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What is Significant Beneficial owner (SBO)

Significant Beneficial Owner (SBO) In India: Definition & Guide

Significant Beneficial Ownership (SBO) has gained considerable attention in India, especially following the updates in November 2023 to the Companies Act, 2013 and the Limited Liability Partnership (LLP) Act, 2008. Recognised globally as a measure to increase transparency and accountability, SBO requirements in India aim to unveil the individuals who have actual control or substantial influence over a corporate entity, even when their ownership is indirect. These regulations form part of India’s broader agenda to combat financial malpractices, including money laundering, tax evasion, and fraud.

What Is A Significant Beneficial Owner (SBO)?

In the Indian context, the concept of SBO mandates that any individual who holds significant indirect rights, whether through voting shares, financial benefits, or decision-making power, must be identified and disclosed. The term “Significant Beneficial Owner” (SBO), specifically under the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023, is defined as:

An individual who, acting alone, jointly, or through one or more persons or trusts, holds certain rights or entitlements within a reporting limited liability partnership (LLP). Specifically, an SBO must meet at least one of the following criteria:

  1. Contribution: Holds indirectly or together with direct holdings, at least 10% of the contribution in the LLP.
  2. Voting Rights: Holds at least 10% of the voting rights related to management or policy decisions in the LLP.
  3. Profit Participation: Has the right to receive or participate in at least 10% of the total distributable profits or other distributions in a financial year, through indirect holdings alone or along with direct holdings.
  4. Influence or Control: Has the right to exercise, or exercises, significant influence or control in any manner other than through direct holdings alone.

This definition is further qualified by rules that exclude individuals who only hold rights directly, without meeting the indirect or combined thresholds stated above.

The Ministry of Corporate Affairs (MCA) has enforced these obligations to create a transparent corporate ecosystem where investors, regulators, and stakeholders can trust information about a company’s ultimate controllers. For entities structured as LLPs, similar SBO requirements now apply, introducing new compliance layers for firms and individual beneficiaries alike.

The SBO rules affect not only the companies but also various stakeholders and the broader investment climate. The ongoing drive towards transparent ownership structures reflects India’s commitment to aligning with international standards set by organisations like the Financial Action Task Force (FATF). 

Criteria for Identifying Significant Beneficial Owners in India

The regulations surrounding Significant Beneficial Ownership (SBO) in India were significantly revised with the 2023 amendment, introducing a more stringent framework for identifying and declaring beneficial owners in Limited Liability Partnerships (LLPs) and companies. The amendment, enacted by the Ministry of Corporate Affairs (MCA) in November 2023, aims to address gaps in transparency, especially concerning entities with complex ownership structures. The 2023 SBO rules place increased responsibility on LLPs and companies to identify individuals who exert significant control, whether directly or indirectly.

Key Definitions Around SBO Under The 2023 Amendment

  1. Significant Beneficial Owner (SBO): Under the 2023 rules, an SBO is an individual who holds at least 10% of either the contribution, voting rights, or distributable profits in a partnership or company. This ownership can be indirect or combined with any direct holdings. Notably, this threshold for SBO identification aligns with global standards, ensuring that entities with any significant influence are documented.
  2. Indirect and Direct Holdings: The amendment specifies that an individual is considered an SBO if they hold rights or entitlements both indirectly and directly in an entity. For instance, if an individual controls an entity that, in turn, holds a stake in a company or LLP, their indirect stake must be calculated in the total ownership assessment.
  3. Control and Significant Influence: The amendment expands on “control” to include the right to appoint majority partners, or to control policy decisions, whether directly or through a group of people acting in concert. This criterion ensures that those who wield control without a direct ownership stake are not overlooked.
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Other Scenarios For SBO Determination

The amendment has introduced detailed explanations to capture different ownership structures, making the rules comprehensive yet nuanced. Key scenarios are covered as follows:

  • Body Corporate Ownership: If an individual holds a majority stake in a corporate partner of an LLP or company, they are deemed to have an SBO stake.
  • Trust Ownership: When the partner is a trust, the SBO status is conferred based on whether the individual is a trustee (for discretionary trusts), a beneficiary (for specific trusts), or a settlor (for revocable trusts).
  • Pooled Investment Vehicles (PIVs): For entities controlled by PIVs, individuals such as general partners, investment managers, or CEOs with influence over the PIV are considered SBOs, especially if these PIVs are based in jurisdictions with weak regulatory standards.

Other Key SBO Compliance Requirements

The 2023 SBO rules mandate that LLPs and companies actively identify SBOs within their structure. Reporting LLPs and companies are now required to file returns with the Registrar of Companies using Form BEN-2 within 30 days of identifying an SBO. They must also maintain a register of SBOs, available for inspection by regulatory authorities and stakeholders, to foster transparency and corporate responsibility.

Obligation To Declare Indirect Control

A significant feature of the 2023 amendment is the requirement for SBOs to declare any indirect control they possess. This includes control via family trusts, subsidiary companies, or holding companies. For example, if an individual holds majority control in an LLP’s corporate partner or the ultimate holding entity, that individual must declare themselves as an SBO.

The amended rules also include provisions for situations where multiple individuals act jointly with a common intent, allowing regulators to identify SBOs even in cases where ownership is shared across several individuals or trusts.

Penalties And Non-Compliance With SBO Guidelines

Non-compliance with the 2023 SBO rules can lead to strict penalties. LLPs and companies that fail to declare SBOs or provide inadequate information are at risk of tribunal-directed sanctions, which may include restrictions on profit distribution, suspension of voting rights, or transfer restrictions. The MCA has underscored these enforcement measures to ensure adherence to SBO regulations and to discourage any attempts to obscure actual ownership.

SBO Compliance Obligations For Companies And LLPs

The updated Significant Beneficial Ownership (SBO) regulations have transformed compliance obligations for companies and Limited Liability Partnerships (LLPs) in India. The revised framework now imposes stricter duties on entities to accurately identify, record, and report individuals with significant beneficial control, addressing prior gaps in transparency. Companies and LLPs must now uphold clear records of ownership and control, particularly where indirect ownership structures could obscure true influence.

Identification And Notification Requirements

Under the current regulations, companies and LLPs must take proactive steps to identify and notify SBOs:

  1. Notice Requirement: Companies and LLPs are required to issue formal notices to any non-individual partners or shareholders whose stakes exceed 10%, whether in terms of contribution, voting rights, or share of profits. The notice (Form LLP BEN-4 for LLPs) aims to gather information on potential SBOs, ensuring all possible avenues of control or influence are assessed.
  2. Duty to Declare: Identified SBOs are required to submit a declaration in Form LLP BEN-1 (for LLPs) within 90 days of the regulations’ effective date or 30 days of any change in ownership status. This formal declaration serves to create a verified record of each SBO’s status.
  3. Submission of Form BEN-2: Companies and LLPs must report each identified SBO to the Registrar of Companies within 30 days, formalising the disclosure and providing a verifiable ownership structure for regulatory purposes.
  4. Register of SBOs: Entities are also required to maintain a register of SBOs (Form LLP BEN-3 for LLPs), available for inspection during business hours. This register supports transparency by making ownership records accessible to regulatory authorities and stakeholders.

Responsibilities Of SBOs

The updated regulations place additional responsibilities on the SBOs themselves. Individuals who meet the criteria for significant beneficial ownership must declare their status within the prescribed timeline. Failing to comply may lead to limitations on their rights within the company or LLP, such as suspension of voting privileges or profit distribution entitlements. These measures ensure that SBOs are accountable for transparently disclosing their interests and influence.

Compliance Timelines And Record-Keeping

The regulations mandate strict timelines for compliance to ensure timely and consistent reporting. Initial SBO declarations must be filed within 90 days of the rule’s effective date, with any subsequent changes reported within 30 days. This ensures records accurately reflect current ownership structures, preventing attempts to obscure significant control.

Exemptions To SBO Compliance

Certain entities are exempt from these disclosure obligations, reducing unnecessary reporting. Exemptions include those entities where the Central Government, State Government, or local authority holds a stake, as well as specific investment vehicles regulated by the Securities and Exchange Board of India (SEBI), such as mutual funds, alternative investment funds (AIFs), and real estate investment trusts (REITs).

Tribunal Powers And Penalties For Non-Compliance

The regulations empower tribunals to impose penalties for non-compliance or inadequate disclosures. Companies or LLPs failing to fulfil SBO obligations may face sanctions, including:

  • Profit Distribution Restrictions: SBOs may have their profit distribution rights temporarily suspended.
  • Voting Rights Suspension: The tribunal may suspend an SBO’s voting rights, restricting their influence over company or LLP decisions.
  • Restrictions on Interest Transfer: The tribunal may limit the transfer of interests associated with the SBO’s contribution, effectively preventing transfers until compliance is achieved.

Impact On Indian Corporate Governance

These SBO regulations underscore the importance of transparency and corporate governance in the Indian business landscape. By requiring that beneficial ownership details be disclosed and verified, the rules align Indian practices with international standards, fostering greater trust among investors and mitigating risks associated with hidden ownership. This contributes to a more robust corporate environment in India, reinforcing accountability and financial transparency at every level.

Impact Of SBO Regulations On India’s Corporate

The SBO regulations have introduced significant changes in the Indian corporate landscape, fostering a more transparent and accountable business environment. By focusing on the identification and disclosure of ultimate beneficial owners, these regulations aim to prevent financial misconduct and reduce the risks associated with concealed ownership structures. The broader impact of these rules has resonated across various areas of corporate governance, investor relations, and regulatory compliance.

Enhanced Corporate Governance

A primary goal of the SBO regulations is to strengthen corporate governance by making it harder for individuals to hide behind complex ownership structures. Companies and LLPs are now compelled to establish transparent reporting mechanisms that accurately reveal who truly controls or benefits from their operations. This transparency ensures that ownership and control are aligned with the company’s declared interests, reducing conflicts of interest and fostering a culture of integrity. The benefits of enhanced corporate governance are twofold: companies gain credibility, and investors feel more secure knowing they can verify ownership details.

Increased Investor Confidence

Investor trust is crucial to attracting and retaining capital, and the SBO regulations play a key role in supporting this trust. By mandating the disclosure of all individuals with substantial control or influence, the regulations allow retail and institutional investors to make more informed decisions. Access to clear ownership records means investors can assess any potential conflicts of interest or risks associated with hidden control. In particular, retail investors have shown growing interest in Indian markets, with the number of registered retail investors on the Bombay Stock Exchange increasing by 27% year-on-year as of December 2023. The SBO regulations contribute to an environment where both foreign and domestic investors have confidence in the market’s transparency and fairness.

Alignment With International Standards

Globally, the Financial Action Task Force (FATF) and similar bodies have long advocated for transparency in beneficial ownership to combat money laundering and financial fraud. The SBO rules position India as a proactive participant in the global movement towards financial transparency, aligning Indian practices with those of developed economies. Many countries, including the United Kingdom, the United States, and European Union members, have enacted similar rules to mandate ownership disclosure. By aligning with these standards, Indian companies are more likely to attract foreign investment and participate smoothly in international trade, given the assurance that they adhere to globally recognised practices.

Compliance Burden And Operational Challenges

While the SBO regulations promote transparency, they also introduce a compliance burden for companies and LLPs. The need to constantly monitor ownership structures, issue notices, and maintain up-to-date records can be resource-intensive, particularly for smaller entities with limited compliance teams. Moreover, entities with complex ownership layers may find it challenging to trace indirect ownership accurately. Despite these challenges, the regulations also serve as a deterrent to opaque ownership structures, prompting companies to simplify their ownership models where feasible.

Legal Clarity And Dispute Resolution

The SBO regulations have also brought clarity to the legal framework surrounding corporate ownership and control. With clear guidelines on defining and identifying an SBO, companies now have a straightforward process to follow. The regulations also empower companies to enforce compliance by approaching tribunals to restrict the rights of non-compliant SBOs, adding a layer of enforcement that discourages attempts to evade disclosure. This provision reduces the likelihood of disputes over ownership and control, as the rules now offer a transparent pathway for identifying SBOs and enforcing compliance.

Overall Economic Impact

In the long term, the SBO regulations are expected to contribute to the Indian economy by creating a stable and transparent business environment that attracts both domestic and international capital. Companies that comply with these regulations are seen as more trustworthy, making their shares and securities more appealing to investors. This increase in transparency can lower the cost of capital, support economic growth, and enhance India’s position as a global economic player. By safeguarding the interests of investors and enforcing corporate accountability, the SBO regulations have laid the groundwork for a more resilient and investor-friendly market.

FAQs around Significant Beneficial Owner (SBO)

A Significant Beneficial Owner (SBO) is an individual who directly or indirectly holds at least 10% of the ownership, voting rights, or profit-sharing rights in a company or LLP, or has significant influence or control over it.

Significant beneficial ownership (SBO) in an LLP refers to an individual who, alone or with others, directly or indirectly:

  1. Holds at least 10% of the LLP’s contribution,
  2. Controls at least 10% of voting rights on management decisions,
  3. Receives or participates in at least 10% of the distributable profits, or
  4. Exercises significant influence or control in ways beyond direct ownership.

To obtain the Significant Beneficial Owner (SBO) ID, an individual must:

  1. Submit a declaration using Form LLP BEN-1 to the reporting Limited Liability Partnership (LLP) if they meet the SBO criteria (e.g., holding at least 10% of contribution, voting rights, or profit participation).
  2. The LLP then files this information with the Registrar in Form LLP BEN-2.
  3. Upon verification, the Registrar records the individual as an SBO and assigns an SBO ID as part of the compliance documentation under the Companies Act, 2013.

This process ensures the identification and documentation of SBOs within the reporting LLP.

To calculate the Significant Beneficial Ownership (SBO) percentage in an LLP, follow these steps:

  1. Identify Direct and Indirect Holdings: Determine the individual’s percentage of direct contribution, voting rights, or profit participation, as well as any indirect holdings through trusts, partnerships, or other entities.

