How better data prevents business fraud

Kyle Mack is CEO and co-founder at Middesk, a San Francisco-based SaaS company that offers business identity verification and compliance automation capabilities for banks, fintechs and other financial services institutions. He also supports early-stage founders as a scout for Sequoia Capital. Prior to Middesk, Kyle was the first go-to-market hire at Checkr. 

There are 30 million companies in the United States with an average of 400,000 new companies formed every month — nearly 30% more than the number of people born. Verifying the identity and legitimacy of those businesses can be a herculean effort, especially when taking into account the growing sophistication of fraudsters and an ever-evolving federal regulatory landscape.

The state of Wyoming has eclipsed Delaware with the number of new entities formed over the past two years. In the U.S., any new business can create an LLC without needing to disclose the owner of the LLC. Instead, they can list a third-party registered agent as the owner. As a result, the state of Wyoming has become a place where both legitimate and illegitimate businesses create U.S. entities at a low cost and very minimal disclosure. Registered agent companies will provide these businesses with an address to receive legal documents, acting as the official point of contact between the company and legal authorities in a state where the business operates.

With the growing rate of new businesses forming, more than ever, banks, lenders and businesses across the board, need the most accurate, up-to-date data available to identify and prevent business fraud.

Entities formed in Delaware vs Wyoming

Fraudsters are exploiting vulnerabilities in business addresses
Amid the growing volume of new LLC formations, fraudsters are increasingly exploiting weaknesses in traditional address verification systems by using registered agents, virtual offices, or private mailboxes to present a veneer of legitimacy while masking fraudulent operations.

Another rising tactic involves using legitimate addresses to register new businesses, securing approval during onboarding, and then quickly abandoning those addresses once the accounts are opened. These shell operations pose a significant risk to financial institutions by increasing fraud exposure during onboarding. This can lead to financial losses, compliance violations, regulatory penalties, and reputational harm. According to the U.S. Federal Trade Commission (FTC), “business imposters” — fraudulent entities posing as legitimate businesses — accounted for over $752 million in reported losses in the U.S. in 2023.

Address intelligence for smarter risk assessment
To combat these challenges, banks, lenders and businesses are increasingly relying on a powerful tool: data. As bad actors refine their tactics to evade detection, financial institutions are leveraging real-time, quality data to stay ahead. Data analysis through AI has accelerated banks’ and businesses’ ability to draw valuable insights, providing greater protection from fraudulent businesses that slip  through the onboarding process. It can also proactively flag suspicious activity among existing customers. 

For example, a registered agent in Wyoming hosts more than 100,000 companies at a single address. Wyoming is the least populated state in the US, with fewer than 450,000 adults. It’s a small market, a small economy (only Vermont is smaller), but 166,960 entities, 92% of them LLCs, chose to incorporate there in 2023. Wyoming’s surge in LLC formations is driven by strong privacy protections and low costs. Its laws offer unmatched anonymity, asset protection from creditors, no state income tax and minimal disclosure requirements—conditions that also make the state appealing to fraudsters seeking to obscure ownership and evade regulatory scrutiny.

Recognizing the proliferation of fraudsters manipulating business addresses, regulators have strengthened the verification requirements for a business’s legitimate U.S. presence through updates to frameworks within the Bank Secrecy Act (BSA) and anti-money laundering (AML) directives.

Reducing risk through beneficial ownership
Another key factor in reducing risk is beneficial ownership data. While it seems obvious that harnessing as much data available is imperative, this thinking sometimes faces headwinds. Through the Corporate Transparency Act (CTA), the Financial Crimes Enforcement Network (FinCEN) is pushing for disclosure of anyone who directly or indirectly owns or controls at least 25% of a legal entity’s ownership interests, adding another layer to business verification. 

Lobbying groups representing some U.S. businesses have fought this, arguing that the CTA puts an unfair administrative burden on small businesses and forces them to disclose private information about their owners. However, keeping beneficial ownership opaque forces financial institutions and other business partners to absorb the risk.

The CTA is being contested in cases that have risen to the Supreme Court. Many legal experts believe beneficial ownership data will eventually come to pass, noting that the U.S. is behind on this requirement, which is standard in other countries, including those in the European Union, the U.K., Japan, and Australia. 

Clear benefits of quality business Identity data
The effectiveness of utilizing data, such as address risk insights, in combating business fraud is clear: high-quality, up-to-date information helps businesses mitigate fraud risk, improve efficiency, and drive growth. It serves as a strategic tool for innovation — enhancing lead qualification, streamlining identity verification, reducing operational friction, and uncovering new market opportunities and business models. 

As fraud tactics evolve, the financial industry must adopt data-driven solutions to stay ahead. By doing so, banks, lenders, and businesses can prevent losses, maintain regulatory compliance, and build customer trust. Equipped with real-time, quality data, informed by AI insights, organizations can turn the challenge of fraud prevention into an opportunity for greater resilience, smarter decision-making and sustainable business success.