes. Here are the most common types of fraud that occur with fake companies:
- Business impersonation: This is when a fraudster creates a fake identity to pretend to be another business, usually one that’s a major household name. Recent data from the Federal Trade Commission (FTC) showed that fraudsters impersonate Best Buy, Amazon, and PayPal most often.
- Shell business: This refers to a business entity that has no significant assets or real operations. Fraudsters usually use a shell business to hide illicit activities.
- Synthetic business: Not to be confused with a shell business, a synthetic business is a fake company created using synthetic IDs.
- Business misrepresentation: This happens when a business owner falsifies key information about their business, like their financials.
Learn some key methods for implementing a fraud prevention strategy.
How to check if a company is legitimate
Verifying a company’s legitimacy before you work with them helps protect your business from fraud. Properly vetting a company isn’t as simple as checking one source, though. You need to consider a wide array of factors, from a company’s legal documents to its social media activity.
Here are four key steps to take:
1. Search for the company’s business registration
Legitimate companies are registered as official business entities in their states, so the first step is to check company registration. You can find a company’s business registration details by searching their Secretary of State office’s website or inputting the company’s name and location into Better Business Bureau’s search page.
Keep in mind, though: that some companies register their business in one state, and then operate it in another, so you may have to check multiple states before you find the registration proof you’re looking for.
2. Verify the company’s contact information
Another easy way to rule out a fake company is to verify its business address and contact information. Start by checking to see if the company’s physical address listed on its website corresponds to the same address on Google Maps. Then contact the business via phone and email to make sure the correct company is on the other end.
3. Assess the company’s online presence
Authentic companies have a visible history of engaging with customers online, whether it’s through social media, Google and Yelp reviews, or professional networking sites like LinkedIn and Glassdoor. Here are some items to check:
- Website: Look for professionalism, brand accuracy, customer testimonials, and up-to-date information.
- Social media profiles: Check for consistency across platforms, activity, and comments back and forth with customers.
- LinkedIn: Look for regular company posts, a history of employee posts tagging the company, and substantial followers. It’s also a good idea to review the posting habits of the company’s owner or CEO to see if they’re actively posting about their business.
- Press: Check to see if the company has awards or acknowledgments from other organizations, as well as press mentions from local or industry-specific news outlets.
- Online reviews: Look up the company’s online reviews on Google, Yelp, and Trustpilot. You want to make sure that the volume and timing of reviews correspond with the company’s operating history, and that the content of the reviews (think: specific, positive) points toward the company’s legitimacy.
4. Pay attention to red flags throughout the process
As you do your due diligence, pay attention to red flags that indicate potentially fraudulent companies. In general, it’s wise to be skeptical about companies that don’t have an operating history or a public-facing brand.
Legitimate businesses aren’t just visible — they also make themselves available to current and prospective customers.
Keep these red flags in mind:
- Unprofessional websites and email domains
- Missing or conflicting contact information
- Little to no social media presence
- No online customer reviews, or a lot of vague, bot-like reviews that use the same language
- No employees or post history on LinkedIn
- A history of past fraudulent activity
- Poor finances, like a low credit score or decreasing revenues
- A company owner who refuses to provide information when asked, or who gives incomplete answers or documentation
- Unverifiable claims from the owner
Why you should use KYB to verify a business
One of the most effective ways to ensure a company’s legitimacy is to run a Know Your Business (KYB) check. KYB is an in-depth due diligence process that involves reviewing the company in question, as well as the business owners behind it. It’s essentially a business identity verification process.
KYB business verification tools automate the verification steps you’d normally have to do manually, so you get comprehensive, accurate information — faster.
Here’s how it works. First, the KYB solution gathers a huge amount of data about the company’s registration and licenses, legal history, social activity, and fiscal health, cross-referencing those details against government databases, websites, and credit bureaus.
Next, the KYB solution verifies the identities of a company’s ultimate beneficial owners (UBOs) to make sure they are who they say they are — and that they have no history of fraud. From there, the tool creates a risk profile for each company, indicating whether or not it’s safe to do business with them.
Prevent business fraud with Persona
Vetting the companies you work with doesn’t have to be painstaking. Using a KYB tool makes it easier to check a company’s legitimacy — and reduce your risk of fraud in the process.
Persona offers an end-to-end KYB solution that lets you onboard businesses faster and with less stress. Make more informed decisions with the help of over 150 global business registries, plus mix-and-match verification and screening methods for UBOs.
The best part? You can create custom flows and adjust friction based on individual risk signals, so you keep conversion rates high.
To ask questions or schedule a demo, reach out anytime.
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