  2. Aggregate Holdings: Add the direct and indirect holdings (if any) to get the total percentage.

  3. Assess SBO Criteria: Check if the aggregated percentage meets or exceeds 10% for contribution, voting rights, or profit participation. If it does, the individual qualifies as an SBO.

Only holdings that cumulatively reach at least 10% are relevant for SBO classification.

In India, Significant Beneficial Ownership (SBO) Articles refer to rules established under the Companies Act, 2013, and the Limited Liability Partnership Act, 2008, which require individuals or entities to disclose their significant beneficial ownership in companies and LLPs. Under these regulations, an individual is classified as an SBO if they, directly or indirectly, hold at least 10% of shares, voting rights, or the right to receive at least 10% of distributable profits in an entity. This disclosure mandate aims to increase transparency in business ownership, prevent illicit activities like money laundering, and ensure compliance with the government’s financial regulations.

The main difference between a Beneficial Owner (BO) and a Significant Beneficial Owner (SBO) lies in the extent of their control or interest in a company or LLP:

  1. Beneficial Owner (BO): Generally, any person who enjoys the benefits of ownership (like profits or voting rights) in a company or LLP, even if they are not listed as the legal owner.

  2. Significant Beneficial Owner (SBO): Specifically defined in regulations, an SBO is a beneficial owner who holds a substantial level of control or interest, typically defined as at least 10% of shares, voting rights, or profit participation in the entity, or who has the right to exert significant influence or control.

In essence, while all SBOs are beneficial owners, not all beneficial owners qualify as SBOs due to the specific thresholds that define “significant” ownership or control.

By Abhinandan, ago
What is UBO?

What Is Ultimate Beneficial Owner/Ownership (UBO)? Definition & Guide

What Is Ultimate Beneficial Owner/Ownership (UBO)?

Ultimate Beneficial Ownership (UBO) refers to identifying the individual(s) who hold significant ownership or control over a business entity, directly or indirectly. This concept has gained traction globally, particularly as countries ramp up anti-money laundering (AML) and counter-terrorism financing (CTF) efforts. In India, identifying UBOs is pivotal in combating financial crimes, enhancing corporate transparency, and ensuring compliance with both local and international regulatory standards.

UBO information is key to Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols in finance and corporates. By identifying UBOs, companies and financial institutions can understand who truly owns and benefits from their business relationships, thereby preventing illicit activities. For example, the Indian government has introduced amendments to the Prevention of Money Laundering Act (PMLA) and other regulations to mandate the disclosure of UBOs in various contexts. These reforms align with international standards, such as those set by the Financial Action Task Force (FATF), to ensure that Indian businesses are held to the same transparency requirements as their global counterparts.

UBO compliance involves detailed verification processes, which often require businesses to disclose details about shareholders with a significant ownership stake, typically defined as owning 25% or more of the company. In India, however, this threshold can vary depending on regulatory context, with certain financial bodies like SEBI and the RBI imposing slightly differing criteria based on risk and industry requirements. India’s regulatory landscape regarding UBO disclosure is constantly changing, and companies need to stay updated on these requirements to avoid compliance risks.

Ultimate Beneficial Owner/Ownership (UBO) Regulations In India

Regulatory Landscape And Legal Framework For UBO Compliance

India’s approach to Ultimate Beneficial Ownership (UBO) regulation is rooted in its broader anti-money laundering (AML) and counter-terrorism financing (CTF) objectives, aimed at bringing transparency to financial transactions. The regulatory framework surrounding UBO disclosure has evolved significantly, particularly since India committed to aligning with the global standards set forth by the Financial Action Task Force (FATF). Key Indian authorities such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Ministry of Corporate Affairs (MCA) are instrumental in enforcing UBO disclosure requirements, ensuring that businesses operate within transparent and legally compliant structures.

The primary legislation enforcing UBO requirements in India is the Prevention of Money Laundering Act (PMLA) 2002, which has undergone numerous amendments to address changing compliance needs. Under PMLA guidelines, businesses, particularly those in finance and corporate services, must identify and verify the ultimate beneficial owners behind corporate clients. This verification process includes confirming the identity of shareholders who hold at least 25% of ownership in a private entity or those who exert significant control over the company’s operations. This threshold is consistent with FATF recommendations, though certain sectors may enforce stricter thresholds as necessary.

Another notable regulation is The Companies (Significant Beneficial Owners) Rules, 2018, which mandates that Indian companies disclose details about significant beneficial owners, defined as individuals holding 10% or more of a company’s shares or exercising a comparable degree of control. This rule aims to prevent the misuse of corporate entities for money laundering or financing terrorism by ensuring that those with significant influence or financial interest are registered and accountable.

The RBI has also issued guidelines that compel banks and financial institutions to conduct UBO checks as part of their KYC processes. These guidelines require banks to maintain accurate and updated UBO information, ensuring that every account linked to a corporate entity is screened for transparency. Similarly, SEBI regulations require entities in capital markets to conduct UBO identification, especially when dealing with Foreign Portfolio Investors (FPIs), who often have complex ownership structures involving multiple layers of investment vehicles.

UBO Compliance Challenges And Industry Impact

While these regulations enhance transparency, they present compliance challenges for Indian companies. Small- and medium-sized enterprises (SMEs), which form the backbone of India’s economy, often struggle with the resources and expertise needed to meet UBO requirements. The documentation, verification, and continuous monitoring of beneficial owners demand a robust compliance infrastructure, which can strain budgets and manpower, especially in the case of multi-tiered ownership structures. Larger corporations, particularly those engaged in cross-border trade, must navigate the complexity of consolidating UBO information across various jurisdictions to ensure compliance with Indian regulations.

Benefits Of Ultimate Beneficial Owner/Ownership (UBO) Compliance

Enhancing Financial Transparency And Security

UBO compliance offers several benefits to businesses and the wider economy, primarily by increasing financial transparency and reducing risks associated with illegal financial activities. For India, where the financial sector has historically grappled with issues like shell companies and undisclosed ownership structures, UBO compliance plays a critical role in exposing and dismantling layers of opaque ownership. By identifying the individuals who truly control or benefit from corporate entities, authorities and financial institutions can better safeguard the integrity of India’s financial ecosystem.

Through UBO compliance mechanisms, authorities traced these entities to their ultimate owners, uncovering widespread instances of regulatory evasion. This move underscored the value of UBO transparency in preventing the misuse of corporate structures and contributed to the government’s efforts to enhance financial accountability.

Strengthening Investor Confidence And Corporate Accountability

A robust UBO framework also strengthens investor confidence by ensuring that businesses operate transparently, making India a more attractive destination for both domestic and foreign investors. Investors, particularly institutional ones, seek assurances that their capital is protected and that the businesses they invest in have no undisclosed ownership risks. One factor contributing to this growth is the country’s strengthened regulatory mechanisms around UBO, as they reduce the perceived risk of financial misconduct.

By requiring companies to disclose UBO information, India aligns its regulatory standards with international best practices, such as those recommended by the Financial Action Task Force (FATF). This alignment not only boosts investor confidence but also enables smoother cross-border financial activities. Foreign investors are more likely to engage with companies that demonstrate transparency in their ownership structures, making UBO compliance a competitive advantage for businesses looking to attract international capital.

Reducing Compliance Risks And Enhancing KYC Efficiency

UBO compliance is also essential in reducing compliance risks associated with Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations. For Indian banks and financial institutions, verifying UBOs is now a critical part of Know Your Customer (KYC) processes, allowing them to screen accounts more effectively and detect potential red flags. Financial institutions that fail to comply with UBO regulations may face substantial penalties and reputational damage. 

Moreover, UBO transparency streamlines the onboarding process for financial clients by simplifying KYC procedures. With clear UBO information, financial institutions can expedite the due diligence process, enhancing the overall efficiency of client onboarding and reducing delays. This is particularly valuable in India’s expanding financial sector, where banks and other financial entities are under pressure to maintain stringent compliance while ensuring operational efficiency.

Challenges And Best Practices For Ultimate Beneficial Owner/Ownership (UBO) Compliance In India

Key Challenges In UBO Identification

Identifying and verifying Ultimate Beneficial Owners (UBOs) remains a complex challenge for many Indian companies, especially due to the diverse ownership structures and limited technological resources available for compliance. The layered and sometimes opaque ownership structures prevalent in both domestic and multinational corporations make UBO identification particularly arduous. Small and medium-sized enterprises (SMEs) in India, which form a significant portion of the corporate sector, often struggle to allocate resources for comprehensive UBO checks.

Further complicating this process is the frequent use of offshore accounts and complex investment vehicles, which can obscure the identity of beneficial owners. For instance, Indian companies with international operations must navigate foreign UBO laws that may conflict with domestic requirements, leading to inconsistent disclosures. This inconsistency can create substantial compliance gaps, particularly for sectors like banking and finance, where due diligence is critical. 

Regulatory Compliance And Cost Implications

The financial cost associated with implementing effective UBO checks is another significant challenge. For many companies, meeting UBO compliance requirements means investing in specialised KYC and AML technology, staff training, and regular monitoring systems. Large corporations often have the means to build dedicated compliance departments to handle UBO checks; however, smaller businesses struggle to keep up, leading to potential compliance risks. Moreover, frequent changes in UBO regulations require continuous updates to compliance frameworks, which can further strain budgets.

In the case of the financial sector, regulatory bodies like SEBI mandate stricter due diligence for high-risk clients, which translates into added costs.

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Best Practices For Effective Ultimate Beneficial Ownership Compliance

To address these challenges, companies can adopt best practices that improve the efficiency and accuracy of UBO identification while minimising compliance costs. Here are a few practical strategies:

  1. Invest in Advanced KYC and AML Technology: Leveraging technologies like artificial intelligence (AI) and machine learning (ML) can significantly improve UBO detection accuracy by automating data analysis and identifying hidden patterns in ownership structures. For instance, using automated KYC solutions enables financial institutions to screen customers quickly, reducing onboarding times while maintaining compliance.
  2. Implement a Centralised Data Repository: Establishing a centralised database for UBO information can help companies maintain updated records of ownership structures, ensuring that compliance checks are based on accurate and comprehensive data. This repository can also facilitate easier information sharing among stakeholders, improving transparency across departments.
  3. Regularly Update Compliance Frameworks: As UBO regulations evolve, companies must continuously monitor regulatory changes and update their compliance protocols accordingly. Establishing a dedicated team to oversee regulatory compliance can ensure that companies remain proactive in adapting to new requirements. Additionally, periodic audits of UBO compliance measures can help identify and address any potential gaps in real-time.
  4. Conduct Enhanced Due Diligence for High-Risk Clients: For clients or investors with complex or international ownership structures, companies should perform enhanced due diligence (EDD) to uncover any hidden beneficial owners. EDD measures, such as conducting independent background checks and consulting third-party data providers, help in verifying the accuracy of UBO information and mitigating potential compliance risks.
  5. Provide Ongoing Training for Compliance Teams: Given the complex nature of UBO regulations, providing regular training for compliance personnel is essential. Training ensures that team members stay informed about the latest regulatory developments and best practices in UBO verification. This can enhance the overall efficiency and effectiveness of compliance programs and reduce the risk of regulatory breaches.

Conclusion

In the years ahead, UBO compliance will be essential for Indian businesses aiming to grow sustainably. While the challenges of UBO disclosure are huge, embracing best practices and innovative solutions can simplify compliance and protect against financial and reputational risks. For companies, financial institutions, and regulatory bodies alike, prioritising UBO transparency is not just a legal obligation but a smart step toward creating a safer and more transparent business environment in India.

FAQs on Ultimate Beneficial Owner (UBO)

A UBO, or Ultimate Beneficial Owner, is the individual who ultimately owns or controls a company or asset, even if it’s held under another name or through a series of entities. UBOs are usually the ones who receive the primary benefits, profits, or control of the organization, often with at least 25% ownership or voting rights.

UBO, or Ultimate Beneficial Owner, is the individual who ultimately owns or controls a business, even if hidden behind layers of ownership structures

An Ultimate Beneficial Owner (UBO) is the individual who ultimately owns or controls a company and benefits from its activities, even if not directly listed as the owner. Typically, a UBO holds at least 25% of the company’s shares or voting rights, either directly or indirectly

An example of an ultimate beneficial owner (UBO) is an individual who ultimately owns or controls a company, even if their ownership is indirect. For instance, if “Person A” owns 60% of “Company B” through a holding entity “Company C,” Person A is considered the UBO of Company B, as they exercise ultimate control through Company C. UBOs are often identified for compliance and regulatory purposes, ensuring transparency in business ownership.

An Ultimate Beneficial Owner (UBO) is typically understood as a person who owns more than 25% of a company’s shares or has more than 25% control over its voting rights, though the exact definition can vary by country.

UBO (Ultimate Beneficial Owner) is calculated by tracing an entity’s ownership structure to identify individuals who directly or indirectly hold significant control or benefit from it, typically owning 25% or more of shares or voting rights. The calculation involves examining shareholder data, ownership tiers, and any nominee arrangements to identify natural persons who have a substantial controlling influence in the entity.

Yes, in India, disclosing the Ultimate Beneficial Owner (UBO) is mandatory for various entities. The Ministry of Corporate Affairs (MCA) requires companies to identify and report individuals holding significant beneficial ownership, defined as holding at least 10% of shares or exercising significant influence or control. Additionally, the Securities and Exchange Board of India (SEBI) mandates that certain Foreign Portfolio Investors (FPIs) provide granular UBO details to enhance transparency and prevent market manipulation.

