Most businesses, especially strictly regulated entities, such as financial businesses, can’t partner and form business relationships with other companies that don’t align with their internal risk management policies and standard regulations like Anti-Money Laundering (AML) laws. As a business, you should identify, screen, and assess all your third-party vendors, service providers, and partners to avoid getting involved with risky or prohibited businesses that are involved in restricted or, sometimes, illegal activities.
Prohibited businesses carry specific risks tied to their industry, location, or operations. And for this reason, there’s a process called Know Your Business (KYB), which helps verify business entities and weigh the risks linked to each company, like assessing if the company is compliant with your internal policies, their overall values, and other critical factors like financial health, potential credit issues, ownership structure, etc. This is important, as some businesses operate legally, but they’re still considered to be high risk due to regulatory complexity or reputational concerns.
In this blog, we’ll talk about how you can verify and manage high-risk and restricted business types and what type of prohibited businesses you’d better avoid if you want to stay compliant.
What are Prohibited Businesses?
Prohibited businesses are companies that are generally considered not suitable to work with. Many companies choose not to work with such businesses for various reasons. For example, if the business’s activities are banned due to sanctions or if it operates in a sanctioned country. Prohibited businesses are labeled this way because they sell products or services that are high-risk, unethical, or illegal.
Prohibited businesses can be those that are:
- Involved in illegal activities, like unlicensed drug sales or firearms
- Engaging in activities banned by law and appearing on sanctions lists
- Operating in countries where the company is not permitted to do business
Many companies choose not to work with prohibited businesses, as they don’t meet their internal standards and fail to comply with regulatory rules. This includes businesses that sell Illegal substances, counterfeit goods, unauthorized copyrighted software, fake credentials or academic documents, material promoting violence, and similar items or services.
What are Restricted Businesses?
Restricted businesses are companies that are operating legally but face stricter regulatory, financial, or reputational concerns and are often considered high-risk. Common examples of such businesses include entities from industries like luxury and high-value items, adult entertainment, iGaming, and gambling, as well as financial services. These businesses need to align with your internal risk management and policies and often need special approval before starting a partnership.
So, it all depends on the risk factors that your business is dealing with, whether it’s the industry, location, or product type. That’s how businesses are classified as restricted or prohibited. For example, an e-commerce platform selling high-value items has to follow Anti-Money Laundering (AML) compliance regulations and may face a higher risk of chargebacks, especially if there’s potential for abuse in items like luxury goods sales.
Companies often avoid working with restricted or high-risk merchants because the risks and costs can outweigh the benefits. In the financial sector, regulated industries often add operational overhead, which results in higher fees, transaction processing limits, and regulatory scrutiny, such as extra AML audits.
What are High-Risk Businesses?
High-risk businesses are typically associated with a more general term used in the context of KYB and AML compliance to describe restricted businesses (sometimes also prohibited
businesses) and those that are generally seen as more prone to AML risks and financial, legal, or operational issues.
Examples of high-risk businesses include:
- Precious metal or material dealers
- Stamp and coin sellers
- Pharmaceutical business
- Extended warranty providers
- Trade in oil products
- Telemarketing companies
- Trust services
- Services related to digital assets
Such companies are often linked to sensitive industries where there are higher rates of fraud, chargebacks, or regulatory scrutiny. Partnering with businesses that are non-compliant or fraudulent can expose companies to regulatory penalties and even link them to money laundering or other illicit activities. Additionally, even partnering with high-risk companies (and not prohibited businesses) can result in higher operational costs, which simply is too much of a risk alone, outshining the benefits from such partnerships. For example, for a payment service provider, this results in stricter processing times, higher fees, and more frequent account audits.
Why Do Companies Screen Prohibited Business Lists?
Using prohibited, restricted, and high-risk business lists and databases is vital for regulated companies to stay compliant. By screening such entities, companies can identify other organizations they won’t work with due to legal issues and increased risks, such as sanctions compliance, differences in laws and regulations in general, as well as other risk factors that negatively impact the company and can be viewed as a threat, not a benefit in business.
