The Top 10 AML Red Flags: Safeguard Your Business from Crime

November 22, 2023

Accelerating developments in recent technology and the consequential rapid changes in financial systems have enabled criminals to launder their money in a myriad of ways, leading to the exposure of more AML red flags.

On the other end, compliance teams must ask the two most important questions: how can we detect and monitor money laundering? And what are the top 10 indicators of such illicit activities?

What AML Red Flags Should I Look Out For?

In order to identify an AML red flag, we need to begin by defining what it is. An AML red flag is a standard warning sign that alerts concerned firms to any suspicious or illicit activity that may include money laundering.

It is important to recognize that any financial institution that conducts AML activities will greatly benefit from the red flag concept in its operations. Compliance teams of financial institutions can utilize this tool to identify any suspicious activity, transaction, or customer behavior and assign it a risk factor, allowing them to efficiently and immediately detect the transaction and report it. AML red flags lists are crucial for detecting money laundering.

AML Red Flags Categories

The FATF warns companies and firms of four crucial categories of red flags in money laundering, each category encompassing a number of individual red flags. These categories are:

1. Customer Red Flags

  • Secretive or elusive behavior: If you notice that your customer is hesitant to answer questions, and is purposely dodging your questions; that sly and sneaky behavior is very likely to pose a potential risk to the financial institution.
  • Fake or incomplete identification documents: If a customer presents questionable identification documents, the missing information is likely the most important part of the puzzle. If you encounter an ID that is a little too polished and clean, or is conveniently missing important information, warning bills should be sounding alongside the waving money laundering red flags.
  • Atypical sources of funds: If a customer presents funds that seem to originate from an unusual source, it should warrant extra scrutiny. If you encounter a sudden influx of funds without a legitimate origin, you should closely examine that situation to avoid finding yourself in the opening scene of a financial thriller.
  • Politically exposed persons (PEPs):  If a customer has high-status political connections, it is a red flag. Political exposure is closely tied to financial behaviors with higher risks, so you should pay extra attention to that customer.
  • High-risk jurisdictions: If a customer has ties to a high-risk jurisdiction, their finances need to be double checked. In this case, geography matters and should entail caution and extra diligence.

2. Transaction Red Flags

  • Large cash transactions: Beware of a flood of cash crashing the security of your financial institution. Large cash transactions are not inherently illegal, but they need to come with a warning of potential risks. For your security, those transactions should be screened and monitored to prevent illicit activities.
  • Transactions including multiple jurisdictions: Look closely at transactions that cross borders. Funds that flow between different jurisdictions could create turbulence. That travel creates complexity that requires closer scrutiny to expose possible illegal activities.
  • Transactions with strategic structuring to avoid reporting requirements: Structuring is splitting large transactions into smaller ones, and it is a major strategic move. Structuring is used to make financial loopholes, and should be looked at very carefully. 
  • Transactions with virtual assets: Avoid missing important details because of the discreteness of transactions involving virtual assets. Similar to the cryptocurrency enigma, those transactions present a digital puzzle with an attached red flag.

3. Geographic Red Flags

  • Countries with high levels of corruption or money laundering: High levels of corruption or money laundering within countries make them into financial boogeymen. Dealing with customers from such countries necessitates heightened scrutiny and vigilance. 
  • Countries with weak AML regulations: In countries with weak and insufficient AML regulations, navigating financial activity is like a maze. This subpar compliance with AML regulations raises many red flags, and demands a comprehensive assessment of potential risks. 
  • Countries that are not members of the Financial Action Task Force (FATF): The FATF is a globally respected and robust financial benchmark. If a country chooses not to comply with the organization’s financial global standards, you have to wonder why. While these countries are not automatically suspicious, further examination is required.

4. Product Red Flags

  • Prepaid cards: Prepaid cards can be an adaptable tool, or a deceptive weapon. The flexibility of these cards make them desirable to money launderers. The cards are not inherently bad, but you need to identify their potential misuse to avoid illicit financial behaviors.
  • Wire transfers: Common financial services can also be misused and exploited for illegal gains. Wire transfers can take a detour and avoid radars to transfer funds discreetly, making them a red flag to investigate. 
  • Trade finance: Another common method that can be exploited. Trade finance offers intricate transactions that can be taken advantage of by money laundering criminals. Thus, entailing the need to label it as a red flag that requires increased monitoring and scrutiny.

5. Industry Red Flags

  • Casinos: You do not want to gamble on the security of your financial institution when it comes to casinos. Because of their financial core, casinos are very susceptible to money laundering, especially their high volume of cash transactions. This industry is a red flag zone that should be examined for potential risks. 
  • Trade finance: Trade finance is both a product and industry red flag due to its role in global commerce. Because trade transactions are complex, they present many opportunities for money launderers. While still acknowledging the good of trade finance, it is important to recognize the need for AML-specific strategies for it.
  • Non-profit organizations: Non-profit organizations originated for important well-natured causes, but have been exploited by money launderers. Money laundering is a leech that can even infiltrate charity, making transparency and diligence crucial when dealing with non-profit organizations.