To identify the Ultimate Beneficial Owner (UBO) in India, follow these steps:

  1. Define UBO Criteria: Per regulatory guidelines (such as RBI and SEBI), a UBO is generally an individual holding 10-25% ownership or control in a company or trust.
  2. Examine Ownership Structure: Review the shareholding or partnership structure to identify individuals with substantial direct or indirect ownership.
  3. Check Voting Rights & Control: Analyze voting rights, decision-making authority, and any control through other entities.
  4. Use KYC & Verification Tools: Utilize KYC, AML, and digital verification services to validate identities.
  5. Conduct Periodic Reviews: Regularly review UBO information for any changes in ownership or control.

Yes, a CEO can be considered a UBO (Ultimate Beneficial Owner) if they have significant ownership, control, or benefit in the company. In India, the UBO is typically identified as someone owning more than 25% of shares or with substantial control over the company’s operations and decisions, as per regulations like the Prevention of Money Laundering Act (PMLA).

Yes, multiple individuals can be Ultimate Beneficial Owners (UBOs) of a company in India. According to regulatory norms, especially under the Prevention of Money Laundering Act (PMLA) and guidelines from the Reserve Bank of India (RBI), UBO status applies to all individuals who directly or indirectly hold a significant ownership stake, typically 10-25%, or exercise significant control over the company. In cases of joint ownership or shared control, each qualifying individual is considered a UBO.

Proof of ultimate beneficial ownership (UBO) involves documents that identify individuals who have significant control over a company, typically those owning 25% or more of the business, even if held indirectly. In India, UBO proof is required to comply with KYC and AML regulations, helping prevent money laundering and fraud. Common documents include government-issued ID, PAN card, shareholding structure, and declarations detailing ownership levels. Financial institutions, companies, and regulatory bodies often request these to verify the actual individuals benefiting from business activities.

In KYC (Know Your Customer) processes, UBO (Ultimate Beneficial Owner) refers to the individual(s) who ultimately own or control a company or organization. In India, identifying UBOs is mandatory for regulatory compliance to prevent money laundering and terrorism financing. The UBO must be disclosed if they hold a 25% or greater stake in a company, or in some cases, a 10% stake for high-risk entities. Financial institutions are required to verify UBOs to ensure transparency in business operations.

Yes, a shareholder can be an Ultimate Beneficial Owner (UBO) if they hold a significant ownership stake or control over a company, typically defined as 25% or more of shares or voting rights under Indian regulations.

If there is no Ultimate Beneficial Owner (UBO) identified, companies in India must disclose this in compliance with regulatory requirements. They may need to report senior managing officials or other individuals with significant control to fulfill KYC and AML obligations under the Prevention of Money Laundering Act (PMLA) and related regulations.

UBO screenings provide essential insights into the backgrounds of key individuals, enabling companies to make well-informed decisions in financial transactions and third-party engagements. By identifying and verifying Ultimate Beneficial Owners, businesses can assess potential risks, ensure compliance with regulatory standards, and protect themselves against fraud, money laundering, and reputational damage.

A UBO, or Ultimate Beneficial Owner, is an individual who ultimately owns or controls a business entity, even if ownership is indirect. Typically, a UBO holds at least 25% of ownership or voting rights, either directly or through other entities.

Not all companies have an Ultimate Beneficial Owner (UBO). UBO typically applies to entities where ownership or control can be traced to specific individuals, such as in partnerships, private limited companies, and trusts. However, publicly listed companies are often exempt from UBO identification, as their ownership is dispersed among numerous shareholders and regulated by public market standards. Identifying a UBO is crucial for entities with complex ownership structures to ensure transparency and compliance with regulatory requirements.

By Abhinandan, ago
What is enhanced due diligence

What Is Enhanced Due Diligence? Meaning And Uses

Enhanced Due Diligence (EDD) is a key process in today’s regulation-laden environment, especially in countries like India, where financial institutions need robust measures to mitigate risks related to money laundering (AML) and counter-terrorism financing (CTF). EDD is an advanced form of Know Your Customer (KYC) and Customer Due Diligence (CDD), specifically designed to identify and manage risks associated with high-risk clients, transactions, vendors, and industries.

In this blog, we will delve into the significance of EDD, key regulatory frameworks in India, and best practices for various industries, including banking, non-banking financial companies (NBFCs), fintech, and foreign exchange sectors.

What Is Enhanced Due Diligence (EDD)?

Enhanced Due Diligence (EDD) refers to a more thorough investigation of high-risk clients or transactions, going beyond standard Customer Due Diligence (CDD). It’s a crucial part of Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) efforts, designed to provide additional scrutiny when a business relationship or transaction poses an elevated risk.

While CDD involves the basic identification and verification of customers, EDD is triggered in scenarios where higher risks, such as those posed by Politically Exposed Persons (PEPs), non-residents, or companies with complex ownership structures, are identified. This involves collecting more detailed information about the customer, verifying the legitimacy of their source of funds, and monitoring their activities.

Why Is Enhanced Due Diligence Necessary?

In India, EDD is an essential tool for financial institutions to comply with national and international AML and CTF guidelines. India’s financial system has seen significant growth in sectors like fintech, real estate, and precious metals, which increases exposure to high-risk clients and industries. Regulatory bodies such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority of India (IRDA) have put in place guidelines to ensure that financial institutions implement EDD when required.

Key situations where EDD becomes mandatory include:

  • High-risk customers like PEPs or those flagged for financial crime risks
  • Companies operating in industries that have higher susceptibility to financial crime, such as real estate, foreign exchange, and precious metals
  • Transactions originating from or linked to countries under economic sanctions or known for corruption and terrorism financing, as outlined by the Financial Action Task Force (FATF).

EDD in India is governed by several regulatory frameworks, including the Prevention of Money Laundering Act (PMLA), the Foreign Exchange Management Act (FEMA), and various RBI and SEBI guidelines. These regulations aim to safeguard the country’s financial system from illicit cash flows and terrorism financing, which remains a global concern.

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Key Regulations Governing EDD In India

India has several laws and regulatory bodies that oversee Enhanced Due Diligence (EDD) practices. Some of the key frameworks include:

1. Prevention of Money Laundering Act (PMLA)

The PMLA is India’s primary legislation to combat money laundering. Under this act, financial institutions are required to establish robust AML programs, including KYC and CDD procedures. When higher risks are identified, EDD is mandated.

2. Reserve Bank Of India (RBI) Guidelines

RBI has introduced several guidelines for banks, NBFCs, and other financial institutions to comply with EDD requirements, especially for high-risk clients and industries like foreign exchange, fintech, and real estate.

3. Securities and Exchange Board of India (SEBI) Guidelines

SEBI requires that all entities dealing with securities maintain stringent AML policies, including EDD for high-risk clients. This is particularly important in scenarios where the source of funds is unclear or linked to countries with poor AML standards.

4. Insurance Regulatory and Development Authority of India (IRDA) Guidelines

In the insurance sector, IRDA mandates EDD for high-value insurance policies or where there is a suspicion of money laundering or terrorism financing. Insurers must thoroughly verify the source of funds and perform ongoing monitoring.

Requirement And Uses Of Enhanced Due Diligence

Enhanced Due Diligence (EDD) is not a one-size-fits-all process. It is typically required in situations where there is a heightened risk of money laundering, terrorism financing, or other financial crimes. Regulatory bodies in India, including the RBI and SEBI, have established guidelines for when EDD must be performed. Here are some key scenarios where EDD is mandated:

1. Politically Exposed Persons (PEPs)

PEPs are individuals who hold prominent public positions, such as government officials, political leaders, or executives in state-owned enterprises. Due to their influence and access to funds, PEPs are considered high-risk, as they could potentially misuse their positions for money laundering or financing terrorism. Financial institutions must carry out EDD when dealing with PEPs, including verifying the source of their funds, their family and close associates, and conducting ongoing monitoring of their transactions.

2. Non-Resident Clients

Non-resident clients, especially those from countries with weak AML/CTF controls or those subject to sanctions, pose a higher risk of financial crimes. For example, transactions originating from jurisdictions flagged by the FATF for insufficient AML measures require more stringent scrutiny. EDD for non-resident clients involves obtaining additional information about their business relationships, source of wealth, and the nature of their transactions.

3. Cash-Intensive Businesses

Industries such as real estate, precious metals, gambling, and foreign exchange are inherently risky due to the volume of cash transactions involved. Such businesses are prone to money laundering as cash transactions are harder to trace. Financial institutions must perform EDD by verifying the source of funds and implementing robust transaction monitoring for clients in these sectors.

4. Complex Ownership Structures

Businesses with complicated or opaque ownership structures, such as shell companies or those using nominee shareholders, are often used to hide the true beneficial owner of funds. EDD helps uncover the ultimate beneficial ownership (UBO) by requiring additional documentation and more in-depth analysis. Understanding the UBO is critical to ensure that companies aren’t being used for illicit activities.

5. High-Risk Jurisdictions

Countries identified by the FATF as having strategic deficiencies in their AML/CTF frameworks require enhanced scrutiny. Transactions or business relationships linked to these high-risk countries necessitate EDD, including a deeper examination of the customer’s source of funds and any potential links to criminal activity. The FATF regularly updates its list of high-risk jurisdictions, and businesses must stay informed to apply the necessary EDD measures.

6. High-Value Transactions

High-value transactions, particularly those that are irregular or fall outside the typical scope of a customer’s usual activity, require enhanced due diligence. Institutions must verify the legitimacy of the funds, ensure there is no involvement in financial crimes, and monitor such transactions closely to mitigate risks.

How Enhanced Due Diligence Is Conducted In India

The process of conducting EDD in India is comprehensive and often involves multiple steps. Financial institutions, fintech companies, NBFCs, and others in the financial sector are required to gather and analyse additional information about their high-risk customers. Here’s a breakdown of the EDD process:

1. Gathering Additional Customer Information

EDD involves collecting more detailed information than standard CDD. This can include a deeper understanding of the customer’s identity, such as their background, family, business relationships, and sources of wealth. For businesses, additional documentation such as corporate records, registration documents, and information about ultimate beneficial ownership (UBO) is often required.

2. Verifying Source Of Funds And Wealth

A key aspect of EDD is verifying the legitimacy of the customer’s source of funds and wealth. This can involve reviewing bank statements, tax returns, and other financial documents. In cases where the customer is involved in high-value transactions or cash-intensive businesses, this step is crucial to ensure there is no involvement in money laundering or terrorism financing.

3. Monitoring Transactions

Ongoing monitoring is another critical element of EDD. Once a customer is identified as high-risk, their transactions must be continuously monitored for any suspicious activity. Financial institutions use advanced transaction monitoring systems to flag unusual transactions, which may then trigger further investigation.

4. Adverse Media And Negative News Screening

Institutions must also conduct adverse media and negative news screenings as part of the EDD process. This involves checking media reports, public records, and other sources for any signs of involvement in criminal activities, corruption, or other reputational risks. In many cases, adverse media screening can uncover information that is not available through traditional channels.

5. Ongoing Risk-Based Monitoring

Once a high-risk client is onboarded, financial institutions are required to engage in ongoing risk-based monitoring. This ensures that the customer’s risk profile is constantly reviewed and updated as needed. Any changes in the customer’s behaviour, business relationships, or transactions are carefully scrutinized, and further action is taken if necessary.

Challenges In Implementing EDD In India

While EDD is a powerful tool for managing risks, its implementation comes with several challenges, particularly in India’s evolving financial landscape. Some of the common challenges include:

1. Complex Regulatory Requirements

India’s regulatory framework for EDD is governed by multiple agencies, including the RBI, SEBI, IRDA, and the Ministry of Finance. Each of these bodies has its own set of guidelines, making it difficult for financial institutions to keep up with changing regulations. Moreover, global regulations such as those set by the FATF must also be followed, adding another layer of complexity.

2. Data Availability And Accuracy

One of the biggest hurdles in conducting EDD is access to reliable data. Many high-risk clients use complex ownership structures to hide their true identities or beneficial ownership, making it difficult to collect accurate information. Additionally, adverse media screening can be time-consuming and may yield inaccurate or outdated results, complicating the EDD process.

3. Cost And Resource Allocation

Conducting EDD requires significant financial and human resources. The need for detailed documentation, ongoing monitoring, and the use of advanced technology like transaction monitoring systems makes EDD a resource-intensive process. For smaller financial institutions and fintech companies, the cost of implementing EDD can be prohibitive.

Best Practices For Enhanced Due Diligence In India

Implementing Enhanced Due Diligence (EDD) effectively is crucial for maintaining compliance and mitigating risks. Financial institutions and businesses across various sectors must adopt specific strategies to ensure that their EDD processes are both robust and efficient. Here are some best practices recommended for EDD in India:

1. Adopt A Risk-Based Approach

The risk-based approach is central to EDD, allowing institutions to focus their resources on areas that pose the greatest threat. This approach involves evaluating each customer’s risk profile based on factors like geographic location, industry, and transaction patterns. The higher the risk, the more stringent the EDD measures. By implementing this approach, businesses can better allocate their resources to higher-risk areas without overburdening low-risk customers.

2. Utilise Technology And Automation

In a landscape where financial crimes are becoming increasingly sophisticated, technology plays a critical role in streamlining the EDD process. Many Indian financial institutions are leveraging RegTech solutions to automate aspects of their EDD procedures. Technologies such as artificial intelligence (AI) and machine learning (ML) can help monitor transactions in real time, flagging any suspicious activities for further investigation.

For instance, automated systems can integrate with public databases, screening tools, and adverse media checks to gather information on clients more efficiently. These tools can significantly reduce manual workloads, allowing compliance teams to focus on analyzing higher-risk cases.

3. Ensure Continuous Monitoring

Once a high-risk client is identified, it is not enough to conduct a one-time EDD process. Continuous monitoring is essential for identifying any changes in a customer’s risk profile or transactional behaviour. Financial institutions must employ advanced monitoring tools to track real-time data and transactions, ensuring that red flags are addressed promptly.

This process also involves conducting periodic reviews of high-risk clients, updating their information, and reassessing their risk status. For instance, a non-resident customer who was initially deemed low-risk may later engage in high-value transactions, warranting further scrutiny.

