What is EIN Verification in KYB Compliance?
Employer Identification Number or EIN is a type of Tax Identification Number (TIN) that’s issued by the IRS in the US for businesses. EIN is crucial for KYB compliance as it helps in proving that a business is operating legally. Including EIN in the KYB verification process helps in verifying whether a business has a valid EIN or not.
Similar to a Social Security Number (SSN) for individuals, an EIN works as a key identifier for businesses. Businesses that don’t have a valid EIN cannot legally hire employees, and manage finances. A valid EIN is an important factor for regulated entities (banks, FinTechs, etc.) as they’re required to conduct KYB checks for all partners before onboarding.
Verifying another company’s EIN is useful for all regulated businesses, especially businesses that have to follow compliance rules.
What is an Employer Identification Number?
The EIN is a unique 9-digit identification number issued by IRS for business identification, employment, and tax reporting.
Any business that wants to operate in the US needs to have a valid EIN. Companies can apply for EIN online through the IRS’s website. An EIN allows businesses to handle tax obligations, open new bank accounts, and apply for credit.
Any US-based business needs to apply for an EIN if they:
- Hire employees
- Participate in a Keogh plan
- Deduct taxes on non-resident alien income
- Have links to other companies, such as estates or trusts
- Operate as a corporation or partnership
- File certain tax returns (alcohol, employment, excise, firearms, or tobacco)
EIN verification in the context of KYB verification is crucial for verifying whether a corporation is legit. A company’s compliance officer is responsible for checking & verifying the KYB information (including EIN). The goal of the verification process is to confirm that the data matches and the company is not fake.
What is EIN Verification?
EIN verification is the process of verifying the EIN number and its legitimacy. Generally, EIN is part of the KYB background check, which is done to verify a company’s legitimacy. The goal of EIN is to check whether a business is registered with the US tax authorities and if the company is legit. A company not having EIN or information not matching with the IRS’s records can be a sign that the company is fraudulent.
EINs are also needed for other processes such as opening a new bank account and investing. If you or your partner don’t have a valid EIN, it poses a risk in all these areas.
Importance of EIN Verification in Regulatory Compliance
While EIN isn’t mandatory for regulated businesses, several US laws have made KYB checks mandatory. So, EIN falls under KYB verification best practices. The entire process can be slightly confusing for businesses without a proper compliance team.
Here’s a breakdown of when EIN Verification is needed:
- During Business Onboarding: EIN verification is part of the KYB checks when conducting background checks for a company.
- When Opening a Business Account: EIN verification is also done before approving risky financial operations, such as approving loans.
- For Continuous Due Diligence: Businesses also conduct EIN to comply with KYB regulations, ensuring businesses stick to tax reporting requirements.
Verifying EIN helps businesses analyze whether an entity is properly registered with the IRS. EIN verification in KYB checks helps spot red flags and mismatches in EIN information.
Key Reasons Why EIN Verification is Crucial for KYB
EIN verification is crucial during KYB checks as it helps companies in:
1. Ensuring Compliance with KYB Requirements
EIN verification isn’t a mandatory part of the KYB verification process, but doing EIN checks can help in verifying whether a company is legitimate or not and if the entity is safe to conduct business with.
2. Highlight AML Risks
The primary reason for KYB checks is to reduce money;-laundering fraud risks. With a proper KYB verification process, businesses can reduce the risk of fraud. As EIN helps in verifying legit tax information for a business, including EIN checks in KYB verification is a good idea.
3. Verify Organization Legitimacy
EIN verification helps determine if the company is operating legally in the US with a valid EIN or not. It also helps conduct financial processes and avoid legal liability.
Different companies are eligible to receive an EIN, such as:
- Partnerships
- Limited liability companies (LLC)
- Sole proprietorships
- Corporations
- Government agencies
- Trusts
- Estates
- Military entities
- Churches
- Farmers
- Cooperatives
- Indian tribal governments and enterprises
While onboarding any of these entities as partners, clients, or vendors, you have to conduct EIN as a part of your KYB checks.
Summing Up
EIN (employer identification number) verification has become a crucial part of KYB checks in recent times. Having a proper KYB verification process in place can help in streamlining the process. DIRO online document verification process can help businesses streamline their KYB verification process with instant document checks.
