How To Verify Which Businesses Have High-Risk NAICS Codes

In brief: 

• High-risk NAICS codes are industry classification numbers that indicate a business belongs to an industry known for being financially, legally, and/or reputationally risky to form business-to-business relationships in.
• High-risk NAICS codes tend to belong to industries that deal primarily in cash, offer money-related services, regularly handle high-value transactions (often involving precious commodities or luxury goods), and/or otherwise have high rates of fraud or other financial crime.
• Verifying a business’s NAICS code is an important step in assessing the risk of forming a B2B relationship with a business, and can sometimes allow you to weed out unsuitable businesses early in the onboarding process.

Some industries carry higher financial (and other) risks than others in terms of forming business-to-business relationships. Some engage in inherently dangerous activities that are heavily regulated. Others do or sell things that run counter to the values of certain people or groups. Still others, by nature of what they do or sell, are more likely to be exploited by criminals to launder money or commit other crimes.

Knowing how to quickly identify businesses in these high-risk industries is a crucial step in Know Your Business (KYB) procedures. It saves you the time and effort of verifying the identities and assessing the risks of businesses you likely won’t onboard anyway. A way to do this is by looking up businesses’ NAICS codes, the standard industry identifiers for businesses across North America.

This article covers some of the highest-risk NAICS codes (and why they’re high-risk), as well as how to screen for businesses that have them.

First, we’ll talk more about what high-risk NAICS codes are and why you should know which ones they are.

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High-risk NAICS codes are North American Industry Classification System (NAICS) numbers that correspond to industries deemed to present high financial risk for B2B relationships. They may be labeled as such due to the potential of being involved in criminal activity, economic instability, and so on.

NAICS is a system used in the United States, Canada, and Mexico to standardize classification of businesses by their industries across the three countries. It was implemented in 1997 to replace the less-efficient Standard Industrial Classification (SIC) system. Businesses by-and-large choose their own NAICS codes to best reflect their primary operations, and are required to report them on documents like censuses, tax returns, and government contract applications.

Why high-risk NAICS codes matter & why you need to know them

NAICS high-risk codes indicate businesses that belong to industries deemed to pose high financial risks in B2B relationships. Some of these businesses may be prohibited for other reasons; their products or services may be illegal, or at least morally frowned upon by society. Thus, they also pose legal or reputational risks.

Therefore, knowing which NAICS codes are high-risk is useful to your company from a compliance and due diligence perspective. It’s fundamental to creating lists of prohibited businesses you don’t want to (or can’t) work with, so you can weed these businesses out early in the onboarding process. This saves you the trouble of doing deeper verification and due diligence on these businesses when you don’t plan on accepting them as clients or partners anyway.

For a business you’re considering onboarding despite the risks, knowing its NAICS code is high-risk is still important. It’s a reminder that you will need to do more through identity verification and enhanced due diligence regarding the business and its ultimate beneficial owners. That is, you will need to do extra work to ensure the business and the people who control it are who they claim to be, and aren’t involved in overly-shady activities (or at least aren’t likely to be).

Knowing which NAICS codes correspond to high-risk industries — and more closely monitoring client or partner businesses that have those codes — is just one way your company can implement Know Your Business (KYB) identity verification and risk management at every stage of its lifecycle. For more advice on that, download our free e-book below.

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So what NAICS codes are high-risk ones you should watch out for? Though they can change from time to time based on economic circumstances, there are groups of them that tend to be commonly seen as high-risk. This is often because their operations are inherently risky and/or morally ambiguous. Other times, businesses that deal with money (and/or deal with it in certain ways) are more vulnerable to being exploited for financial crime. Here are some examples.

Cash-Intensive Businesses

Businesses that deal primarily in cash are more vulnerable to being used for money laundering. This is because cash can be a difficult form of payment to trace, as there isn’t always a record of when it changes hands. So criminals can fund a business with “dirty” cash, then exchange it for “clean” cash with unsuspecting customers.