4. Conduct Thorough Training for Staff

A well-trained compliance team is key to executing EDD effectively. Indian financial institutions must ensure that their staff is well-versed in EDD requirements, how to assess high-risk clients, and how to apply the necessary regulatory frameworks. This includes training on identifying red flags, verifying sources of wealth, and documenting all findings comprehensively.

Regular training programs should be conducted to keep teams updated on the latest developments in AML/CTF regulations, technology advancements, and any changes in internal compliance policies. Properly trained staff will be more capable of identifying risks and ensuring compliance with EDD protocols.

5. Engage in Cross-Border Collaboration

Many high-risk clients operate globally, making it essential for Indian institutions to collaborate with international partners and regulators. Cross-border collaboration helps in sharing intelligence and data, especially concerning customers that operate in multiple jurisdictions. This is especially critical in the fight against money laundering and terrorism financing, which often transcend borders.

Indian institutions should actively engage with global AML/CTF bodies such as the Financial Action Task Force (FATF), as well as maintain strong partnerships with local regulators like the RBI, SEBI, and IRDA. Sharing best practices and intelligence can help institutions stay ahead of emerging threats.

Conclusion

Enhanced Due Diligence (EDD) is an indispensable tool for financial institutions in India, enabling them to mitigate the risks associated with high-risk clients and transactions. By adhering to the guidelines set forth by regulatory bodies like the RBI, SEBI, and IRDA, institutions can ensure they are compliant with AML/CTF regulations while protecting themselves from financial crimes.

EDD goes beyond basic customer verification and requires a deep dive into the customer’s financial behaviour, business relationships, and sources of wealth. As financial crime continues to evolve, so too must the strategies for combating it. Implementing a risk-based approach, utilising technology, and ensuring continuous monitoring are essential practices for effective EDD.

FAQs around Enhanced Due Diligence (EDD)

Enhanced Due Diligence (EDD) is a deeper investigation process used to assess higher-risk clients. It involves gathering more detailed information than standard checks to manage financial, regulatory, or reputational risks and ensure compliance.

The purpose of Enhanced Due Diligence (EDD) is to thoroughly assess and mitigate risks posed by high-risk clients, ensuring compliance with legal and regulatory standards while protecting businesses from financial, reputational, and operational threats.

In KYC, Customer Due Diligence (CDD) involves basic identity verification to assess the risk level of clients, while Enhanced Due Diligence (EDD) is a more in-depth investigation applied to high-risk clients, requiring additional scrutiny and information to mitigate potential risks.

Enhanced Due Diligence (EDD) is required for high-risk clients, such as politically exposed persons (PEPs), entities in high-risk industries, clients from sanctioned or high-risk countries, and those involved in large or complex transactions.

The requirement for Enhanced Due Diligence (EDD) arises when dealing with high-risk clients, transactions, or jurisdictions. It involves gathering additional information and performing deeper investigations to ensure compliance with regulatory standards and mitigate risks related to fraud, money laundering, or other financial crimes.

The correct use of Enhanced Due Diligence (EDD) is to conduct a thorough risk assessment of high-risk clients or transactions by gathering detailed information, ensuring compliance with regulatory standards, and mitigating potential financial, legal, or reputational risks.

The Enhanced Due Diligence (EDD) process in Anti-Money Laundering (AML) involves a detailed investigation of high-risk clients to assess potential money laundering risks. It includes gathering additional information, continuous monitoring, and thorough scrutiny of financial transactions to ensure compliance with AML regulations.

An example of Enhanced Due Diligence (EDD) is conducting an in-depth background check on a high-risk client, including verifying their source of funds, ownership structures, and involvement in politically exposed activities, to assess potential risks before establishing a business relationship.

Enhanced Due Diligence (EDD) is important because it helps identify and mitigate risks posed by high-risk clients, ensuring compliance with regulations, preventing fraud, and protecting businesses from financial and reputational harm.

The Enhanced Due Diligence (EDD) process in banking involves deeper scrutiny of high-risk customers, including detailed identity verification, financial checks, transaction monitoring, and additional documentation to mitigate risks like money laundering and ensure regulatory compliance.

By Abhinandan, ago
What is Third Party Verification?

What Is Third-Party Verification (TPV)? All You Need To Know

Ensuring the accuracy and authenticity of information provided by vendors, suppliers, and other third parties is essential for mitigating risks and ensuring compliance. Third-party verification (TPV) serves as a crucial process, allowing companies to validate the credentials, claims, and transactions of external entities. By utilising independent verification from a neutral party, such as AuthBridge, businesses can trust the data they rely on for important decisions, whether it’s for vendor onboarding, background checks, or regulatory compliance.

This blog talks about the significance of third-party verification, its key processes, and how it contributes to building trust, reducing fraud, and adhering to legal standards. Whether you’re looking to improve vendor management or strengthen your due diligence process, understanding the core aspects of third-party verification is essential for modern business operations.

What Is Third-Party Verification?

Third-party verification (TPV) is the process in which an external organisation validates the information, claims, or actions of a company or individual on behalf of another entity. This could include verifying a customer’s details, or a vendor’s credentials, or ensuring compliance with industry regulations. The use of third-party verifiers is especially critical when businesses need impartial validation, as it eliminates conflicts of interest and ensures objective results.

Typically, third-party verification ensures that companies can make informed decisions based on verified information, minimising the risk of errors, fraud, and non-compliance. The third-party verification process covers a wide range of industries and scenarios, from financial audits to verifying security practices in supply chains. It helps build confidence among stakeholders, including investors, regulators, and customers, by adding an extra layer of credibility to the business’s operations.

Types And Use Cases of Third-Party Verification

Third-party verification (TPV) can be tailored to meet the specific needs of businesses across various industries. Depending on the nature of the transaction or the relationship being verified, TPV can serve different purposes, from ensuring vendor integrity to confirming customer intentions. Below are the common types of third-party verification and their relevant use cases:

1. Vendor and Supplier Verification

Companies rely heavily on external vendors and suppliers for various products and services. Ensuring the legitimacy and credibility of these partners is crucial for minimising risks in the supply chain. Vendor verification involves checking the credentials, financial stability, and past performance of a supplier before engaging in any business relationship.

  • Use Case: A manufacturer sourcing raw materials might engage a third-party verifier to assess a new supplier’s financial health, ethical practices, and adherence to environmental regulations. This ensures the supplier aligns with the company’s standards and mitigates the risk of supply chain disruptions or reputational damage.

2. Third-Party Background Checks

Third-party verification is often used for background checks in hiring, particularly for critical roles where trust and compliance are paramount. The background check process involves verifying the candidate’s education, employment history, criminal records, and other personal details to prevent fraudulent hires.

  • Use Case: Companies in the financial sector may hire a third-party agency to conduct a thorough background check on potential employees. This ensures that the candidates have a clean history and can be trusted with sensitive financial information.

3. Regulatory and Compliance Verification

With changing regulations, businesses must ensure that their partners and vendors comply with industry-specific rules and laws. Third-party verification helps validate whether a vendor or business partner adheres to necessary regulatory compliance standards, such as data privacy regulations or industry-specific certifications.

  • Use Case: A healthcare company partnering with a third-party software provider may require compliance verification to ensure that the provider adheres to HIPAA (Health Insurance Portability and Accountability Act) standards for data security and patient privacy.

4. Financial Verification

For businesses engaging with vendors, customers, or investors, ensuring financial credibility is paramount. Third-party financial verification involves reviewing an entity’s financial records, credit ratings, and other financial data to confirm its financial standing and reliability.

  • Use Case: A bank considering a loan for a small business may request a third-party financial verification of the borrower’s assets and financial history to assess the risk before approving the loan.

5. Security and Data Privacy Verification

In sectors like IT, where data privacy and security are top priorities, third-party verification is often used to ensure that vendors or service providers follow best practices for data protection. Security verification ensures that partners comply with the necessary security protocols, such as encryption standards and cybersecurity regulations.

Use Case: An e-commerce platform might engage a third-party verifier to audit and verify the data security protocols of a payment gateway provider, ensuring that the gateway complies with PCI-DSS (Payment Card Industry Data Security Standard) requirements.

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Benefits Of Third-Party Verification

Third-party verification (TPV) offers a multitude of advantages for businesses, ranging from enhanced trust to better compliance management. By involving an impartial, external party to verify information, companies can ensure transparency, reduce risks, and improve overall efficiency. Below are some key benefits of implementing third-party verification:

1. Enhanced Trust and Credibility

Engaging a third-party verifier adds an extra layer of confidence for all stakeholders involved, including customers, investors, regulators, and business partners. By using independent verification services, businesses can demonstrate their commitment to accuracy and reliability.

2. Reduced Risk of Fraud

One of the primary reasons businesses invest in third-party verification is to mitigate the risk of fraud. Whether it’s verifying a vendor’s credentials, checking a new hire’s background, or ensuring that a customer’s financial details are accurate, TPV helps reduce fraudulent activities. This is especially crucial for sectors like finance, healthcare, and e-commerce, where fraud can have significant consequences.

3. Compliance With Regulatory Standards

In today’s highly regulated industries, businesses must adhere to strict compliance guidelines. Third-party verification plays a pivotal role in ensuring that all partners, vendors, and internal processes comply with relevant laws and standards, such as data privacy regulations or industry-specific certifications. Non-compliance can result in fines, legal issues, and reputational damage.

4. Streamlined Due Diligence

The due diligence process can be complex, especially when dealing with new vendors, partners, or clients. By outsourcing the verification process to a third party, businesses can streamline their due diligence process, ensuring that all necessary checks are completed without overburdening internal teams. This not only saves time but also provides more comprehensive verification results.

5. Objective and Impartial Evaluation

One of the most important aspects of third-party verification is that it provides an objective, unbiased evaluation. Internal assessments may carry inherent biases, especially if they are conducted by individuals with vested interests. TPV eliminates this issue, offering an impartial assessment of the information being verified.

6. Improved Efficiency Through Automation

Many third-party verification providers use advanced technology to automate certain aspects of the verification process, such as background checks or vendor risk assessments. This not only accelerates the verification process but also reduces human error, ensuring that businesses receive accurate and timely results.

Challenges Of Third-Party Verification

While third-party verification (TPV) offers numerous benefits, it also comes with certain challenges that businesses must navigate to ensure its successful implementation. Understanding these obstacles can help organizations better prepare and mitigate potential issues. Here are some of the key challenges associated with third-party verification:

1. Data Privacy and Security Concerns

One of the primary challenges in third-party verification is the handling of sensitive data. Verifiers often require access to confidential information, such as financial records, personal identification, or internal business data, to perform their tasks. Ensuring that this data is protected throughout the verification process is critical, especially in sectors with stringent data protection regulations like healthcare, finance, and e-commerce.

2. Regulatory Compliance Complexity

As third-party verifiers operate across various industries and regions, they must navigate a complex regulatory landscape. Different countries and industries have specific laws regarding regulatory compliance, and TPV providers must stay up-to-date with evolving rules. Ensuring that all third-party vendors meet local and international legal requirements can be a challenge for companies working in multiple markets.

3. Cost Implications

The cost of employing third-party verification services can sometimes be a barrier for businesses, especially small and medium-sized enterprises (SMEs). Although the benefits of TPV often outweigh the costs in terms of risk reduction and compliance, the upfront investment in hiring a reputable verification provider can be significant.

4. Integration With Existing Systems

Another challenge companies face is integrating third-party verification solutions with their existing infrastructure. Businesses with legacy systems may find it difficult to seamlessly incorporate external verification tools, which could lead to operational delays or inefficiencies. Ensuring that the verification process integrates smoothly with internal systems is crucial for avoiding workflow disruptions.

5. Dependence on Third-Party Reliability

When outsourcing verification to a third-party vendor, businesses are dependent on the reliability and accuracy of the service provider. If the verifier fails to deliver accurate results, it could lead to legal and financial repercussions. Therefore, selecting a trustworthy and reliable third-party verification service is essential, but reliance on an external entity also poses risks.

6. Potential for Delays

In some cases, third-party verification can introduce delays, especially when dealing with a high volume of checks or complex assessments. If the third-party verifier does not operate efficiently or is overburdened with work, it could slow down critical processes such as vendor onboarding, due diligence, or background checks.

Best Practices For Implementing Third-Party Verification

Implementing an effective third-party verification (TPV) system requires careful planning, adherence to industry standards, and the use of best practices to ensure successful outcomes. By following these guidelines, businesses can optimize their verification processes, minimize risks, and enhance overall efficiency. Below are key best practices for integrating third-party verification into business operations:

1. Select Reputable Verification Providers

Choosing the right third-party verification provider is crucial to ensuring reliable and accurate results. Companies should thoroughly vet potential TPV vendors based on their experience, certifications, and reputation in the industry. Selecting a vendor that has a proven track record, particularly in your specific sector, can help avoid errors and ensure compliance with relevant regulations.

2. Ensure Compliance With Data Privacy Laws

Given the sensitive nature of the information involved in third-party verification processes, businesses must ensure that they and their TPV providers comply with all applicable data privacy laws. This includes local regulations, such as the General Data Protection Regulation (GDPR) in Europe or the DPDP in India, as well as industry-specific data security standards.

3. Integrate Verification Into Existing Workflows

One of the key challenges businesses face when implementing third-party verification is the integration of these processes with existing workflows. To ensure efficiency and minimize disruption, companies should integrate TPV seamlessly into their systems, particularly in areas such as vendor onboarding, risk assessment, and compliance management.

4. Conduct Regular Audits and Assessments

Even after implementing third-party verification, businesses should perform regular audits and assessments to ensure the effectiveness and accuracy of the verification process. This includes checking the performance of TPV providers, verifying compliance with regulatory requirements, and reviewing the quality of the verification reports.

