The financial world is becoming more connected and diverse, meaning criminals must stay one step ahead of changes. As a result, the red flags that firms need to monitor also change over time to keep up with them; however, there are common red flags that can alert you to money laundering.
Red Flag 1 - Unusual and secretive clients
Criminals engaging in money laundering will try to provide as few details as possible about their identity, the source of funds and the nature of the business relationship. This secrecy can also be coupled with clients who wouldn’t usually do business with your firm.
To counter this red flag, all firms that need to comply with money laundering regulations should have Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures in place.
As part of these checks, the firm needs to understand why the client chose to use them, for example:
- Why are overseas nationals instructing your firm when you have no connection to that country?
- Why is a client in a different region instructing your firm when you’re in a different geographic location?
- Why is a client instructing your firm when you’ve never worked in the field before?
If the client gives vague answers to these questions, or a reasonable explanation cannot be found, then business with them should cease.
Red Flag 2 - Unusual transactions
There are a few ways in which a transaction may appear to be unusual. For example, it’s unusual for large transactions to be made in cash or from multiple foreign accounts. More examples include, but are not limited to:
- Receiving and withdrawing large sums of money without a clear economic purpose.
- Depositing large amounts of cash from private funds.
- Using multiple accounts without good reason.
- Using foreign accounts without good reason.
- Early repayment of mortgages, much earlier than the agreed maturity date with no clear source of the funds used.
Essentially, if the transaction isn’t consistent with what you understand of the client and their position, or the type of retainer they have with you, then the transaction should be classed as unusual.
Red Flag 3 - The customer is featured in adverse media
Adverse media covers news and other media sources that contain information about financial and organised crime incidents and associations with political figures.
If the customer has been in adverse media for committing crimes, financial or otherwise, it could be a sign not to conduct business with them.
However, if it’s decided that the customer is otherwise low risk and you do conduct business with them, then you should still proceed with caution as it could lead to reputational damage to your business.
Red Flag 4 - Beneficial owner is unclear
The ultimate beneficial owner is the one who ultimately owns or manages the company. It is possible to disguise who the beneficial owner is by having complex ownership structures and using shell companies.
Although there can be legitimate reasons to use a shell company, money launderers often use them to conceal the flow of funds while remaining relatively anonymous.
The Register of Overseas Entities (ROE) may help to a certain extent with this, but there’s a possibility that the entity you’re doing business with, isn’t included under this requirement.
If you’re unable to identify the ultimate beneficial owner, this is a red flag that shouldn’t be ignored in your processes.
Red Flag 5 - High-risk countries
Certain jurisdictions are more at risk of money laundering due to lenient measures in place and poor government oversight. Typically, these high-risk countries are more exposed to corruption and organised crime. For example, the top three high-risk countries you need to be aware of are Gabon, Guinea-Bissau, and Venezuela.
Doing business with any high-risk country should immediately raise suspicions of money laundering.
In MLVerify, you can add a risk scoring rule to bring this to your attention, making it easier for you to notice these sort of issues.