How to Verify Freelancers’ and Contractors’ Identity for Security Purposes

The thriving freelance economy has opened up new ways for partnering with global talent. Thanks to instant connectivity, digital-first work, and freelance hiring platforms, few real barriers remain to cross-border hiring. Except for perhaps lingering security concerns. 

What if we bring on a sham contractor with no real qualifications? Or accidentally hire a person with some unsavory history of economic crimes? 

Those concerns are perfectly valid. Though your chances of running into real criminal or compliance mishaps are quite slim as long as you practice some baseline practices for contractor and freelancer identity verification. 

Why identify verification is a cornerstone for compliance and security 

Whether you hire a full-time employee or an on-demand worker like an independent contractor, knowing their identity is essential for building trust and ensuring compliance. After all, freelancers often get access to internal corporate information and take on important roles in your company. 

Global workplace laws are pretty straightforward in this regard: You need to know who you’re working with and their legal status. 

Legal status means having the right credentials for performing the assigned job. Depending on the industry (and the market), these can include:

• Valid work permit 
• Proper tax registration 
• Necessary license(s) 
• Special clearances 

In some cases, you may be also requested to provide a medical report, which which confirms that you’re physically and mentally up for the job. 

In practice, however, most industries require only baseline information to work with freelancers: Their name, tax information, and business details (e.g. self-employment registration or company incorporation details).

Knowing the above protects you against (unlikely, yet possible) compliance mishaps such as:

• Incorrect worker classification 
• Fraud or money laundering exposure 
• Partnerships with sanctioned entities 
• Tax reporting issues 

Plus, protect you against some good ol’ swindles like catfishing (aka pretending to be another person or company) or hijacking someone else’s portfolio. Such freelancer scams aren’t that common but do happen once in a blue moon. 

3 best methods to verify freelancers’ and contractors’ identity

A big appeal of using a freelance marketplace is done-for-you freelancer identity verification. At least — on paper. Most popular platforms do check freelancers' IDs to avoid duplicate sign-ups, impersonations, and other low-level scams. Yet few run deeper checks. 

If you hire a freelancer directly, you’ll have to verify their identity yourself. Here, you have three options: 

• Essential: Request identity and business documents 
• Recommended: Run an anti-money-laundering check on top 
• Optional: Do a full background check 

Let’s see what each option entails. 

ID and business documents check

Verifying the freelancer's identity (full legal name, residence country/address) is a must-do compliance check. This way you ensure that you’re partnering up with a real person (not some “clever” impersonator) and get the deets you need for your HR system.

Separately, you may want to request extra details on the person’s operating status. Legally, freelancers and independent contractors have to be registered as either:

• A sole trader / self-employed person: Someone authorized to perform independent work in their country of residence. 
• A legal entity: Be incorporated as a business organization such as a limited liability company (LLC) or a similar entity type. 

Having the freelancer’s full identity and business details is essential for compliant invoicing. In most jurisdictions, the invoice should clearly display the provider's legal or business name, address, and tax information (e.g. VAT number or company registration number).

If you receive and then submit incomplete invoices from a service provider, your local tax authority may end up questioning the legitimacy of the transactions. And no one wants extra headaches during tax season. 

Separately, if you’re commissioning freelance services in a regulated industry (e.g. healthcare, education, or finance), you may also want to verify that the freelancer has the necessary trade license(s) for performing their duties. If you have doubts about licensing requirements, contact a local labor authority to get up-to-date information on regulated professions. 

Anti-money-laundering (AML) check

Money laundering is a scary word. But this check means ensuring that none of your external workforce members has ever engaged in some murky financial business. Think things like 

payment scams, economic fraud, or money transfers to countries/companies under sanctions. 

Some companies in the EU, namely credit and financial institutions, are also bound by the 5th AML Directive — a document, designed to mitigate criminal economic activities. If this law applies to you, you’re legally bound to very if each contractor is not: 

• On the sanctions list 
• A politically exposed person (PEP)

Also, you need to check that the ultimate beneficial owner of the company you’re partnering with is neither of the above. 

The above already sounds pretty complex (and it is). Soundly, you don’t have to run contractor AML checks manually by scrolling endless government registers. 