5. Use Technology to Enhance Accuracy and Speed

Automation and advanced technology can significantly improve the efficiency and accuracy of third-party verification processes. By leveraging tools like artificial intelligence (AI) and machine learning, businesses can streamline verification tasks and reduce the likelihood of errors or delays.

6. Develop Clear Vendor and Supplier Agreements

When working with external partners, it’s important to establish clear agreements regarding the verification process. These agreements should outline the responsibilities of each party, including the scope of the verification, timelines, and any compliance obligations. Having well-defined contracts can help avoid misunderstandings and ensure accountability.

Conclusion

Third-party verification (TPV) is essential for businesses to ensure accuracy, reduce risks, and maintain compliance in today’s complex and globalised marketplace. By employing independent verifiers, companies can confidently validate vendor credentials, conduct background checks, and meet regulatory standards, all while enhancing operational efficiency. As technology continues to evolve, the integration of remote verification methods will further streamline the TPV process, making it a critical tool for securing trust and ensuring transparency in business operations.

FAQs around Third-party verification (TPV)

Third-party verification refers to the process of using an independent, external entity to confirm the accuracy, legitimacy, or compliance of information provided by an individual or organization. It ensures objectivity and credibility by having a neutral party validate claims such as identity, qualifications, or legal standing. 

Examples of third-party verification include:

  1. Background Checks – Verifying employment history, education, and criminal records through an external agency.
  2. KYC (Know Your Customer) – Confirming identity documents, such as Aadhaar or passport, via authorized third-party services.
  3. Supplier Audits – Assessing suppliers’ compliance with quality or regulatory standards by independent auditors.
  4. Financial Audits – Independent review of a company’s financial statements to ensure accuracy and compliance.
  5. Certification Services – External verification of industry certifications like ISO or PCI-DSS compliance.

The benefits of third-party verification include:

  1. Enhanced Credibility: It provides independent validation, boosting trust among customers, clients, and partners.
  2. Risk Mitigation: Reduces exposure to fraud, compliance breaches, and operational risks by ensuring accuracy in information.
  3. Regulatory Compliance: Helps meet industry and government regulations by verifying identities, credentials, or business details.
  4. Streamlined Onboarding: Speeds up processes like vendor, partner, or employee onboarding through reliable verification systems.
  5. Improved Decision Making: Provides verified data to make informed, secure business decisions.

Third-party Background Verification (BGV) involves an external agency conducting checks on a candidate’s credentials and history on behalf of a company. The process typically includes:

  1. Identity Verification – Confirming the individual’s identity through official documents.
  2. Educational and Employment History – Verifying academic qualifications and previous work experience.
  3. Criminal Record Check – Checking for any criminal background.
  4. Address Verification – Confirming current and past addresses.
  5. Reference Checks – Contacting previous employers or referees to assess performance and character.
  6. Credit Check – Reviewing financial stability for specific roles.

The third-party verification process involves an independent organization confirming the accuracy and authenticity of information provided by a business or individual. This verification is commonly used in areas such as employee background checks, vendor assessments, and customer due diligence. The process typically includes verifying identity, financial records, legal standing, or compliance with regulations to ensure trustworthiness and mitigate risks for the requesting party.

By Abhinandan, ago
Linking PAN with Aadhaar

How To Link PAN Card With Aadhaar?

Introduction

Linking your PAN (Permanent Account Number) with Aadhaar has become a crucial requirement for tax-related processes in India. This linkage aims to simplify and streamline the taxpayer’s identification process, making it easier for the Income Tax Department to detect and prevent tax evasion. It ensures that each individual has only one PAN card and that all financial transactions are linked to a single identity.

Why Should You Link Your Aadhaar With PAN Card?

The Government of India has mandated the linking of PAN with Aadhaar under the Income Tax Act, 1961. This legal requirement helps in creating a unified base for the financial and social welfare schemes, facilitating better governance. Failure to link the PAN with Aadhaar by the stipulated deadline can result in the PAN becoming inoperative, which could complicate financial transactions and tax submissions.

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Benefits Of Linking PAN With Aadhaar

    1. Streamlined Financial Transactions

Linking PAN with Aadhaar significantly streamlines various financial transactions that require PAN verification. This linkage simplifies the process of verifying PAN details for banking transactions, mutual fund investments, and stock trades, making these processes quicker and more efficient. It also helps in reducing the paperwork since Aadhaar can be used to satisfy KYC norms effectively.

    1. Enhanced Compliance and Transparency

The integration of PAN with Aadhaar enhances the ability of tax authorities to oversee financial transactions, thus improving compliance with tax laws. This transparency aids in curbing tax evasion and ensures a more robust financial system. Moreover, it facilitates quicker tax refund processes by quickly verifying the authenticity of tax returns filed online.

Step-by-Step Process To Link PAN With Aadhaar

Method 1: Linking via the Income Tax e-Filing Portal

  1. Visit the Income Tax e-Filing Portal:
    • Go to the Income Tax e-Filing website.
  2. Login/Register:
    • Log in to your account. If you do not have an account, you will need to register using your PAN.
  3. Link Aadhaar:
    • After logging in, navigate to the ‘Profile Settings’ section and click on ‘Link Aadhaar’.
  4. Enter Details:
    • Your PAN details will already be populated. Verify the details and enter your Aadhaar number and name as per Aadhaar.
    • If only your birth year is mentioned in your Aadhaar card, select the checkbox indicating the same.
  5. Captcha Code:
    • Enter the Captcha code for verification.
    • If you have a visual impairment, you can use the OTP option instead, which will send an OTP to your registered mobile number.
  6. Submit:
    • Click on ‘Link Aadhaar’. A pop-up message will confirm that your Aadhaar has been successfully linked with your PAN.
PAN Aadhaar Link Initiation Steps

Method 2: Linking via SMS

  1. Compose SMS:
    • Open your SMS app and type the following message: UIDPAN <12-digit Aadhaar> <10-digit PAN>.
  2. Send SMS:
    • Send this message to either 567678 or 56161.
  3. Confirmation:
    • You will receive a confirmation message once your PAN is successfully linked to your Aadhaar.

Method 3: Linking via the Aadhaar Seva Kendra

  1. Visit Aadhaar Seva Kendra:
    • Go to the nearest Aadhaar Seva Kendra or PAN Service Center.
  2. Fill Form:
    • Fill out the required form to link your PAN with Aadhaar.
  3. Provide Documents:
    • Provide a copy of your PAN card and Aadhaar card.
  4. Submit:
    • Submit the form along with the documents. The staff will process your request, and your PAN will be linked with Aadhaar.

Method 4: Linking via the NSDL Portal

  1. Visit NSDL Portal:
  2. Link Aadhaar:
    • Look for the option to link Aadhaar and follow the instructions provided.
  3. Enter Details:
    • Enter your PAN, Aadhaar number, and name as per Aadhaar.
  4. Submit:
    • Click on ‘Submit’ to link your PAN with Aadhaar.

Common Issues And Solutions In Linking PAN With Aadhaar

Troubleshooting Common Errors

Common issues include mismatched personal details such as names or dates of birth between PAN and Aadhaar records. To resolve these, you may need to update either your PAN or Aadhaar details. This can be done by submitting a correction form through NSDL for PAN or visiting a nearby Aadhaar Enrollment Center.

What to Do If PAN-Aadhaar Linking Fails?

If the online linking fails due to technical reasons, retry after some time or try the SMS method. If persistent issues arise, contact the PAN/Aadhaar helplines for detailed guidance and troubleshooting.

PAN Helpline Number: (020) 272 18080

Aadhaar Helpline Number: 1947 (Toll Free)

How To Check PAN-Aadhaar Link Status?

Checking the status of your PAN card’s link with Aadhaar is a pretty straightforward process.

Online Method via Income Tax e-Filing Portal

  1. Visit the Income Tax e-Filing Portal: Go to the Income Tax e-Filing website.
  2. Link Aadhaar Status: Click on the ‘Link Aadhaar’ option under the ‘Quick Links’ section.
  3. Enter Details: Enter your PAN and Aadhaar number.
  4. Submit: Click on the ‘View Link Aadhaar Status’ button.
  5. Check Status: The portal will display the status of your Aadhaar-PAN linking.

Online Method via SMS

  1. Send SMS: Compose an SMS in the following format: UIDPAN <12-digit Aadhaar> <10-digit PAN>.
  2. Send to Number: Send this SMS to 567678 or 56161.
  3. Receive Status: You will receive an SMS back confirming whether your Aadhaar is linked to your PAN.

Online Method via NSDL Portal

  1. Visit NSDL Portal: Go to the NSDL PAN portal.
  2. Check Aadhaar Status: Look for an option to check Aadhaar-PAN linking status and follow the instructions provided.

Through Income Tax Department Mobile App

  1. Download App: Install the Income Tax Department’s mobile app.
  2. Login: Log in with your credentials or register if you haven’t.
  3. Link Aadhaar: Navigate to the ‘Link Aadhaar’ section to check the status.

How to Link Your PAN to Your Aadhaar After the Deadline

If you missed the deadline to link your PAN with Aadhaar, you may still be able to complete the process, but there could be additional steps or penalties involved. Here’s how you can proceed:

1. Pay the Late Fee

  • Late Fee Payment: As per the Income Tax Department guidelines, a late fee of ₹1,000 may be applicable for linking PAN with Aadhaar after the deadline.
  • Payment Process:
    • Visit the e-Filing portal e-Pay Tax or use a Challan 280.
    • Select ‘Proceed’ under the ‘Income Tax’ section.
    • Choose the ‘Other Receipts (500)’ option.
    • Complete the payment with your PAN, assessment year, and other required details.

2. Link PAN with Aadhaar

After paying the late fee, follow these steps to link your PAN with Aadhaar:

Method 1: Through the Income Tax e-Filing Portal

  1. Visit the e-Filing Portal: Go to the Income Tax e-Filing website.
  2. Login/Register: Log in to your account or register if you don’t have an account.
  3. Navigate to Link Aadhaar: Under ‘Profile Settings,’ click on ‘Link Aadhaar.’
  4. Enter Details: Verify your details, enter your Aadhaar number, and name as per Aadhaar.
  5. Captcha Code: Enter the captcha code for verification.
  6. Submit: Click on ‘Link Aadhaar’ to complete the process.

Method 2: Using SMS

  1. Compose SMS: Type the message UIDPAN <12-digit Aadhaar> <10-digit PAN>.
  2. Send SMS: Send the SMS to 567678 or 56161.
  3. Confirmation: You will receive a confirmation message upon successful linking.

Method 3: Through Aadhaar Seva Kendra or PAN Service Center

  1. Visit the Center: Go to the nearest Aadhaar Seva Kendra or PAN service center.
  2. Fill Form: Fill out the form to link PAN with Aadhaar.
  3. Submit Documents: Provide self-attested copies of your PAN and Aadhaar.
  4. Fee Payment: Pay the late fee if not already paid online.
  5. Receive Confirmation: The staff will process your request and provide confirmation.

FAQs around PAN-Aadhaar Linkage

Linking PAN with Aadhaar is mandatory to ensure that each PAN card holder has a unique identity and to curb tax evasion through multiple PAN cards.

The government periodically sets deadlines for linking PAN with Aadhaar. It’s important to check the latest deadline on the Income Tax Department’s official website.

If you do not link your PAN with Aadhaar before the deadline, your PAN will become inoperative. This means you won’t be able to use your PAN for financial transactions, and you may also face a penalty.

You can link your PAN with Aadhaar online through the Income Tax e-Filing portal. Log in to your account, go to ‘Profile Settings,’ click on ‘Link Aadhaar,’ and follow the instructions.

Yes, if you link your PAN with Aadhaar after the deadline, a late fee of ₹1,000 is applicable. You need to pay this fee before proceeding with the linkage.

Yes, you can link your PAN with Aadhaar by sending an SMS in the format UIDPAN <12-digit Aadhaar> <10-digit PAN> to 567678 or 56161.

Generally, you do not need to submit any documents if the details in both PAN and Aadhaar match. However, if there is a discrepancy, you may need to update your details in either PAN or Aadhaar database.

You can check the status of your PAN-Aadhaar linking on the Income Tax e-Filing portal by clicking on ‘Link Aadhaar Status’ under the ‘Quick Links’ section.

If there is a mismatch in details between PAN and Aadhaar, you need to update the information in either of the databases. This can be done online through the respective portals.

Yes, NRIs also need to link their PAN with Aadhaar if they have an Aadhaar card. The process and deadlines are the same as for resident Indians.

The linking process is usually instantaneous if done online. However, it may take a few days if there are discrepancies or if done offline.

No, once PAN and Aadhaar are linked, they cannot be de-linked.

By Siddharth, ago
New GST Invoice Management System

New GST Invoice Management System Goes Live On October 1: Key Details

The Goods and Services Tax Network (GSTN) has announced a significant enhancement to the GST portal with the introduction of the Invoice Management System (IMS). Set to go live on 1st October, this new feature is designed to streamline the process of managing invoices between suppliers and recipients, ultimately improving the accuracy of Input Tax Credit (ITC) claims, as per an advisory by the GST Network. The IMS offers taxpayers the ability to accept, reject, or keep invoices pending directly within the system, which can be crucial for maintaining compliance and avoiding errors in GST returns.

Efficient invoice management is critical for businesses of all sizes, particularly in the context of GST compliance. With the complexity of the GST system, errors in invoicing can lead to significant financial penalties and disruptions in business operations. The new IMS addresses these challenges by providing a more transparent and manageable process for handling invoices, ensuring that only genuine and accurate invoices contribute to ITC calculations.

Key Features Of The New GST Invoice Management System

The soon-to-be-introduced Invoice Management System (IMS) is poised to change the way taxpayers interact with their invoices on the GST portal. Below are some of the key features that will enhance the GST compliance process for businesses:

Invoice Acceptance, Rejection And Pending Status

One of the most significant aspects of the IMS is the ability for taxpayers to take decisive action on invoices received from their suppliers. After the supplier uploads an invoice into their GSTR-1, GSTR-1A, or IFF, it becomes visible in the recipient’s IMS dashboard.