6. Channel Red Flags

  • Keep an eTransactions conducted through mobile or online banking 
  • Transactions conducted through third-party payment processing
  • Transactions conducted through anonymous channels, such as shell companies or trusts

7. Behavioral Red Flags

  • Elusive attempts at avoiding scrutiny and important questions, such as dodging providing required identification or documentation
  • Deceptive attempts at manipulating the financial institution
  • Atypical activity patterns, such as large transactions at unusual times

8. Third-party Red Flags

  • Third parties who have been involved in money laundering or other criminal activities
  • Third parties who are located in high-risk jurisdictions
  • Third parties who are not adequately licensed or regulated
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What Are The Top 10 Common AML Red Flags? 

The FATF Global Network collects hundreds of case studies to create a list of the most important red flags for banks and financial institutions. The key red flags that could indicate criminal behavior and should be looked out for are:

1. Suspicious Sources of Funds

In the world of AML, it is a huge red flag when funds appear out of the shadows. Unexplained origins defy transparency, hence suspicious sources trigger alarm bells, signaling the need for a closer look to ensure financial integrity.

2. Suspicious Track Record

Another AML red flag is a track record marred by irregularities and questionable transactions. AML scrutiny heightens when past behavior leaves a trail of suspicion, promoting a meticulous examination to uncover potential illicit activities and safeguard the financial realm.

3. Being on a Sanctions List

To be listed is to be watched closely, doesn’t matter if someone is listed domestically or internationally. In AML, individuals or entities on sanctions lists raise red flags, signaling potential involvement in unlawful activities. This status demands heightened scrutiny to prevent illicit transactions and protect the financial system from risks associated with sanctioned entities.

4. New Customers Refusing to Cooperate

While firms cannot be suspicious of all new clients to refrain from driving them away, set procedures such as Know Your Customer (KYC) and Customer Due Diligence (CDD) are necessary in order to safely onboard new clients.

A lack of cooperation from customers in the form of refusing to answer questions or displaying suspicious behavior must immediately lead to flagging the potential customer and monitoring their sender or recipient profiles for any unusual and illicit behaviors.

5. Unusual Transactions

There are a few factors to consider in a transaction to label it as a red flag in money laundering, including size, nature, and frequency. More than one factor will probably be unusual in a suspicious transaction. A transaction is unusual whether it involves frequent cash transactions or irregular large transactions.

Money laundering usually entails sending large amounts of cash payments, sending payments through a third party, or having multiple foreign accounts. Any transactions with atypical factors are considered AML transaction monitoring red flags.

6. Inconsistent Company Profiles

AML red flags often stem from inconsistencies. One of the most important examples of suspicious inconsistencies is a mismatch between a firm’s documents and actual operations, which suggests possible deception or attempts to obscure illegal activities and must be flagged.

7. Politically Exposed Persons

Individuals with high political statuses may be at a higher risk and red flags for money laundering and illegal activities, as their status increases their vulnerability, as well as their families’ and associates’, to corruption.

8. Shell Companies

The use of shell corporations raises an AML red flag because it may be an attempt to conceal funds and funding sources. The location of the shell company could also be an indicator, as money laundering criminals tend to exploit countries with weak national measures for virtual assets.

9. High-risk countries

International transactions with high-risk countries (on the FATF Grey list and blacklist) are under more scrutiny and are considered an AML red flag, since these countries are seen as posing a higher risk of money laundering.

10. Adverse media

Negative publicity and adverse media regarding an individual, organization, or institution is considered a red flag for money laundering. This means that the worldwide view of this entity, expressed through news articles, social media, or court records, could display them as posing a higher risk for money laundering.  

What Industries Are Most Prone to AML Red Flags?

  1. Banks and financial services
  2. Real estate
  3. Cryptocurrency
  4. Trade and export

What Are the AML Red Flag Indicators for Banks?

Banks often fall victim to criminals’ attempts at money laundering and could become unknowingly and unwillingly complicit in their illicit activities. Criminals typically exhibit banking red flags through three stages:

  1. Placement
  2. Layering
  3. Integration

What are the Consequences When Ignoring AML Red Flags?

  1. Legal Penalties
  2. Reputational Damage
  3. Financial Loss

How Does FOCAL Help Your Company with AML Red Flags?

1. Easily Configure Risk Scoring Rules and Criteria

FOCAL can ease your worries about onboarding new customers by presenting you with the potential risks of all your customers and detecting high-risk entities based on their profile and behavior. With FOCAL, accurately evaluate potential risks associated with new customers, optimize assessments with the Rule Builder, a flexible algorithmic tool that aligns with industry standards and your unique needs, enhancing decision-making while ensuring regulatory compliance.

2. Ongoing Screening and Monitoring

FOCAL can help you detect high-risk customers and unusual transactions with our ongoing screening that checks  transactions in real-time and detect potential financial crime by screening sender and recipient information against global watchlists. It also helps you monitor transactions using customized rules and historical behavior to flag potential suspicious activities.

3. Decrease Manual Workload

FOCAL can allow your employees to focus on and devote more time to what matters most. At the same time, it automates various processes and reduces time spent on compliance tasks while reducing human errors.

In conclusion, identifying AML red flags is crucial to protect businesses from falling victim to financial crimes and regulatory repercussions, and it keeps them compliant with AML regulations.

Protect the integrity of your business against money laundering red flags and criminals by choosing the best security with FOCAL, which enables you to simplify AML compliance efforts and streamline the screening, monitoring, and risk-scoring processes. Let FOCAL handle the AML security logistics while you focus on growing your secure organization. Request your free demo now

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