Industries that contain these types of businesses include:

Money Services Businesses (MSBs)

The term “money services business” refers to a business whose primary purpose is to transmit, convert, or exchange money. Naturally, this makes MSBs attractive channels for financial crime. This is especially true for MSBs that aren’t as heavily-regulated, and/or that deal with difficult-to-trace payment methods (such as cash, cryptocurrencies, or one-time payments such as money orders and wire transfers).

Here are some of the most high-risk MSB categories:

Non-Bank Financial Institutions (NBFIs)

The Bank Secrecy Act (BSA) classifies some types of businesses as “financial institutions” even though they aren’t primarily involved in transmitting, converting, or exchanging money. This is because these businesses routinely process high-value transactions, often involving valuable commodities such as jewels, precious metals, antiques, or art. These commodities are often used in money laundering, as criminals will buy them with “dirty” money and then re-sell them to get “clean” money (and sometimes profit in the process).

High-risk industry NAICS codes in this category include:

Other High-Risk Industries

Certain other industries are considered financially risky for a number of reasons. They may often deal in cash, frequently fulfill large transactions (typically for high-value products or services), or both, making them vulnerable to being used for money laundering. They may also have a reputation for being used for fraud or other types of financial crime, possibly because they aren’t very heavily-regulated.

This high-risk NAICS codes list includes industries such as:

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As you can see, there are several NAICS codes that denote businesses in risky industries. Middesk’s Industry Classification product can screen businesses you’re onboarding against all of them so you can quickly identify and act on risk signals.

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If you want to avoid dealing with businesses in high-risk industries — or at least be aware that they’re in high-risk industries so you can monitor them more closely — you need to perform NAICS code verification. Here’s a quick guide on how to do this.

Step 1: Look up identifying information — including NAICS codes — for businesses you’re onboarding

The first step is to choose reliable data sources from which to research identifying information about a business, including what industry (or industries) the business belongs to according to its NAICS code. You can look up a NAICS code using several different methods, but the most efficient one is to use an API from a dedicated business verification solution such as Middesk.

There are at least three advantages to using this method. First, you can look up businesses’ NAICS codes (and other classification codes) in bulk rather than having to search for them one-by-one. Second, you might not need to input as much information: Middesk only requires a business’s name, address, and (optionally) website URL to run a NAICS code search, whereas other tools may require a phone number, postal code, and/or DUNS number. Third, Middesk’s data comes directly from US government agencies, so you can be assured the data is accurate and up-to-date.

For more information, check out our detailed guide on how to look up a NAICS code by company name.

Step 2: Use this information to screen prohibited and high-risk businesses

Once you have a business’s identity information, you can use its NAICS code as part of assessing the risks involved in continuing to onboard the business. In some cases, a business’s NAICS code will put it in an industry your company prohibits. In other words, you can’t or don’t want to work with businesses in that industry to avoid regulatory hassles, legal liability, financial uncertainty, reputational damage, etc. This can let you disqualify certain businesses on the spot, saving you the time and work of doing further verification and risk assessment.

Step 3: Develop monitoring plans for high-risk businesses you onboard anyway

There may be times when you decide to onboard a business despite it having a high-risk NAICS code. In that case, you should still make a note of the business being high-risk, and formulate a due diligence and ongoing monitoring plan accordingly. This may include enhanced due diligence measures such as conducting additional background checks, looking into how the business is funded/supplied, reviewing the business’s transaction history, searching for adverse media coverage on the business, and visiting the business in person. It may also mean keeping a closer eye on the business’s activities or internal structure for suspicious actions or changes.

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Get a full picture of any US business’s risk profile with Middesk

Belonging to a high-risk industry is just one signal that a business you’re considering onboarding could be trouble. You have to look at other factors such as the veracity of the business’s basic information, registration documents, and beneficial owner ID information. Still other risk signals include the business (or an associated person or country) appearing on a financial watchlist or a list of politically exposed individuals, or being covered negatively in the media.

Middesk’s Verify product can perform automated checks on all of this information. That lets you instantly know what you need to know to make an informed decision on whether getting your company involved with another business is the right call. To see it in action, contact us for a demo.