New Dashboard IMS
Source: GST Portal

At this point, the recipient has the option to:

  • Accept the Invoice: Accepted invoices will be automatically included in the recipient’s GSTR-2B and will be considered for ITC eligibility. The GST on these accepted invoices will also auto-populate in GSTR-3B.
  • Reject the Invoice: If an invoice is deemed incorrect or fraudulent, it can be rejected. Rejected invoices will not be included in GSTR-2B, thereby preventing any erroneous ITC claims.
  • Keep the Invoice Pending: If the recipient is uncertain about the validity of an invoice, they can keep it pending. This invoice will not be included in GSTR-2B or GSTR-3B until further action is taken. This feature is particularly useful when additional verification is required.

Impact On Input Tax Credit (ITC)

The IMS plays a crucial role in determining the ITC available to taxpayers. Only invoices that are accepted by the recipient will be reflected in the GSTR-2B, which serves as the basis for ITC claims. This ensures that only valid and verified invoices contribute to the ITC, reducing the risk of errors and fraudulent claims.

Additionally, if no action is taken on an invoice, it will be considered as “Deemed Accepted” and will automatically be included in the GSTR-2B. This feature minimises the compliance burden on taxpayers, allowing them to focus on more critical aspects of their business.

Invoice Amendments And Their Implications

Suppliers can amend invoices before filing their GSTR-1. If an invoice is amended, the changes will be reflected in the IMS, and the amended invoice will replace the original one on the recipient’s dashboard. The recipient must then decide whether to accept, reject, or keep the amended invoice pending.

In cases where an invoice is amended after it has been included in a filed GSTR-1A, the amended invoice will affect the ITC for the subsequent month. This ensures that any changes made by the supplier are accurately reflected in the recipient’s GST returns, maintaining the integrity of the GST system.

Workflow And Implementation Of The GST Invoice Management System (IMS)

The workflow of the GST Invoice Management System (IMS) is designed to integrate seamlessly with the existing processes on the GST portal, ensuring that the system is both user-friendly and efficient. Here’s how the IMS is implemented and how it fits into the broader GST compliance framework:

Invoice Flow In IMS

The flow of invoices within the IMS begins when a supplier uploads an invoice to their GSTR-1, GSTR-1A, or IFF. Once uploaded, the invoice becomes visible in the recipient’s IMS dashboard, where they can take one of three actions:

  • Accept: Accepted invoices are automatically included in the recipient’s GSTR-2B and are considered for ITC eligibility. The corresponding GST amount is also populated in the recipient’s GSTR-3B as eligible ITC.
  • Reject: Rejected invoices are excluded from the GSTR-2B, ensuring that no erroneous ITC is claimed.
  • Pending: Invoices that are marked as pending are not included in the GSTR-2B or GSTR-3B for the current month. These invoices remain in the IMS dashboard for further action in subsequent months.

Handling Amendments And Updates

The IMS is equipped to handle amendments made by suppliers to their invoices. If a supplier amends an invoice before filing their GSTR-1, the amendment is reflected in the IMS, replacing the original invoice on the recipient’s dashboard. The recipient must then decide how to proceed with the amended invoice.

For invoices amended after inclusion in a filed GSTR-1A, the impact on ITC is deferred to the subsequent month. This ensures that all amendments are accurately tracked and reflected in the GST returns, preserving the integrity of the data.

IMS Dashboard
Source: GST Portal

Sequential Generation Of GSTR-2B

A unique aspect of the IMS is the sequential generation of GSTR-2B. The system will only generate the GSTR-2B for a given period after the GSTR-3B for the previous period has been filed. This sequential approach ensures that all invoices and amendments are accounted for in the correct period, preventing discrepancies in ITC claims.

Special Considerations For QRMP Taxpayers

For taxpayers under the Quarterly Return Monthly Payment (QRMP) scheme, the IMS provides tailored functionality. Invoices uploaded through IFF by QRMP taxpayers flow into the IMS, but GSTR-2B for these taxpayers is generated on a quarterly basis, rather than monthly. This adjustment aligns with the QRMP scheme’s reporting requirements, ensuring that compliance remains streamlined for these taxpayers.

The IMS is designed to work with various GST compliance software, offering automation and integration capabilities that enhance the efficiency of managing invoices. Businesses using GST e-invoicing software, GST invoice reconciliation tools, or other related solutions can benefit from the seamless integration of IMS into their existing workflows. This allows for automated updates and real-time tracking of invoice statuses, further simplifying GST compliance.

Also Read

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By Abhinandan, ago
gst collection August 2024

GST Collection Rises 10% YoY In August 2024

The Goods and Services Tax (GST) is an important parameter of India’s economic health, and the GST collection for August 2024 has once again highlighted the strength of the Indian economy. With the total GST collection for August 2024 reaching ₹1,74,962 crore, this marks a significant 10% year-on-year growth compared to August 2023. This blog explores the GST collection data for August 2024, analyses the trends, and compares it with the GST Collection data for July 2024 to provide a detailed understanding of the ongoing economic dynamics.

GST Collection August 2024: Key Figures 

August 2024 witnessed a robust GST revenue of ₹1,74,962 crore, which includes:

  • Central GST (CGST): ₹30,862 crore
  • State GST (SGST): ₹38,411 crore
  • Integrated GST (IGST): ₹93,621 crore
  • Cess: ₹12,068 crore

This strong performance reflects a 10% growth compared to August 2023, when the total collection was ₹1,59,069 crore. The data indicates sustained economic activities and improved GST compliance across the country.

Comparative Analysis Of GST Collection: August 2024 vs. July 2024

When we compare the GST collection of August 2024 with July 2024, which recorded a total GST revenue of ₹1,82,075 crore, there is a slight dip of around 4%. However, this fluctuation is typical in the monthly GST collection trends due to the varying economic activities across months. Despite the slight decrease from July, the year-on-year growth is a positive sign of the economy’s steady recovery.

  • CGST and SGST Comparison:
    • July 2024: CGST ₹32,386 crore; SGST ₹40,289 crore
    • August 2024: CGST ₹30,862 crore; SGST ₹38,411 crore

CGST and SGST collections in August 2024 were slightly lower than in July 2024. The CGST dropped by approximately 4.7%, while the SGST fell by around 4.6%. This minor decline could be attributed to seasonal factors and the timing of tax payments.

  • IGST and Cess Comparison:
    • July 2024: IGST ₹96,447 crore; Cess ₹12,953 crore
    • August 2024: IGST ₹93,621 crore; Cess ₹12,068 crore

IGST and Cess collections also observed a marginal decrease in August compared to July, by 2.9% and 6.8%, respectively. However, the overall year-on-year growth remains strong, reflecting a healthy and growing economy.

State-wise GST Collection August 2024

The state-wise GST collection data for August 2024 presents a mixed bag, with some states showing significant growth while others experienced a slight decline. Here are the top-performing states for GST collection for August 2024:

    • Maharashtra: ₹26,367 crore, a 13% increase from August 2023
    • Delhi: ₹5,635 crore, marking a substantial 22% growth from August 2023
    • Haryana: ₹8,623 crore, with a 12% growth from August 2023
    • Assam: ₹1,353 crore, showing an 18% increase from August 2023
    • Madhya Pradesh: ₹3,438 crore, showing a 12% growth from August 2023

    On the other hand, states like Andhra Pradesh and Arunachal Pradesh saw a reduction in GST collections by 5% and 10%, respectively. This disparity highlights the varied economic activities and GST compliance levels across different regions of India.

    You can read the entire report of the GST Collection for August 2024 by clicking here.

    The GST collection trends for August 2024 are encouraging, with consistent year-on-year growth reflecting the resilience of the Indian economy. The slight monthly dip from July 2024 is not alarming but rather indicative of the usual fluctuations in economic activities and tax payments.

    Looking ahead, the government’s ongoing efforts to streamline GST compliance through the GST portal and regular updates to GST rates and returns are expected to sustain and even enhance this growth trajectory. Additionally, as the Indian economy continues to recover and expand, we can anticipate further improvements in GST revenue collections in the coming months.

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    Conclusion

    The GST collection for August 2024, amounting to ₹1,74,962 crore, marks a significant milestone in India’s fiscal journey. The 10% year-on-year growth is a testament to the robustness of the Indian economy and the effectiveness of GST as a revenue collection mechanism. As we move forward, the focus will remain on enhancing compliance, optimising GST rates, and ensuring that the GST system continues to support India’s economic aspirations.

    By Abhinandan, ago
    TPRM Software Best 2024 In India

    13 Best Third-Party Risk Management Software In 2024

    As businesses become more and more interconnected, effectively managing third-party risks has become extremely important to protecting operations and ensuring compliance with various regulations. Third-party risk management (TPRM) software is an important tool in this effort, enabling organisations to assess, monitor, and mitigate the risks associated with their vendors, suppliers, and external partners. 

    Top 13 Third-Party Risk Management (TPRM) Softwares In India

    Whether your organisation requires TPRM software designed for large enterprises, solutions with AI-driven capabilities, or platforms that emphasise regulatory compliance, several leading providers offer robust options. Below, we explore the 13 most effective TPRM software solutions in 2024, in no particular order:

    1. AuthBridge

    AuthBridge offers a comprehensive Third-Party Risk Management (TPRM) solution designed to help businesses manage, monitor, and mitigate risks associated with their third-party relationships. The solution is built on advanced technology and provides a robust framework for businesses to ensure compliance, reduce vulnerabilities, and protect their reputation.

    End-to-End Risk Management

    • Holistic Risk Assessment: AuthBridge provides a full-spectrum assessment of third-party risks, covering financial, legal, regulatory, operational, and reputational areas. This allows businesses to gain a complete understanding of their third-party entities.
    • Supply Chain Due Diligence: Ensures continuous due diligence throughout the entire relationship with third parties, not just at the onboarding stage, helping identify and mitigate risks over time.

    Compliance and Regulatory Assurance

    • Comprehensive Compliance Checks: Detailed checks against local and international regulations, including Anti-Money Laundering laws, and data protection standards like the DPDP Act, and GDPR, are conducted to ensure full compliance.
    • Audit-Ready Documentation: The platform provides the necessary documentation and reports to demonstrate compliance during audits, reducing the risk of regulatory penalties.

    Continuous Monitoring and Alerts

    • Real-Time Monitoring: Continuous monitoring of third-party entities with real-time alerts on any changes in their status or risk profile helps businesses stay ahead of potential risks.
    • Automated Red Flag Alerts: The system includes automated alerts that flag suspicious activities or non-compliance issues, enabling immediate corrective actions.

    Technology-Driven Insights

    • AI-Powered Risk Analysis: Leveraging AI and machine learning to analyse large data sets, AuthBridge identifies patterns and anomalies that may indicate potential risks, enabling data-driven decision-making.
    • Customisable Dashboards: The platform offers customisable dashboards for a clear overview of the third-party risk landscape, aiding quick decisions and efficient management.

    Third-Party Screening and Verification

    • Thorough Background Screening: Extensive background checks on third-party entities, including verification of legal standing, financial health, and overall reputation, ensure credible and reliable partnerships.
    • Global Watchlist Screening: The solution includes screening against global sanctions, watchlists, and adverse media to prevent engagements with entities involved in illegal or unethical activities.

    Risk Scoring and Prioritisation

    • Dynamic Risk Scoring Models: Risk scores are assigned to third-party entities based on various factors, dynamically updated as new information becomes available, helping prioritise and address high-risk relationships.
    • Risk Mitigation Prioritisation: The solution assists in prioritising risk mitigation efforts based on risk scores, ensuring that resources are allocated effectively to manage the most critical risks.

    Efficient Onboarding and Contract Management

    • Streamlined Onboarding: The onboarding process for third-party vendors is automated, reducing the time and effort required while ensuring necessary due diligence before contract signing.
    • Contract Lifecycle Management: Tools for managing the entire lifecycle of third-party contracts, from initiation to renewal or termination, ensure risks are managed at every stage of the relationship.

    Industry-Specific Solutions

    • Tailored TPRM: Industry-specific TPRM solutions address unique risks faced by different sectors like BFSI, healthcare, manufacturing, and IT/ITES, ensuring relevant and actionable insights.

    Data Privacy and Security

    • Secure Data Handling: Ensures all data processed is handled securely with encryption and other advanced security measures to protect sensitive information from unauthorized access.
    • Data Protection Compliance: Designed to comply with global data protection regulations by being ISO/IEC 27001:2013 and SOC 2 Type II Certified, maintaining the highest standards of data privacy.
    GST Verification
    One Of The Many Instant Checks Powering AuthBridge's TPRM Solution

    2. UpGuard

    UpGuard is a robust third-party risk management software known for its comprehensive risk assessment capabilities. It categorises risks into six key areas: email security, website risks, phishing and malware, network security, brand protection, and reputation risk. UpGuard’s TPRM software is especially valuable for its pre-built questionnaires and libraries, which accelerate vendor assessments and improve third-party security postures. With a user-friendly interface and frequent updates, UpGuard is an excellent choice for businesses of all sizes looking for reliable TPRM software with automation and data privacy compliance features.

    3. SecurityScorecard

    SecurityScorecard excels in providing continuous security ratings across ten categories, making it a top TPRM provider for businesses needing comprehensive cybersecurity risk management. This third-party risk assessment software offers automated action plans to improve security scores, and its tools for compliance management and breach insights are indispensable for organisations prioritising regulatory compliance. SecurityScorecard is a versatile solution, suitable for small businesses and large enterprises alike, offering proactive risk mitigation and seamless compliance management.

