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Learn about the money laundering red flags indicated in the FATF’s latest report.
The financial industry has 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. 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.
There are certain red flags that are specific to specific fields.
If you want to read more about money laundering in the crypto industry, ways to spot the red flags and what to do afterward, read our article here.
To learn more about money laundering in real estate, check out our guide here.
Traders and broker-dealers
To read more about trading regulations around the world, check out our guide here.
Usually, criminals conduct money laundering through banks in three stages:
A full guide on AML in banking can be found here.
Red flag indicators signal criminal activity. Companies need to establish policies and procedures to ensure their ability to detect and report red flags to respective authorities in a timely manner. The Financial Action Task Force (FATF) provides companies with guidelines on what can be considered a red flag.
Some red flags include:
Some of the red flags that we identify for the crypto industry include:
In general, suspicious activity in banking doesn’t have a good logical explanation. An example could be when a company specializing in marketing suddenly pays for building materials.
Transaction monitoring is an ongoing security process that helps companies detect suspicious transactions. Transaction monitoring software spots unusual patterns and reviews dubious transfers and transactions made in digital or fiat currencies. The purpose is to answer the following questions:
Generally, wire transfers don’t raise red flags unless they follow some of the abnormal patterns mentioned above. According to FinCEN guidelines, banks have to report wire transfers that exceed $10,000 to the IRS.