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Learn about the money laundering red flags indicated in the FATF’s latest report.
The financial, marketplace, and e-commerce industries usually have to comply with Anti-Money Laundering (AML) regulations. This includes adopting a risk-based approach when working with customers, conducting Customer Due Diligence (CDD) checks and developing an ongoing transaction monitoring system. All of these procedures involve determining red flags that indicate suspicious customer activity.
This article explains what these AML red flags are, with a focus on the top ten most common indicators.
AML red flags are warning signs, such as unusually large transactions, which indicate signs of money laundering activity. If a company detects one or more red flags in a customer’s activity, it should pay closer attention. In many cases, companies have to submit suspicious activity reports to authorities. However, the presence of a red flag does not necessarily mean that the customer is a criminal by default.
The FATF indicates 42 red flags that companies should be aware of, dividing them into the following four categories:
The FATF warns that criminals use one or a combination of the following methods to launder money:
We’ve chosen the ten most common types of red flags in money laundering and also added the most common ones for marketplaces. The full version of the report “Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals” can be found here.
If a customer doesn’t want to provide their personal information, that’s a red flag that should draw your attention. According to the FATF, some of the information that customers deliberately hide includes:
New clients can have a questionable personal history. Therefore, companies should pay extra attention to customers with convictions for acquisitive crime or known connections with criminals. It’s also worth keeping a close eye on relatives of someone involved in illegal activities.
According to the FATF report, questionable sources of funds include:
If a customer conducts unusual transactions, a certain level of suspicion should arise. This includes:
People typically hire legal representatives that correspond to their needs. That’s why if a client chooses a lawyer that’s not familiar with their industry-specific regulations, or doesn’t reside in the same country, it can be considered a red flag.
Another red flag may come from Politically Exposed Persons (PEPs). A PEP is an individual who is currently (or has been) in a powerful public position, such as a high-level politician or judge. Since PEPs are exposed to sensitive information, there’s a higher possibility that they might abuse their position. Therefore, companies should have their policies intact when working with such customers. If you want to learn more about PEPs and how to work with them, read our guide here.
The mere use of virtual assets (e.g., cryptocurrencies) doesn’t indicate a red flag. However, if it is detected that a customer exchanges fiat into crypto on a regular basis without an apparent reason, this should raise suspicion. To learn more about the FATF’s regulations on virtual assets, read our Travel Rule guide.
Companies need to ensure that their customers aren’t on any sanction lists. In many cases, customers may be added to a sanctions list after initial onboarding. Therefore, companies have to check sanctions lists on an ongoing basis.
Companies need to monitor whether their customers have any adverse media presence. This means any sort of compromising information discovered across various sources (including traditional media, databases of international organizations, blogs, etc.). A proper adverse media check can expose complicity in money laundering, terrorist financing, financial fraud, racketeering, organized crime and much more.
If a customer receives or sends money to unusual geographic locations that have nothing to do with their background or area of expertise, this can be considered a red flag. Further suspicion should arise if the location can’t be tracked or is a high-risk country.
Criminals constantly seek new ways to launder money. And since regulations in the fintech and crypto industries are getting tighter, these bad actors are starting to target other sectors. Therefore, over the past few years, we’ve seen an uptick in money laundering in marketplace and e-commerce businesses. Here are some red flags to look out for:
1: A sudden increase in the price of goods sold
If a seller sticks to selling low-priced goods for a while, and then suddenly switches to far more expensive goods, this could be a red flag. And it could be a reason to double-check and suspend the account.
2. Customer attempts to conceal identity or location
Honest users don’t usually hide their IP address with VPNs or usefake identities. So if you detect a VPN or the user’s ID seems suspicious, this can be a red flag for money laundering and fraud.
3. Selling intangible goods for a high price
Intangible assets or services are difficult to value. This is the reason why money launderers tend to use such assets. For instance, one can easily pretend to sell “consultancy services” for millions.
4. Duplicated personal data or bank card information
If an account is registered with passport or bank card data that matches other registered account, this signals multi-accounting—which, in turn, may lead to fraud, bonus abuse, or money laundering.