Technology, in general, has been one of the inventions that have fostered economic growth and development, however, it has also provided fraudsters with an infrastructure to execute malicious activities. One of the most perpetrated financial crimes today exploiting technology is money laundering. Criminals now leverage digital banking channels as an alternative to previous manual processes. Fortunately, there are money laundering red flags that financial institutions can watch to detect criminal activities early.
Regulatory bodies like the Financial Actions Task Force (FATF) have set money laundering rules and regulations. To help financial institutions, they also recommend aml red flags that businesses are expected to watch. This makes identifying money laundering operations easier.
In this article, we discussed the top 10 red flags for money laundering detection in the finance sector as recommended by the FATF.
Understanding Anti-Money Laundering: What is Money Laundering?
Anti-money laundering simply refers to the steps or processes put in place to prevent money laundering. It consists of a series of laws and regulations depending on the needs of the business and its industry. AML & KYC laws generally protect businesses against money laundering activities including gambling, money mules, drug trafficking, smuggling and more.
What are AML Red Flags?
AML red flags are warning signs or indicators that suggest suspicious activities related to money laundering, terrorist financing or other illegal financial activities.
AML red flags serve as warning signs for banks, and compliance professionals to detect and prevent financial crimes.
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Key Red Flags Category by FATF
FATF, the global money laundering and terrorist financing watchdog, provided a list of red flags in aml. The red flags, 42 in number were categorized into 4 key groups:
- Red flags related to the client. Examples include excessive secrecy about the origin of funds, their identity, the purpose of the transaction, the method of execution, or the identity of the beneficial owner.
- Red flags related to the source of funds. This could involve the use of multiple foreign accounts without a reasonable explanation or unexplained third-party funding for transactions or associated fees, lacking a legitimate justification or clear connection.
- Red flags regarding the choice of lawyer. For instance, selecting legal counsel with insufficient expertise in the relevant specialty or frequently changing advisors within a short period without a valid reason.
- Red flags in the nature of the retainer. For example, the client engages in transactions that are unusual for their typical business activities, or the operation being notarized is significantly inconsistent with the size, age, or usual activity of the individual or legal entity involved.
Related: FATF's 40 Recommendations
Top 10 Anti-Money Laundering Red Flags in the Finance Sector
These top 10 anti-money laundering red flags are in accordance with the FATF recommendations. So, banks, NFBI and other businesses are expected to take them serious.
The aml red flags indicators are:
1. Suspicious Transaction Patterns:
One of the most common signs of money laundering is inexplicable transaction patterns. These patterns are most often associated with less known accounts which would normally not deserve attention. Sometimes, they could be precise like a specific transfer of money to a specific account at a specific duration every month. This is where effective transaction screening comes in.
2. The Use of Virtual Assets:
Virtual assets like cryptocurrencies and NFTs are now part of our day-to-day transactions, creating an easy avenue for criminals to perpetrate money laundering. Most often, the criminal withdraws money sent into their account immediately, converting it into virtual assets that are difficult to trace. Before doing this, the transaction sums are broken down into smaller bits to avoid triggering the AML threshold. As a business, you should monitor accounts that consistently do this because it is usually used to disguise the source of money.
3. Multiple Accounts Belonging to One Customer:
Customers with more than one account should be verified and their transactions authenticated at varying intervals. Essentially, this is to prevent them from using these accounts for money mule scams. Money mule scams are one of the most common reasons why a customer may have two accounts with the exact same details and frequent transactions between them without explanation.
4. Issues with Customer Due Diligence Processes
From the absence of the necessary documents to spoof attacks during facial verification, customers with issues during Customer Due Diligence (CDD) processes should be monitored. As a financial institution, you are required to validate all documents and perform further checks/ investigations if you encounter problems during verification. It is better not to onboard a customer if unable to complete the necessary CDD requirements.
5. Transactions Between Suspicious Accounts
This is one of the most prominent red flags for money laundering detection. For example, one of your customers may consistently receive money from a suspicious account (from a sanctioned or blacklisted country). It could also be that the account has been blacklisted by another bank. According to the FATF, an account that receives funds from suspicious accounts or high-risk countries may be involved in money laundering.
6. Transactions from High-Risk Geographic Locations
These include locations that are not registered or compliant with AML global guidelines and countries under sanctions. It is important to monitor and possibly speak with customers that often receive funds from such areas for more details. A proactive step would be to restrict transactions from that account and then investigate or report to the right authorities.
7. Hard to Explain Random Transfers
This refers to transfers that are not routine and can't be explained with sound logic. Customer transactions should be easily justifiable or it is better not to permit the transfer as a business. It could also be a case of synthetic identity fraud.
8. Accounts of High-Risk Customers
This is one of the most foundational money laundering red flags for money laundering detection. Accounts of customers with high risk should always be monitored for possible money laundering activities. Examples of high-risk customers include politically exposed persons (PEPs), government officials or from a high-risk state. Frequent Enhanced Due Diligence (EDD) should also be carried out including sanction list checks.
Recommended - What is EDD in Banking? Understanding KYC & AML Recommendations For Enhanced Customer Due Diligence
9. Unexplainable Regular Transfers to Several Accounts
The proof is in the process. Although not normally a problem, transfers could become suspicious for example if a customer who has not been active for a while suddenly starts exhibiting unusual transactions. It is even more suspicious if the transactions are between accounts in high-risk jurisdictions or blacklisted areas.
10. Sender or Recipient Profile and Source of Wealth:
The profile of the sender or recipient could also be a red flag for money laundering detection. Sender and receiver profiles should always be accessed as well as their sources of funds, especially when there it involves huge sums.
Bottom Line
The rise in money laundering activities needs to be curtailed starting from financial institutions through a robust AML structure. These top 10 red flags for money laundering detection recommended by the FATF are an excellent place to start, making it easier for financial institutions.
From suspicious customer profiles to transaction activities, high-risk customers, virtual asset trading and unexplainable actions, ensure you keep an eye out for these red flags to curtail money laundering. This is why transaction monitoring is quickly becoming arguably the most preferred method for AML compliance.
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