Keeping Current On Company Identities is Critical To Fraud Prevention: Using Identity and Business Data To Find Connections, Track Changes

By guest writer Matthew Donahue, Director of the Tax and Regulatory Market Strategy, LexisNexis Risk Solutions

The global consulting firm PricewaterhouseCoopers put out a study a couple of years ago that estimated nearly 41% of government organizations have experienced some level of fraud.

Here in the United States, over 900,000 new businesses1 are created every year – including serial business owners and shell companies. Almost half of small businesses, 48%, are misreporting2 their business information to government agencies, and somewhere between 7% and 11% of companies3 may be “hiding in the shadows,” either unregistered or not reporting their information.

In 2017 alone, just the 20 cities with the largest number of small businesses (less than 100 employees) were home to more than 5.1 million small companies. Which means almost 2.5 million small businesses are misreporting to their cities and states, and as many as a half-million or more are hidden from local and state government.

This represents a huge challenge for cities, whether it’s from lost tax and licensing revenue, potential safety risks to citizens, or unknowingly awarding contracts to risky businesses and individuals.

One reason so many companies are able to keep doing business without proper oversight is because it’s so easy to alter a corporate identity. If a known bad actor applies for a liquor license from the state or city, and they put their son or daughter’s name on the application, they can hide their association. On a sanctions list? Change the business name, move to a new address, change corporate officers, sell to a friend – there are many ways to avoid being identified and barred from a city contract.

That’s why establishing a corporate identity program is so important. Just like people, companies have evolving identities. Making use of a city’s own records is just a starting point. That data should be supplemented with third-party databases that include both personal information and information drawn from federal agencies, surrounding states and localities – and data that sees across jurisdictional boundaries.

Undertaking this kind of corporate identity program has a number of benefits. First, of course, there’s the potential for generating additional revenue. If a company hasn’t acquired the licenses it needs, for instance, identifying it is the first step to getting it to pay its fees.

It also protects against the prospect of a procurement scandal, when a contract is awarded either to someone barred from doing business with the city or to a city employee’s or elected official’s relatives. Using a tool that pulls thousands of different data sources into one solution provides a much more comprehensive understanding of all of the parties or people involved, and can show up to three degrees of separation – perhaps the company is a spinoff from another company whose owner has a felony. This helps provide the government with the tools to conduct more due diligence and evaluate the risk of whether they should receive the government funds and/or do business with them all together. It

Then there are the time savings and increased productivity of city enforcement departments. The more information available on a company and the identities behind them, the better insights to help drive actionable and reliable results around the decision about whether enforcement actions are needed. It also means better handling of caseloads in frequently stretched departments. What would have been a large audit can now be a “let us help you” letter campaign. Alternatively, a shadowy company that had been hiding from enforcement can be identified and visited if necessary to bring them into compliance.

Cities should have as much information on a business as that business has on itself. That leads to more targeted and fairer enforcement, more rapid and less intrusive enforcement activities, and a healthier budget.



1 U.S. Bureau of Labor Statistics, 2017: Private sector establishment births and deaths report

2 IRS estimate: Over the last 20 years the non-compliance rate has grown to about half of all Small & Midsize Business (SMB) income is unreported, under-reported or misreported.

3 Investopedia, J.B. Maverick, June 2016