Red Flags for Money Laundering: Exposing the Illicit Transactions

In recent years, financial crime has surged to the roots of our global financial system. This has increased the focus of regulators and law enforcement agencies to crack down on the money laundering system. While exposing Money Laundering is a challenging task, the Red Flags are a tool in the Anti-Money Laundering process that helps expose Fincrime. This editorial explains the Red Flags for Money Laundering and the ways of exposing criminals. Also, we shall discuss the predicted indicators of a Red Flag in 2023.

M Abd'al Bari

Research Associate

What are Red Flags for Money Laundering?

Commonly, a Red Flag indicates a warning sign in a procedure. It suggests that there is a potential threat of a problem ahead. Further Investigation is suggested if a red flag is raised. A company’s stock, financial record, and other reports can have red flags in them.

In the context of Money Laundering, a Red Flag is a suspicious transaction that indicates a possible Money Laundering activity. Commonly, these are the warning signs that a Money Launderer is using the system.

FATF Recommendations for AML

The Financial Action Task Force (FATF) provides a framework that is consistent and comprehensive for measures against Money Laundering. FATF’s report 2020 helps national regulators detect the potential misuse of Virtual Assets for money laundering and other illicit activities. Based upon 100 case studies through its Global Network, it highlights the most important Red Flag indicators.

The key focus of these indicators is on:

Enhanced Anonymity via Technologies: Peer-to-peer exchanges and cryptocurrencies enhanced the anonymity levels in virtual assets making them vulnerable to illicit activity.
Geographic Vulnerability: Jurisdictions with weak to no AML regulations are the prime target locations for criminals.
Suspicious Transaction Patterns: Transaction patterns that raise suspicion of money laundering or criminal funding activity are a rising concern for regulators.
Sender/Receiver Profiles: Atypical behavior exhibited by individuals involved in transactions, raising suspicions of criminal involvement.
Sources of Wealth/ Sources of Funds: Funds or assets associated with potential criminal activities.
VASPs, Private and Public Sectors, and Non-Financial businesses: Need to implement the same preventive measures as financial institutions including due diligence, record maintenance, and Suspicious Transaction Reporting (STR).
Obtain, hold, and securely transmit originator and beneficiary information when making transfers.

What comes under the Red Flags for Money Laundering?

Generally, Red Flags are raised by regulatory bodies or compliance professionals. Mainly, the following suspicious activities are considered to be red flags:

A notable amount of private funding in a cash-intensive business.
Third-party private funder’s involvement without a connection to the business. Also, if there’s no legal explanation for their participation.
Unusually, proportionate or disproportionate private funding or cash is involved with an individual’s profile. Also, inconsistency in the said amounts as compared to the socio-economic profile of the individuals.
Funding by a lender other than a financial institution without any legal or economic justification.

Moreover, the businesses themselves might be of such a nature that can raise Red Flags for Money Laundering as follows:

Unjustifiably, the intricate ownership arrangements pose a hindrance.
Cross-border dealings in regions with elevated threats of financial crime and terror financing.
Transactions backed by questionable or falsified documentation.
Abnormal levels of activity raise concerns about the alignment of the client’s business and actual sources of legitimate revenue.

Top 10 Red Flag Indicators for AML – 2023

Initially, the Red Flag Indicators for this year shall be more or less the same. However, the implications and compliance strategy of AML can evolve accordingly. Now, we shall explain these 10 Red Flags Indicators for AML:

1. Unusual Transactions

Secondly, money launderers can conduct unusual transactions. Notably, firms should look for such transactions in financial statements. There can be large cash payments, minimal payments, and others coinciding with the customer’s typical behavior. All such transactions and trends would be considered Red Flags for Money Laundering.

2. Stealthy New Clients

Firstly, the secretive nature of a newly onboarded client through KYC onboarding is a red flag indicator. Primarily, the Firms must have a robust KYC (Know Your Customer) and CDD (Customer Due Diligence). Here, if any customer refuses to answer an imperative question, the regulators should be red-flagged.

3. Suspicious Funding Sources

Privately, funding could be suspicious, indicating money laundering activity. If the cash deposit or crypto assets are involved unusually in customer trends, they are Red Flags.

4. Unusually featured transactions

Similarly, the size and purpose of the transaction can be unusually repetitive or unique. AML Red Flags are raised. Particularly, firms must be alert to such transaction trends and link them to the customer’s profile against unwanted urgency.

5. Foreign National UBOs (Geographic concerns)

Usually, the customer is considered Red Flags in the UK if the firm is overseas. Unexplained connections and money trails might be visible in this case. Hence, jurisdictions of that geographical location must raise a concern in this case.

6. PEPs (Politically Exposed Persons) as Red Flags for AML

Sensitive individuals, families, and associates in high positions or power are known as PEPs (Politically Exposed Persons). Mostly, PEPs are found to be money launderers if the court proves their involvement in a crime or corruption. This is why the firms should red-flag all PEPs to stay secure.

7. Unclear UBO status

When an Ultimate Beneficial Owner is unwilling to declare his status but owns a company. Especially, when a UBO owns an overseas company, the host country firms must raise Red Flags. The reason is that complex ownership structures use of shell companies is a high possibility of hiding illicit funds. Ultimately, it can lead to criminal activity that is disguised under Money Laundering.

8. Bylaws Risk

Notably, many countries have high rates of corruption, unstable governments, and economic instability. Such economies are also known as Money Laundering havens. Furthermore, the inadequacy in the AML (Anti-money Laundering) regulations and the weak CFT (Counter Terrorist Financing) will trigger Red Flags too.

9. Exposure to sanctions

Likewise, firms should keep themselves updated with the sanction lists and ensure that their customers are not sanctioned. Moreover, the customers should not be involved in transacting with a sanctioned business.

10. Adverse Media

Consequently, if a customer is notorious as per media and news, then a Red Flag should be raised. So, Adverse media screening will be appropriate to align with the AML rules.

How do KYC Solution Providers Enhance the Detection of Red Flags?

Advanced Identity Verification	Employ cutting-edge identity verification technology for accurate and authentic customer information.
Continuous Monitoring	Implement ongoing monitoring with alerts for unusual activities like large fund transfers.
Risk-Based Scoring	Develop a risk-scoring system to prioritize higher-risk customers for more scrutiny.
Integration with Watchlists	Cross-check customer names against global watchlists and sanctions databases.
Documentation and Audit Trails	Maintain thorough documentation and audit trails to ensure transparency and compliance.

KYC AML Guide ensures that fintech companies including banks and other FIs do not get penalized due to wrong or poor decision-making in regulatory compliance.

Selecting a KYC solution requires a diligent eye with deep research and comparison of service sets to ensure that it aligns perfectly with your compliance needs, offers the necessary features for your industry, and complies with the latest regulatory standards.

If you’re looking for a solution that offers a robust watchlist and sanction screening services for your fintech setup, book your consultancy with KYC Technology Buying and save yourself the hassle and cost of developing these crucial compliance measures in-house.

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