By verifying these entities, companies can accurately detect organizations they should avoid due to legal exposure and elevated risk. This includes unwanted cases like sanctions violations, conflicting local and global regulatory requirements, and other risk factors that could harm the business. Such companies are often seen as liabilities rather than valuable partners, which is why KYB checks and UBO verification are required to review the true ownership structure of each entity.
In today’s geopolitical environment, many companies are registered in jurisdictions with weak AML and sanctions compliance, making it easier to set up shell companies or front businesses. These entities are often used to evade restrictions, obscure ownership, and, sometimes, launder funds. However, what’s acceptable in one country may be restricted in another region, or considered high-risk by certain firms and their risk appetites.
Common Reasons for Prohibiting Business With a Company
Some triggers can be key reasons for not partnering or doing business with a company. These reasons often include factors like:
- High regulatory burden. Companies often don’t want to deal with the increased costs of hiring compliance specialists, building complex risk management systems from scratch, which are required to deal with ever-evolving regulations.
- Involvement in crime. This includes activities like fraud, money laundering, drug trafficking, arms dealing, and other clearly illegal activities that can cause serious reputational damage.
- Brand misalignment. There can be conflict with internal values and ethical requirements that a company has, which are different for different markets. These standards vary by market and are often shaped by cultural norms or public sentiment. Associating with such businesses can damage the company’s mission and trigger customer backlash, leading to a loss of trust.
3 Key Categories of Prohibited Business Activities
Common prohibited business examples can be divided into three sectors, which are:
1. Illegal or Fraudulent entities
This includes businesses or ultimate beneficial owners (UBOs) that were previously or are now involved in crime, such as money laundering, drug trafficking, terrorism financing, and similar enterprises that funded illegal activity. This category also covers deceptive practices, such as businesses based on pyramid schemes that are intentionally designed to deceive both customers and investors.
2. Counterfeit or Stolen Goods
This refers to companies that sell or produce fake items, such as replicas of designer and luxury products. The are often low-quality imitations and copies of branded items. Some businesses can market them as authentic to gain funds and attract more customers. This is illegal, as it violates intellectual property laws, which share similar rules both in the USA and the EU. Sometimes, the business can get blacklisted for not sticking to such regulations.
3. Sanctioned Entities or Jurisdictions
This refers to entities that operate in sanctioned countries and all businesses or individuals that appear on sanctions lists and are under some sort of sanctions, such as trade sanctions or embargoes. For example, companies often screen OFAC sanctions lists to search for prohibited businesses as a way to avoid working with them.
Related: Financial Crime Compliance — Comprehensive Business Practices
Examples of Prohibited Businesses
Some well-known examples of businesses that are typically considered prohibited in different jurisdictions include:
Gambling and Casinos
Traditional casinos, gaming, and other gambling-related activities, such as iGaming and sports betting platforms, are always considered high-risk due to their:
- History and potential for being used in money laundering and other schemes, including the misuse of high-value transactions.
- Handling large volumes of transactions across multiple parties. Traditional casinos are often cash-intensive, which makes it difficult to track financial crime.
Since many gaming platforms offer promotional benefits and are based on monetary rewards, they are considered to be addictive and are sometimes banned in certain regions. For this reason, gambling and casinos are a heavily regulated industry and can be considered a prohibited area for partners like traditional financial companies that want to avoid the general complexity of reputational damage or the cost of regulatory compliance.
Related: 5 Online Casino Scams You Need to Know
Adult Content
Adult-only websites, for example, explicit content platforms or dating apps designed for mature audiences, are often strictly regulated and require age verification solutions to confirm that content creators or users are of legal age. This requires users to provide an ID document and complete a Know Your Customer (KYC) check. Some countries prohibit such businesses and consider them illegal. As a result, partnership opportunities with such companies can be limited and can carry additional risks and stigma regarding another company’s public image and values.
Related: How Does Age Verification in the Adult Industry Actually Work?
Virtual Assets
Virtual assets (VAs) and Virtual Asset Providers (VASPs) are considered high-risk due to their borderless, anonymous, speculative, and decentralized nature. In some regions, regulations for virtual currencies like Bitcoin are inconsistent or lack universal frameworks, and, for this reason, some have banned them entirely. Scammers use such regulatory loopholes to deceive users and investors by committing crimes, such as creating get-rich schemes or laundering funds through crypto. Due to these negative factors, some companies consider virtual assets and VASPs too risky, labeling them as a prohibited business.
