Merchant services providers will interact with a wide range of companies, businesses and activities. They will have customers from all sectors, and probably all sizes depending on the terms of service they offer. As such, they will need the flexibility to work with very different money flow schemes and particular needs, as well as the knowledge to determine the best way to work with each client.
Merchant services apply to all sorts of businesses, which is possitive, since it allows providers - mostly banks - to target a wide demographic, while at the same time it does have its risks. Not all businesses are legal and not all activities are legitimated. Practices outside of the law, like illegal trafficking, gambling, illicit activities and others of the like will also require some sort of merchant platform to process their transactions, so there is a chance that if you own a bank that provides those services, they will come knock your door sooner or later.
In order not to get involved with illicit activities, you must train your personnel to identify suspicious customers and develop a KYC (Know Your Customer) scoring system based on information required from all customers. There is Know Your Customer Guidance provided by many different governments and organizations in a combined effort to fight money laundring and other forms of fraud and illegal transactions.
Nobody running an illegal business will come to you stating it openly. They will all forge lies and even whole masquerades with fake businesses and shell accounts to hide their true intentions. It is your job as a provider to verify how legitimate these businesses actually are. This is your duty as established by the law, but also your responsibility with your own business, as taking dangerous clients could get you caught in illegal affairs, in trouble with the police - with all the losses it means - or force you to deal with people you would rather not deal with at all. KYC rules are established as a protocol to request background information from merchant customers, in order to get a clear picture of their real intentions and activities. The result of these protocols are KYC Reports that are submitted to the bank's competent authorities in order to decide what to do with the application. In case there is something suspicious about the customer, the bank might be required to submit those reports to an authorized entity, usually a government body linked to the police.
These governments offer free access KYC Tools and guidelines for bank entities to use, but those are not the only resources available. These guidelines might vary from country to country, as well as the entities to which you are obliged to submit suspicious customer behaviour, but the general idea behind them is still the same, so the differences you should bear in mind are more about entities and reports than the procedure itself. For example, banks must comply with the OFAC about due diligence in the United States.
Tools and guidelines provided by governments are in some cases enough for banks to get a clear picture of what to do with due diligence, but it is important to note that those aren't the only resources at your hand. You can also hire a company specialized in running deep backround research on your potential merchant customers, so you can access detailed records of their history, both with their businesses and their personal activities, in the search for any sign of alarm. This is an extra expense, of course, but the cost of making a mistake is so much higher that it's well worth the investment.
Of course, you don't need to run a deep background research in all cases. Most customers are legit and will cause no trouble derived from fraud or money laundering. A routine search, which is due dilligence, should be enough in most cases. However, this due dilligence can rise some red flags pointing at suspicious activity or even a suspicious customer background. In these cases, it is indeed worth it to run a deeper research, and even requested in most cases by the law itself.
Peculiar transactions, odd sudden changes of business area, purchases or transactions with seemingly no connection with the business's area, and customers wtih empty or stained records are especially suspicious. It is in these cases that you should pay more attention. Run a deeper annalysis and ask more questions. The price for overlooking these details might be too high for you and your own business.