    4. BitSight

    BitSight’s TPRM software leverages advanced algorithms and daily security assessments to minimise risks associated with third-party vendors. The platform’s continually updated Security Ratings provide a solid, data-driven foundation for evaluating and managing third-party risks. With features like automated vendor onboarding and data-driven validation of vendor responses, BitSight ensures that companies can make informed decisions. This makes it one of the best TPRM solutions for organisations looking for a blend of efficiency, accuracy, and continuous monitoring.

    5. OneTrust

    OneTrust’s TPRM software is tailored for businesses needing to adhere to strict data privacy and regulatory compliance standards, such as GDPR and HIPAA. The platform offers tools for data inventory mapping, privacy impact assessments, and automated workflows, all accessible through an intuitive web portal. While its advanced analytics and risk mitigation tools could be stronger, OneTrust remains a top choice for organisations that prioritise data privacy compliance and regulatory adherence in their third-party risk management processes.

    6. Prevalent

    Prevalent’s TPRM platform offers a comprehensive solution for mitigating security and compliance risks throughout the vendor lifecycle. Ideal for larger organisations or mid-sized companies with dedicated TPRM resources, Prevalent excels in providing continuous risk monitoring, automated assessments, and detailed risk scoring. With its strong vendor intelligence networks and flexible, hybrid approach, Prevalent delivers tailored solutions that offer a rapid return on investment, making it one of the top TPRM providers in the market.

    7. ProcessUnity

    ProcessUnity’s Vendor Risk Management (VRM) software streamlines risk and compliance programs by automating vendor assessment, monitoring, and management. This platform is particularly effective for large enterprises that require robust TPRM software with risk scoring and continuous monitoring capabilities. ProcessUnity’s customisation options and integration with other governance, risk, and compliance (GRC) tools make it a powerful choice for organisations aiming to manage third-party risks effectively.

    8. Centraleyes

    Centraleyes offers a cloud-based TPRM solution designed for scalability and customisation, providing a comprehensive console for overseeing and assessing risks. With features like an advanced risk register, real-time alerts, and customisable dashboards, Centraleyes ensures that security teams are promptly informed of any vulnerabilities. As businesses evolve, Centraleyes plans to integrate AI to further enhance risk assessment and mitigation processes, making it a forward-thinking choice for companies seeking TPRM software with AI and automation features.

    9. Diligent ThirdPartyBond

    Diligent’s ThirdPartyBond stands out for its advanced risk analytics powered by machine learning algorithms. This TPRM software offers features like KPI and KRI-driven reports, centralized third-party inventory, and adaptive vendor surveys with advanced risk-scoring. Although the platform’s editing features primarily rely on scripting, which may be challenging for non-technical users, its capabilities in monitoring SLA performance and managing contracts make it a valuable tool for enterprises needing a sophisticated TPRM solution with regulatory compliance features.

    10. Venminder

    Venminder is a user-friendly SaaS solution for third-party risk management, offering tools for contract management, vendor onboarding, risk assessments, and due diligence. The platform’s customisable vendor questionnaires, SLA management, and vendor scorecard tracking ensure comprehensive oversight of vendor relationships. Venminder’s extensive library of learning resources and scalable services make it an adaptable solution for organisations of any size looking for TPRM software that simplifies risk management processes.

    11. LogicGate

    LogicGate’s Risk Cloud is a highly configurable platform that streamlines governance, risk, and compliance processes. Its drag-and-drop interface automates tasks like vendor onboarding and risk surveying, making it easy for businesses to manage third-party risks without needing extensive technical skills. The platform’s real-time visibility into the risk landscape, coupled with integration with tools like Jira and Slack, makes LogicGate a versatile option for enterprises seeking TPRM software that enhances decision-making through data-driven insights.

    12. Archer

    Archer Third-Party Governance offers powerful tools for managing and mitigating third-party risks, with customisable risk indicators and advanced visualization tools like Bowtie Diagrams. The platform’s AI-powered assessments and industry-specific design enable organisations to evaluate risks comprehensively and address potential disruptions proactively. Archer’s cloud-based deployment ensures scalability, making it a versatile TPRM software solution for organisations looking to enhance business resilience and streamline vendor risk management.

    13. Panorays

    Panorays is a leading TPRM platform that efficiently manages cybersecurity risks associated with third-party vendors. It offers AI-powered cybersecurity questionnaires, extended attack surface assessments, and continuous monitoring, providing a comprehensive view of vendor security postures.  Panorays excels in regulatory compliance and quick risk alerts, making it a strong choice for businesses focused on enhancing cybersecurity resilience.

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    Conclusion

    As businesses become more interconnected, effective Third-Party Risk Management (TPRM) is essential to safeguard operations, compliance, and reputation. The right TPRM software helps mitigate risks associated with vendors and partners, offering solutions from AI-driven insights to robust compliance tools. The best TPRM platforms integrate seamlessly with existing processes, enhance risk management, and scale with your business. By evaluating each option’s features and strengths, organisations can choose a solution that protects their operations and supports long-term resilience.

    FAQs

    Third-Party Risk Management (TPRM) is a process companies use to identify, assess, and manage risks posed by vendors and partners. It involves risk assessment, due diligence, ongoing monitoring, and mitigation planning to ensure third parties don’t expose the company to operational, reputational, regulatory, or security risks.

    Yes, Third-Party Risk Management (TPRM) is considered part of Governance, Risk, and Compliance (GRC). TPRM focuses specifically on identifying, assessing, and managing risks associated with third-party relationships, while GRC provides a broader framework for managing governance, risk, and compliance across an organization. Integrating TPRM within GRC enhances overall risk visibility and helps ensure that third-party risks align with the organization’s compliance and governance objectives.

    A practical example of Third-Party Risk Management (TPRM) is a company onboarding a background verification provider to streamline employee checks. Before partnering, the company evaluates the provider’s data security measures, compliance with privacy regulations (like GDPR), and incident response capabilities to ensure that employee data remains secure throughout the verification process. This due diligence mitigates potential risks related to data breaches, regulatory fines, and reputational damage.

    The most famous tool in risk management is the Risk Assessment Matrix (RAM), also known as the Risk Matrix. It is widely used to evaluate the likelihood and impact of risks, helping organizations prioritize and address potential threats effectively. By plotting risks based on probability and severity, it aids in decision-making and ensures focused mitigation strategies.

    • SWOT Analysis: Evaluates Strengths, Weaknesses, Opportunities, and Threats to understand both internal and external factors impacting a project or organization. It helps in identifying risks and strategic opportunities.

    • Failure Mode and Effects Analysis (FMEA): Used to identify potential points of failure in a process or system and assess the severity, likelihood, and detectability of each failure, allowing for proactive mitigation.

    • Monte Carlo Simulation: A quantitative method that uses probability distributions to model and predict a range of possible outcomes, helping in assessing risk under uncertainty.

    • Bowtie Analysis: Visualizes the pathways and barriers of risk events from causes to consequences, helping in understanding how to prevent and mitigate risks effectively.

    • Risk Registers: A structured log of identified risks, their likelihood, impact, and assigned mitigations, allowing for consistent monitoring and updating.

    • Root Cause Analysis (RCA): Focuses on identifying the underlying causes of a risk or problem, enabling effective resolution and prevention.

    Third-Party Risk Management (TPRM) is a strategy focused on identifying, assessing, monitoring, and mitigating risks associated with an organisation’s third-party relationships. This includes risks from vendors, suppliers, contractors, and other external entities. The strategy involves due diligence processes, regular assessments, compliance checks, and monitoring mechanisms to ensure third-party activities align with the organisation’s security, legal, regulatory, and operational standards. A robust TPRM strategy helps organisations minimise exposure to operational disruptions, data breaches, regulatory violations, and reputational damage arising from third-party partnerships.

    In Third-Party Risk Management (TPRM), risk domains are the key areas where potential risks may arise from third-party relationships. Common risk domains include:

    1. Financial Risk: The risk of third-party financial instability affecting service continuity.
    2. Operational Risk: Risks related to operational failures, process disruptions, or supply chain issues.
    3. Compliance and Regulatory Risk: Risks of non-compliance with laws and regulations, leading to penalties or legal issues.
    4. Cybersecurity Risk: The risk of data breaches, cyber-attacks, and unauthorised data access.
    5. Reputational Risk: Risks that negatively impact a company’s reputation due to third-party actions.
    6. Strategic Risk: Risks arising from misaligned third-party strategies or goals affecting business objectives.
    7. Environmental, Social, and Governance (ESG) Risk: Risks related to sustainability, ethical practices, and corporate governance.

    The Third-Party Risk Management (TPRM) framework is a structured approach organisations use to identify, assess, manage, and mitigate risks associated with external vendors and partners. It involves evaluating potential risks these third parties may pose to the organisation’s operations, data, and reputation. The TPRM framework typically includes risk assessment, due diligence, continuous monitoring, and governance practices to ensure third-party relationships remain secure, compliant, and aligned with the organisation’s objectives.

    By Abhinandan, ago
    Digital Merchant Onboarding in India

    Digital Merchant Onboarding

    Introduction

    Digital Merchant Onboarding refers to the process of using digital tools and platforms to register, integrate, and enable merchants to transact on a business’s platform electronically. This process typically involves gathering necessary merchant information, verifying identities, and setting up transaction capabilities, all executed digitally. In India, with its rapidly expanding digital infrastructure and government initiatives like Digital India, the relevance of efficient digital onboarding systems cannot be overstated.

    Core Components of Digital Merchant Onboarding

    1. Identity Verification and KYC (Know Your Customer)

    2. Risk Assessment and Due Diligence

    • Purpose: To assess the potential risk the merchant might pose to the platform.
    • Process: Includes evaluating the merchant’s business model, financial health, creditworthiness, and transaction history. High-risk merchants might require additional scrutiny or higher levels of monitoring.
    • Outcome: Determines the level of oversight needed for each merchant and helps set appropriate transaction limits.

    3. Compliance and Regulatory Checks

    • Purpose: To ensure the merchant complies with relevant laws and industry regulations.
    • Process: Involves checking against anti-money laundering (AML) lists, and sanction lists, and ensuring compliance with PCI DSS (Payment Card Industry Data Security Standard) if the merchant will be handling card payments.
    • Tools: Automated compliance checks are often integrated into the onboarding system to streamline this process.

    4. Bank Account and Payment Gateway Integration

    • Purpose: To enable the merchant to receive payments and process transactions.
    • Process: Involves verifying the merchant’s bank account details and setting up payment gateways that will be used for processing transactions. This may include integration with various payment methods like credit cards, e-wallets, and bank transfers.
    • Security: Ensures that the payment infrastructure is secure and compliant with relevant financial regulations.

    5. Contract Signing and Agreement

    • Purpose: To formalize the relationship between the platform and the merchant.
    • Process: The merchant reviews and signs the terms and conditions, service agreements, and other legal documents. This can be done digitally through e-signature tools.
    • Outcome: Establishes the legal framework for the partnership, outlining the responsibilities and expectations for both parties.

    6. Platform Training and Support

    • Purpose: To ensure the merchant can effectively use the platform.
    • Process: Providing tutorials, guides, and training sessions to help merchants understand how to use the platform’s features, manage their accounts, and process transactions.
    • Support: Ongoing customer support is critical, especially during the initial phase, to help merchants resolve any issues quickly.

    7. Testing and Go-Live

    • Purpose: To ensure that all systems are functioning correctly before the merchant starts transacting.
    • Process: Involves conducting test transactions to check the integration of payment gateways, security protocols, and the overall user experience.
    • Go-Live: Once testing is successful, the merchant is given the green light to go live and start processing real transactions.

    8. Monitoring and Continuous Review

    • Purpose: To ensure ongoing compliance and detect any irregularities in the merchant’s transactions.
    • Process: Continuous monitoring of transactions for signs of fraud or suspicious activity, periodic reviews of the merchant’s performance, and updating KYC information as needed.
    • Tools: Automated monitoring systems that use AI and machine learning to flag unusual activity.

    Technological Advancements In Digital Onboarding

    Technological advancements have significantly transformed digital onboarding processes, making them faster, more secure, and more user-friendly. Here are some of the key technological developments that are driving innovation in digital onboarding:

    1. Artificial Intelligence (AI) and Machine Learning (ML)

    • Enhanced Data Processing: AI and ML algorithms can quickly analyze and process vast amounts of data, improving the accuracy and speed of identity verification. These technologies can automatically flag suspicious activities, predict risks, and offer personalized onboarding experiences based on customer data.
    • Fraud Detection: AI-driven systems can detect patterns and anomalies that might indicate fraud, reducing the likelihood of fraudulent accounts being onboarded. Machine learning models continuously improve by learning from new data, enhancing their ability to prevent fraud over time.

    2. Biometric Authentication

    • Fingerprint Scanning and Facial Recognition: Biometric technologies like fingerprint scanning, facial recognition, and iris scanning are now commonly used in digital onboarding to verify the identity of users securely and efficiently. These methods are more difficult to forge than traditional ID documents and provide an additional layer of security.
    • Liveness Detection: This technology ensures that the biometric data being presented is from a live person and not a spoofed or pre-recorded image, further enhancing security.

    3. Blockchain Technology

    • Decentralized Verification: Blockchain can be used to create a decentralized, immutable record of a user’s identity, which can be accessed by multiple parties securely. This reduces the need for repeated verification processes and can streamline onboarding across different platforms and services.
    • Smart Contracts: Blockchain-based smart contracts can automate the compliance and agreement processes during onboarding, ensuring that all terms are met before a service is activated.

    4. Robotic Process Automation (RPA)

    • Process Automation: RPA is used to automate repetitive tasks involved in onboarding, such as data entry, document verification, and compliance checks. This reduces the manual workload, minimizes errors, and speeds up the onboarding process.
    • Scalability: RPA enables businesses to handle large volumes of onboarding requests simultaneously without compromising accuracy or speed, making it ideal for scaling operations.