As per usual, tech does that for you. Popular freelancer management systems (FMS) like Xolo include an automatic contractor verification system. During onboarding, we request all the necessary checks for you using an embedded AI-powered KYC and AML tool. This way we can run sweeping checks across global databases to weed out any unlikely wrongdoers in a matter of moments.

Full background check 

A full background check is a process of verifying information about the contractor's criminal, educational credentials, and employment information among other elements. The purpose of a background check is to ensure that a person has no “questionable history” that would make you question their suitability for a particular role.

Full background checks aren’t necessary for most professions with some roles in government services, finance, or healthcare being an exception. If you have doubts, verify the information with a local authority. 

A full background check cannot be done without the contractor’s explicit permission. It must also be conducted in line with local provisions. 

The definite advantage of a background check is that you receive exhaustive information about a potential hire, leaving no room for doubt. 

The cons are the time and cost of doing a background check. Specialized agencies can take anywhere between two weeks and two months to complete the inquiry. In the freelance economy, that equals almost an eternity. Unless legally required, most contractors will likely pass on the opportunity you’re offering if you ask them to jump through unnecessary hoops.

Because a background check requires multiple inquiries from different authorities and registrars, it’s also an expensive process. Again, if you’re onboarding several contractors at once or hiring people for short-term engagements, you’ll end up with a ginormous bill. 

Ultimately, a well-done identity and AML check are sufficient to ensure that you’re partnering with a reputable person or company. 

How to check if a freelancer or contractor is under sanctions?

International sanctions are no joke. Being caught up in doing business with a sanctioned person or business entity can leave you with plenty of “explanations” to do in front of your local tax or law enforcement authorities. 

To check if an independent contractor or a freelancer (and the company they’re associated with) is under sanctions, you’ll have to verify their location details. Specifically, enquire if they are operating out of or have a legal entity incorporated in a sanctioned country. If that’s the case, you might want to either avoid contracting with them or conduct extra legal research into the implication of such a decision. 

As of 2023, the following countries remain under sanctions, restricting business transactions with local talent:

• Belarus 
• Cuba
• Iran
• North Korea
• Russia
• Syria 
• Annexed regions of Ukraine (Crimea, Donetsk, and Luhansk)

The European Commission has an up-to-date list of persons, companies, and locations under financial sanctions, also available as a country map. 

Other data sources for sanctions lists include: 

• OFAC Foreign Sanctions Evaders (FSE) List 
• United Nations Security Council Consolidated List of Sanctions 
• The UK Financial Sanctions and Counter-Terrorism List 
• The UK Search Directory of Insolvency Disqualified Directors
• Canadian Database of Financial Institutions Anti-terrorism Financing List
• French Liste Unique de Gels de la Direction générale du Trésor

…And countless similar lists are maintained by other authorities worldwide. 

The easiest way to confirm that a freelancer isn’t sanctioned is to rely on an AML services provider. The best freelancer management systems perform this check for you. An integrated AML engine has real-time access to global regulatory data sources and cross-checks the freelancer’s ID details against the list entries. Typically, you’ll get a green light from the tool in under 15 minutes. 

Staying Safe and Sound 

The news sometimes makes us think that dangers lurk around every corner in the (freelance) world. While surely there are some bad apples here and there, you’re not as likely to encounter them as long as you practice basic due diligence. 

Verify contractors’ identity independently by requesting relevant ID and business documents with one of the popular KYC/AML tools. Or — better yet — don’t put the extra workload on your HR teams and let a freelancer management platform like Xolo Teams run the checks for you. 

As part of our 10-minute freelancer onboarding process, we collect all the necessary documents from your hire and run a quick (but thorough!) compliance check on them. Unlike other FMS providers like Worksuite or Stoke, we don’t charge any extra for verifying freelancers’ backgrounds. The ID checks are included in our flat-free pricing on each contractor payout. Learn more about Xolo! 

Note: The information contained in this document is for guidance only and cannot be considered financial, legal or tax advice.

About Elena

Elena Prokopets writes content for tech-led companies & software development businesses, marketing to them. Her empathy for the customer, expertise in SEO, and knack for storytelling help create content that ranks well and drives industry conversations.

Elena uses Xolo so she can focus on her solo B2B content writing business without stressing over the compliance and admin overhead.