According to the Financial Action Task Force (FATF), the key risks and crimes regarding virtual assets include money laundering via mixers and tumblers, fraud linked to initial coin offerings (ICOs), hidden beneficial ownership, and the use of peer-to-peer (P2P) exchanges to bypass oversight. There are other AML red flags that are more universal as well, for example, unexplained transaction sizes or frequency, which show transfers with no clear business justification. So, even where legal, some companies avoid working with crypto-related businesses due to their association with criminal activity.
Related: Cryptocurrency Regulations Around the World
Healthcare Services and Pharmaceuticals
Due to handling sensitive patient data and records, standard pharmaceutical sellers online, even if they are not illegal drugs, are still under strict control and require various security measures. The same principle is applied to healthcare service providers, such as remote doctors’ consultation services.
So, it’s safe to say that the entire medical sector is heavily regulated, requiring such companies to implement processes like Know Your Patient (KYP). Healthcare services are also more prone to risks like data breaches or ransomware attacks, which can shine a negative light on the business and its partners. This added burden can make such partnerships costly and less attractive, putting them on the prohibited list category.
Weapons and Firearms
This type of prohibited business is self-explanatory since most weapons or firearms, such as hunting knives, bows, or explosives, are subject to strict legal controls. Many companies prohibit partnerships with such businesses also due to reputational risks. Some companies also avoid such companies due to the natural risks that weapons pose to public safety. The narrative also shows concerns regarding ethical aspects and the violence risks that weapons pose. To avoid such complexity, many businesses choose not to work with other companies that manufacture or sell weapons.
How to Verify and Screen Prohibited Businesses?
To avoid non-compliance fines or penalties, companies should through background checks and have a proper KYB, or Know Your Business, process for all partners, third parties, and vendors. Verifying prohibited businesses through proper due diligence processes helps identify products and services that are illegal, potentially illegal, or fall outside the company’s risk tolerance.
This process ensures the company avoids partnerships that could lead to legal issues, high compliance costs, or reputational harm. This is essential for any company’s success and sustainable growth in the long run. Depending on your risk tolerance, it’s best to avoid certain business types.
To make this decision and identify prohibited businesses, you need to:
- Verify the company’s UBOs. This helps determine if any of the people linked to the company are involved in prohibited or illegal activities. All UBOs should be KYC’d using a risk-based approach, which essentially boils down to enhanced due diligence (EDD) for high-risk individuals and simplified due diligence (SDD) for low-risk cases.
- Screen sanctions lists. This helps identify sanctioned businesses, individual clients, or countries that should be avoided and treated as prohibited businesses to prevent legal and financial repercussions. Sanctions compliance is very important in AML compliance, and KYB is part of this framework.
- Check if the business is in good standing. This helps ensure that the company is legally operating, which means it’s legally registered and recognized by the state. The “good standing” status also serves as an indicator of a company’s financial and regulatory health. It shows that the business has met its tax obligations, filed annual reports, and is eligible to open a business bank account or apply for credit.
- Do a criminal background check. A company’s criminal background check often involves reviewing multiple official government databases, including court records, national and international watchlists, sanctions, and Politically Exposed Person (PEP) lists, criminal conviction, and arrest histories (such as arrest records, warrants, inmate databases).
- Screen adverse media. Looking for specific keywords and mentions in negative news, such as PRs, newspapers, or simply online, helps detect illicit activities and previous crimes linked to a company or an individual who you might not want to be associated with.
To detect prohibited businesses and assess risk factors that might impact your decision to partner with a certain entity, you should review their brand image, values, and target markets. iDenfy’s KYB software can help you achieve this using custom workflows that streamline corporate entity onboarding and simplify criminal background checks with AI that are vital when doing due diligence.
iDenfy offers all of the tools mentioned above and others in the same KYB dashboard. This includes solutions like automated risk assessment that evaluates business risks for you based on custom risk factors that you can choose based on your organization, industry, geographical location, and other custom options, including built-in AML checks, KYC verification, and more.
Want to automate your due diligence processes, simplify detecting high-risk or prohibited businesses, and improve your KYB onboarding? Let’s chat.
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