Counterparty verification

Verification of counterparties has today transformed from a formal “we signed the contract – and off we go” step into a key element of the compliance system and of protecting business from financial, tax and reputational risks. For a professional finance director, it is no longer a “bonus” procedure, but a core part of risk management and corporate governance.

One of the main reasons for the increased focus on counterparty verification is the tightening of tax authorities’ requirements regarding the reality of business transactions and the due diligence of taxpayers. Case law on VAT and corporate income tax increasingly places responsibility on the taxpayer where they have not taken obvious measures to verify their partner: lack of staff, fixed assets or a real place of business, mass registration at a single address – all of this becomes arguments against the business in disputes with the fiscal authorities. At the same time, classic fraudulent schemes – shell companies, “front” entities, pseudo-intermediaries – continue to evolve, exploiting gaps in KYC procedures and corporate compliance.

Modern counterparty verification is based on a combination of KYC (Know Your Client) and Due Diligence procedures: identification, analysis of ownership structure, assessment of integrity and compliance with legislation and the company’s internal policies. It is important not to limit the process to formally obtaining an extract from the companies register, but to build a systemic process: defining risk criteria, information sources, a decision-making algorithm, as well as the frequency of repeated checks, since a counterparty’s status can change very quickly.

The first level of verification is basic identification: official registers, registration data, business activities, history of changes in founders and management, tax debt, litigation, sanctions or restrictions. Ukrainian practice shows that at this stage alone it is possible to filter out a significant share of high‑risk companies: mass‑registration addresses, frequent director changes, links with bankrupt entities, participation in criminal proceedings – all these are strong red flags for finance and legal departments.

The second level is operational capacity and reputation. Business intelligence specialists recommend analysing whether the scale of the proposed transaction matches the counterparty’s real resources: number of staff, production capacity, experience in delivering similar projects, client portfolio. It is worth paying attention to inconsistencies between the declared business profile and actual market presence: no website or a very recently created one, minimal activity in professional communities, no mentions of completed projects – all this may indicate either a start‑up or a potential fraud risk.

Another dimension is anti‑corruption and sanctions risk. For companies working with foreign partners or attracting international financing, checks against sanctions lists, the presence of politically exposed persons (PEP), and links to offshore structures and high‑risk jurisdictions are becoming standard. A poor choice of counterparty may lead not only to financial losses, but also to blocked bank accounts, refusal of banking services and reputational scandals that directly affect business value and access to capital.

Another common mistake is treating verification as a one‑off action before signing a contract. Practice shows that even a reliable partner can turn into a risk source within a year: changes in beneficial owners, deterioration of financial standing, involvement in litigation or inclusion in “high‑risk taxpayer” lists. That is why it is advisable to implement a policy of repeated verification of key counterparties at defined intervals, as well as trigger‑based monitoring – automated or manual signals that launch an unscheduled review (for example, significant payment delays, unusual document changes, suspicious behaviour of representatives).

To make the process effective, internal regulations must be formalised: who initiates the check, who carries it out, which information sources are used, how results are documented and who makes the final decision on cooperation. It is important that the finance director, lawyer and security function act in a coordinated way: only a comprehensive view allows real risk to be assessed rather than simply collecting a “file of documents” for formal protection in front of regulators. Having an approved internal regulation on counterparty verification, checklists and standard request templates for partners significantly improves decision quality and helps demonstrate due diligence in disputes with tax or law‑enforcement authorities.

Ultimately, counterparty verification is not about distrust as such, but about professional risk management and safeguarding business stability. A well‑designed procedure not only minimises tax and legal threats, but also increases transparency of relationships, strengthens creditor and investor trust, and builds a culture of compliance within the company.

If you have questions or issues related to counterparty verification, building internal KYC/DD procedures or assessing a specific partner, write to us and we will walk through your situation step by step.

Author: Ihor Yasko, Managing Partner of JSC “Legal Company ‘WINNER’”, PhD in Law.