Financial organisations have to comply with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations.

What are the requirements of these regulations?

• To adopt a risk-based approach when dealing with clients,
• To conduct Customer Due Diligence (CDD) procedure, and
• To develop an ongoing transaction monitoring system.

All the above-mentioned requirements involve identifying red flags indicating suspicious or unusual customer activity.

Red flags help financial organisations to carry out their AML/CFT activities successfully.

The concept of a red flag is used to detect and report unusual transactions.

How?

By identifying any transaction, activity, or client behaviour and associating it with a certain level of risk.

This identification makes it easier for financial institutions to detect and report suspicious activity.

We, at Signzy, provide AI-driven screening software to enhance your ability to identify red flags and keep you updated on list-based sanctions.

Let’s understand the concept of the red flag in detail.

What is a Red Flag in AML?

Like most red flag, in the context of AML compliance too, a red flag is an alert signal that suggests possible illegal activity like money laundering.

A prominent example of a red flag is transactions involving huge amounts or companies based in sanctioned jurisdictions.

An AML red flag’s primary objective is to alert businesses and law enforcement to potentially suspect money laundering activity.

A successful AML program must be able to recognise red flags.

Thus, regulated organisations must have a clear procedure for recognising and looking into concerns that have been reported.

But wait, an alert signal doesn’t automatically paint the client or business as dishonest.

Few companies are required to file Suspicious Activity Reports (SARs) upon the discovery of suspicious activity among their clientele with the concerned authority.

Categories of red flags

Below-mentioned are 4 categories including the 42 alert signs that businesses need to be aware of, according to the FATF (Financial Action Task Force):

•       Red flags about the client – such as an excessive degree of secrecy or evasion regarding their identity
•       Red flags about the source of funding – such as the client’s indiscriminate use of different bank accounts
•       Red flags in the choice of lawyer. For instance, if the client has switched advisers often in a short period, it is seen as a red flag
•       Red flags in the nature of the retainer— such as the client’s involvement in transactions outside of their regular business activity

Indicators of red flags

Let’s have a look at a few indicators of red flags as mentioned below –

Unusual transaction trends

Any abnormal trends in the transactions reveal the possibility of money laundering.

Bizarre activities may be indicated by –

• fast-moving transactions taking place,
• notable increases in frequency or value,
• structuring of schemes to break down deposits, or
• inconsistencies in the client’s activities/dealings.

Cash-intensive activities

Cash-related companies like casinos, eateries, and grocery stores are frequent target for money launderers.

Why?

Cash is the primary facilitator of money laundering.

They provide an unmatched chance to transfer money with incredibly little oversight and comparatively simple means of getting over regulations.

Construction firms and service providers could also be involved in money laundering operations – as they don’t seem to have a reason to handle cash.

Specific geographic areas

Because of lax government monitoring and regulatory frameworks, certain nations are more vulnerable to organised crime, corruption, and money laundering than others.

Geolocation data may serve as a signal of questionable activity when it comes to transaction monitoring.

The Basel AML index and the Corruption Perception index are always useful in supporting transactional analysis by providing a country-by-country view of global money laundering threats.

Relations with third parties

Determining the beneficial ownership of corporations located in tax havens is and will continue to be a challenging task, particularly in nations with less well-defined regulatory frameworks.

To hide the route and source of illegal payments, money launderers may enlist the help of third parties to set up sophisticated transaction chains involving several accounts or middlemen.

To hide the beneficial ownership, money launderers sometimes also use intricate global ownership structures and employ shell or offshore corporations with nominees.

Checking for indications of money laundering also requires considering transactions involving politically exposed persons (PEPs).

Inadequate financial systems

Certain financial systems make it simpler to launder money than others.

Why so?

Either due to regulatory framework weaknesses, improper KYC/AML program execution, or corruption.

Specifically, insufficient due diligence procedures or feeble internal controls at a financial institution are particularly intriguing to those seeking to conceal the origin of their funds.

Presence in unfavourable media

Businesses must keep an eye out for unfavourable media coverage of their clients.

Unfavourable media meaning?

Yes, compromised material that is found in a variety of sources (such as blogs, international organisation databases, conventional media, and databases).

An appropriate negative media investigation can reveal involvement in financial fraud, organised crime, money laundering, financing of terrorism, and racketeering, among other things.

Technology-driven money laundering

Money laundering has been greatly facilitated by the advancement of technology and digitalisation, and there are endless options.

In addition to decentralised or peer-to-peer exchanges, the rise of cryptocurrencies and virtual assets offers an extra degree of anonymity that may be taken advantage of.

For instance, transferring money through an account and being changed into cryptocurrency right away might raise red flags.

Industry-wise AML Red Flags

AML warning signs might differ between sectors. It is critical to comprehend industry-specific indications.

Here are a few AML warning signs industry-wise:

• Crypto industry – unique difficulties facing the call for closer examination:
  • Unusual transaction volume, destination, or trend
  • Usage of fake swaps and mixing services
  • Dividing big transactions into smaller ones in a structured manner
  • Suspicious user actions

• Financial Institutions – face unique risks related to money laundering havens and financial crime in the context of anti-money laundering laws.

Comprehending the process of worldwide watchlist screening is essential to guaranteeing strong AML procedures and identifying any red flags in financial institution transactions.

Three steps are involved in money laundering-

• Placement: Bringing money from abroad into the banking system.
• Layering: Practice of carrying out intricate financial transactions to hide the source of illegal payments.
• Integration: Giving money obtained illegally back to offenders in a way that seems right.
• Real Estate – susceptible to money laundering in the following ways:
  • Purchasing from strangers and using shell corporations
  • Buyers or funding from nations with lax anti-money laundering laws or high levels of corruption
  • Difference between the purchaser’s income and the property’s worth
  • Unknown separation between the purchaser and the property
  • Overpriced or undervalued real estate
  • Significant sums of money were spent

A strong AML compliance program is essential for financial organisations and companies to effectively prevent money laundering. Using cutting-edge AML software can help improve your AML compliance efforts.