    5. Digital Identity Verification

    • eKYC (Electronic Know Your Customer): eKYC processes allow customers to verify their identities online without the need for physical document submission. This is often done through the use of government databases, such as Aadhaar in India, where user information is verified instantly.
    • Document Verification: Advanced OCR (Optical Character Recognition) technology allows for the automatic extraction and verification of information from uploaded documents, such as passports or driver’s licenses.

    6. Video KYC

    • Remote Verification: Video KYC has become increasingly popular, especially during the COVID-19 pandemic, as it allows for remote verification of a user’s identity. During a live video call, a representative verifies the customer’s documents and identity in real-time, ensuring that the person is physically present.
    • Integration with AI: AI can be integrated with video KYC to automatically analyze the video feed, verify document authenticity, and even detect signs of deception or fraud.

    7. Cloud Computing

    • Scalable Infrastructure: Cloud-based platforms offer scalable infrastructure for onboarding processes, allowing businesses to handle fluctuating volumes of new customers efficiently. Cloud solutions also support real-time data processing and storage, which is essential for fast and responsive onboarding.
    • Data Security: Cloud computing providers often include advanced security features such as encryption, multi-factor authentication, and secure access controls, helping to protect sensitive customer information during the onboarding process.

    8. Omnichannel Onboarding

    • Seamless Experience Across Channels: Omnichannel onboarding allows customers to start the onboarding process on one channel (e.g., a mobile app) and complete it on another (e.g., a web portal), without losing progress. This flexibility improves the customer experience and increases the likelihood of successful onboarding.
    • Unified Customer Profiles: Data from multiple channels is integrated into a single customer profile, providing a holistic view of the customer and ensuring consistency across all touchpoints.

    Challenges In Digital Merchant Onboarding

    Regulatory Hurdles

    The regulatory environment in India is dynamic and often presents multiple complex compliance requirements that can be intimidating for both new entrants and established players in the digital space. Adhering to guidelines set by bodies such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Information Technology Act poses considerable challenges, especially when these regulations frequently update to address emerging market realities and technological advancements.

    For instance, the RBI’s directive on KYC for financial institutions requires rigorous verification processes which can slow down the onboarding process if not managed with efficient digital tools. Additionally, the evolving framework around GST and digital payments mandates businesses to consistently update their compliance protocols, which can be resource-intensive.

    Strategies for Mitigation:

    • RegTech Solutions: Investing in Regulatory Technology (RegTech) can help manage and simplify compliance requirements. These solutions use AI and data analytics to ensure ongoing compliance and can adapt to regulatory changes in real-time, reducing the risk of non-compliance.
    • Continuous Training: Regular training sessions for legal and compliance teams can help businesses stay ahead of regulatory changes. Workshops and seminars conducted by regulatory bodies or industry associations can be invaluable.

    Technological Integration Challenges

    Integrating state-of-the-art digital onboarding solutions with older, legacy systems can create significant hurdles. These systems often cannot communicate seamlessly without substantial customization or a complete overhaul, which involves high costs and significant downtime—a luxury many businesses cannot afford.

    Furthermore, the diversity in software platforms used by various stakeholders in the merchant onboarding chain (e.g., banks, payment gateways, inventory management systems) increases complexity. Ensuring compatibility across all these systems is crucial but challenging.

    Strategies for Mitigation:

    • API-Led Connectivity: Using APIs to bridge different technologies is a cost-effective way of integration. APIs allow disparate systems to communicate with each other without extensive modifications.
    • Incremental Integration: Phasing the integration process can minimize disruption. Starting with non-critical functions and gradually scaling up can help manage the risks associated with integration.

    Merchant Education And Adoption

    Many merchants, especially small and medium-sized enterprises (SMEs) in semi-urban and rural areas, are either unaware of the benefits of digital onboarding or reluctant to adopt new technologies due to fear of the unknown. This reluctance is compounded by the diversity in educational and cultural backgrounds, making widespread adoption challenging.

    Strategies for Mitigation:

    • Localized and Simplified Training Material: Providing training and onboarding material in local languages and using relatable contexts can help in better understanding and quicker adoption.
    • Demonstrations and Pilot Projects: Showing the tangible benefits through demonstrations or pilot projects can help merchants understand the value of transitioning to digital platforms. Case studies highlighting success stories from similar businesses can also be very persuasive.
    Talk to sales - AuthBridge
    By Siddharth, ago

    Merchant Onboarding Risk: A Comprehensive Guide

    What Is Merchant Onboarding?

    Merchant onboarding involves integrating new merchants or sellers onto a platform, such as an online marketplace, e-commerce site, or payment gateway. This process includes registering the merchants, verifying their information, and approving their accounts so they can begin selling their products or services on the platform. A streamlined onboarding process ensures compliance, mitigates risk, and enables merchants to start operations swiftly. This process not only sets the stage for the merchant’s transactions and interactions within a digital or physical commerce environment but also involves significant checks and balances to ensure security, compliance, and optimal functionality.

    Essential Documentation For Merchant Onboarding

    To streamline the merchant onboarding process and reduce potential delays, businesses in India should gather the necessary documents and materials beforehand. Being well-prepared can save time and ensure a smoother onboarding experience.

    Here’s a list of essential documents and materials businesses should have ready for their merchant onboarding process in India:

    1. Business Registration Documents

        • Certificate of Incorporation
        • Articles of Association (AOA) and Memorandum of Association (MOA)
        • GST Registration Certificate
        • Shops and Establishment Certificate (if applicable)

    2. Tax Identification Numbers

    3. Ownership Information

        • Details about the business’s ownership structure, including information on owners, partners, or directors
        • Personal identification documents for key stakeholders, such as an Aadhaar card, PAN card, passport, or driving licence

    4. Financial Statements

        • Recent financial documents, including balance sheets, profit and loss statements, and cash flow statements, provide insight into the business’s financial condition

    5. Bank Account Information

        • Details of the business’s bank account, including the account number, IFSC code, and the name and address of the bank

    6. Business Licences and Permits

        • Copies of relevant business licences, permits, or certifications required for operation in your industry or jurisdiction, such as FSSAI licence for food businesses or SEBI registration for financial services

    7. Business Website and Online Presence

        • Information about the business’s website, online store, or mobile app, including URLs and descriptions of products or services offered

    8. Payment Processing History

        • If available, statements or summaries of previous transaction volumes, chargeback rates, and other relevant payment processing history

    9. Business Plan and Revenue Projections

        • A comprehensive business plan, including revenue projections and anticipated transaction volumes, particularly important for startups or businesses with limited operational history

    10. Compliance Documentation

    Any documentation related to compliance with industry regulations or standards, such as:

    Having these documents ready can significantly facilitate the merchant onboarding process in India, allowing businesses to begin operations more quickly and efficiently.

    Step-by-Step Merchant Onboarding Process

    The merchant onboarding process varies by industry and country, adhering to local regulations and law enforcement requirements. However, it generally follows these steps:

    1. Processing Stage

    2. KYB (Know Your Business) of Merchant

    3. Merchant History Check

    4. Verifying Ultimate Beneficial Owner (UBO)

    5. Risk Assessment

    6. Operational Analysis

    What Are The Risks Involved In Merchant Onboarding?

    The merchant onboarding process comes with various risks that Acquiring Banks, Payment Service Providers (PSPs), and Payment Aggregators (PAs) need to address effectively. Here’s an in-depth look at these risks:

    1. Financial Risk

    • Credit Risk: The possibility that a merchant might default on payments or fail to meet financial obligations. Evaluating a merchant’s creditworthiness and financial health is crucial.
    • Chargebacks: Frequent chargebacks can indicate fraudulent activity, poor service, or dissatisfaction among customers, impacting the financial stability of the business.

    2. Operational Risk

    • Business Continuity: Assessing the merchant’s ability to continue operations without interruption is essential. Disruptions can affect the supply chain and overall business operations.
    • Process Reliability: Ensuring that the merchant’s operational processes are dependable and consistently meet service standards. This includes timely delivery of goods and services.

    3. Reputational Risk

    • Brand Association: The risk that a merchant’s negative reputation or actions will impact the business’s brand image. Poor performance or unethical practices by a merchant can harm the primary business’s reputation.
    • Customer Satisfaction: If a merchant provides poor service, it can lead to dissatisfied customers, negative reviews, and potential loss of business.

    4. Regulatory and Compliance Risk

    • Legal Compliance: Ensuring that merchants adhere to all relevant laws and regulations to avoid legal penalties. This includes compliance with industry-specific regulations.
    • Data Security: Verifying that merchants follow data protection regulations to safeguard customer information. This is critical in preventing data breaches and maintaining customer trust.

    5. Fraud Risk

    • Transaction Fraud: The risk that a merchant might engage in fraudulent transactions, leading to financial losses for the partnering company.
    • Identity Theft: Ensuring that the merchant’s identity and business credentials are legitimate to prevent identity fraud.

    6. Supply Chain Risk

    • Supplier Reliability: The risk that a merchant might fail to deliver goods or services as agreed, disrupting the supply chain.
    • Quality Control: Ensuring that the products or services provided by the merchant meet the required quality standards.

    7. Technological Risk

    • System Integration: Ensuring that the merchant’s technology and systems integrate seamlessly with your own to avoid operational disruptions.
    • Cybersecurity: Assessing the merchant’s cybersecurity measures to protect against data breaches and cyberattacks.

    8. Contractual Risk

    • Contract Clarity: Ensuring that contracts with merchants are clear, comprehensive, and enforceable.
    • Dispute Resolution: Having clear mechanisms in place for resolving disputes that may arise with merchants.

    Mitigating Merchant Risk

    1. Due Diligence and Vetting:
    Thorough background checks on merchants, including financial health, legal compliance, and reputational standing, are essential for mitigating risks. Third-party verification services can validate merchant credentials and performance history.

    2. Continuous Monitoring:
    Ongoing monitoring of merchant activities helps detect and address issues promptly. Real-time data analytics can identify potential risks and enable corrective action before problems escalate.

    3. Contractual Agreements:
    Comprehensive contracts outlining expectations, responsibilities, and liabilities of both parties help manage risks. Regular audits, compliance checks, and penalties for non-compliance should be included in these agreements.

    4. Technology Solutions: 
    Advanced risk management software and tools can automate risk assessment and monitoring processes. AI and machine learning can predict potential risks and proactively mitigate them, enhancing overall risk management.

    5. Training and Awareness
    Regular training for employees on risk management practices and raising awareness about potential merchant risks can prevent issues. Knowledgeable staff can recognize and address risks before they escalate.

    6. Diversification of Suppliers
    Diversifying the supplier base reduces over-reliance on a single merchant, mitigating the impact of any single merchant’s failure on business operations.

    7. Regular Audits and Assessments
    Periodic audits and assessments ensure ongoing compliance and performance. Identifying and rectifying potential issues early helps maintain high standards.

    8. Insurance and Risk Transfer
    Insurance options covering merchant-related risks can mitigate financial impacts. Transferring some risks to an insurance provider offers additional protection.

    Merchant Monitoring

    Ongoing Risk Management

    Merchant acquirers of payment service providers (PSPs) must continue risk management efforts even after onboarding a new merchant. If a merchant changes the nature of their business or if there is a sudden change in transaction volume or amounts, the merchant must be re-evaluated for risk. Quick re-evaluation is essential to mitigate potential damage.

    Key Merchant Monitoring Practices

    Merchant monitoring practices should include checks for:

    • Exceeding transaction thresholds
    • Spikes in transaction activities
    • Changes on the merchant’s website, such as product updates or new links
    • Inclusion of individuals on sanction lists
    • Unusual cross-border transactions
    • Negative media mentions

    While automation in monitoring has been largely successful, it comes with challenges, such as false positives. Despite this, automation is generally considered better than manual monitoring. Issues can arise when merchants start selling in new markets or offering new products, as the technology may not always keep pace. This makes the industry increasingly competitive and challenging.

    Merchant Onboarding With AuthBridge

    Merchant onboarding is a critical process that involves verifying the legitimacy and risk levels of businesses before they are allowed to process payments. AuthBridge offers comprehensive solutions to streamline and secure this process, ensuring businesses meet all necessary compliance standards. Here’s how AuthBridge enhances the merchant onboarding experience:

    1. Streamlined Document Collection and Verification

    AuthBridge facilitates the efficient collection and verification of essential documents, such as business registration papers, tax identification numbers, and ownership information. Their automated systems ensure accuracy and reduce the time required for initial verification.

    1. Comprehensive KYC and KYB Compliance

    AuthBridge employs advanced Know Your Customer (KYC) and Know Your Business (KYB) protocols to verify the identity and legitimacy of merchants. This includes background checks and ongoing monitoring to prevent fraud and financial crimes.

    1. Enhanced Security Measures

    By integrating robust security measures, AuthBridge helps protect against financial crimes like money laundering and terrorist financing. Their systems continuously monitor for suspicious activities and ensure compliance with industry standards such as AML (Anti-Money Laundering) regulations.

    1. Detailed Merchant History Checks

    AuthBridge conducts in-depth checks on the merchant’s financial history, including past transactions and dealings. This helps identify any previous issues with fraud or chargebacks, ensuring that only trustworthy merchants are onboarded.

    1. Efficient Risk Assessment

    AuthBridge’s risk assessment tools categorize merchants based on their risk levels, ranging from very low to very high. This allows payment service providers to make informed decisions and implement appropriate measures before merchant onboarding.

    1. Ongoing Monitoring and Re-evaluation

    Even after onboarding, AuthBridge continues to monitor merchants for any changes in their business activities or risk profiles. This includes tracking transaction volumes, website updates, and compliance with regulatory standards, ensuring that any potential risks are identified and addressed promptly.

    1. Seamless Integration and User Experience

    AuthBridge’s solutions are designed to integrate seamlessly with existing systems, providing a smooth and user-friendly onboarding experience. Their automated processes reduce manual intervention, minimize errors, and speed up the overall onboarding timeline.

    By Siddharth, ago

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