The 10 Key Warning Signs For Money Laundering (and How to Mitigate the Risk)

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Banks, money transfer and fintech companies, credit and insurance organizations and gambling operators must ensure AML compliance and take every step to avoid money laundering. Playing a part in facilitating money laundering, however unintentionally, is a risk for every financial institution and professional. Most anti-money laundering compliance programs adopt a risk-based approach. They make a risk assessment and create a control program tailored directly to customers’ risk levels during the onboarding process. Understanding the red flags associated with transactions and following a concise but thorough Know-Your-Customer Process can help professionals combat and avoid implications in economic crime.


What Is Money Laundering? 

Within the UK, money laundering was formerly defined by the Proceeds of Crimes Act (POCA) as “the process by which the proceeds of crime is converted into assets that appear to have legitimate origin” to be either retained or retained used to fund other criminal activity. It further includes all forms of handling or otherwise being in possession of the criminal property, including facilitating any form of handling or being in possession of criminal property. 


What Are The 10 Key Warning Signs For Money Laundering? 

To combat money laundering and other nefarious activities, financial and business professionals must go above and beyond the information provided by their customers. It is essential to dynamically identify, verify and evaluate suspicious activity as part of your regular business practice. These are some of the behaviours that might be considered red flags: 

1. Evasiveness, Secrecy or General Reluctance to Provide Information 

Evasiveness and a general reluctance to disclose information are considered a red flag as per the Financial Action Task Force (FATF). This may include a refusal to disclose who the client or beneficial owner is, what the source of their income is, or an unwillingness to disclose data or documents required to enable a transaction. 

2. Unusual Funds Received From Suspicious Accounts

The Consultative Committee of Accountancy Bodies (CCAB) has advised financial practitioners to be wary of funds transferred to or from high-risk or non-cooperative jurisdictions. It’s advisable to investigate transfers of money or other assets where there is no immediately apparent business relationship between parties or loan transactions between entities that do not match the usual commercial arrangements. Similarly, it’s worth examining high turnover for cash-based businesses that are not in line with other enterprises of the same size and within the same sector. 

3. Immediate Withdrawal to Private Wallets

The FATF asks that crypto exchanges / businesses maintain close monitoring of transactions of any accounts that make an immediate or rapid withdrawal to private wallets when funds arrive. Multiple high-volume transactions within a short period is another warning sign. 

4. Conversion To and From Virtual Assets

Virtual assets or VAs are a new sector that faces significant money laundering and criminal financing risks. If a customer withdraws funds quickly to convert into virtual assets, especially if they convert funds in smaller increments to avoid detection, it may be cause for concern. The same can be said of the reverse: if the client converts virtual assets into fiat currency and makes numerous small deposits using local currency generated by converting VAs, it should raise a red flag as the customer is likely attempting to conceal the source of their money. 

5. Complex or Unusual Group Structures and Investments, Without Obvious Explanation

Some criminal schemes use complex structures to disguise the source and ownership of assets. If a group is structured in an unusual way, without proper explanation, or if the group makes frequent investments in areas with no obvious geographic connections, it may be an indicator of layering and integration, key steps in the money laundering process.

6. Unusual Repayment Cycles or Transfers

Unusual patterns of funds transfer, multiple transfers from dormant accounts, or inconsistent transfers without a logical explanation should immediately raise a red flag, especially if the client is receiving or sending transfers to unregistered jurisdictions.

7. Transactions With Unregistered Geographies 

Transactions with unregistered countries or sanctioned states are high-risk. If the client is unable to logically explain these transactions, their account must be restricted and investigated immediately. 

8. Multiple Accounts Under the Same Client 

If clients own and operate multiple accounts under the same details, their accounts require regular verification and monitoring to eliminate the possibility that they are operating as money mules, third-parties that launder money on behalf of financial criminals. 

9. Account Holders Belong to High-Risk Countries

While nothing prohibits financial institutions from onboarding applicants who belong to high-risk countries, these accounts require mandatory background checks and verification through sanction and PEP lists. 

10. Irregularities in the Due Diligence Process

Economic criminals are reluctant to perform AML checks and may attempt evasive manoeuvres, such as submitting the wrong documents or attempting to spoof facial verification or biometric verification. It is better not to onboard the client if you encounter issues during your due diligence process. 


How to Mitigate The Risk of Money Laundering

While new anti-money laundering rules and guidelines appear every single year, the building blocks of AML best practices remain the same. By implementing a few basic measures, it is possible to protect your firm from nefarious parties and economic criminals. 

Implement a Concise but Thorough KYC Process

Know-Your-Customer protocols involve confirming the identity of customers, the beneficial owners of the business and the nature and purpose of the business upfront. This can include ID card verification, facial and other biometric verification, document verification and more. Automating case reviews will often lead to standardised and quality-assured results, improving the firm’s ability to spot discrepancies and hit regulatory targets. 

AML Compliance Training

Staff should be trained at regular intervals to raise awareness surrounding anti-money laundering and terrorist financing laws and how to recognise and handle suspicious transactions. Training should be mandatory and duly recorded. It’s recommended that staff are trained at least once every two years, or when new staff join the business, transfer between departments or whenever legislative changes are implemented. Any changes in the risk level companies experience should trigger additional training. 

Transaction Monitoring

A robust screening and monitoring program conducts regular PEP screening (to identify and conduct due diligence on Politically Exposed People and other high-risk customers) as well as Sanctions screenings to ensure that no entities listed on Sanctions lists may make financial transactions. These screening processes must be applied during onboarding but also on an ongoing basis (transaction and time based) to establish whether the risks associated with the client have changed. 

Firms need to understand where data originates from and how data is maintained. Analytics deployed to monitor customer behaviour, and transactions must be based on sound logic. 

Handling SAR’s

Suspicious Activity Reports (SARs) are a complex topic on their own. SARs are made by financial institutions to alert law enforcement to potential instances of money laundering. The firm needs to decide whether or not a suspicion has been formed before submitting a SAR, bearing in mind that the threshold for suspicion is low. Any possibility that is more than fanciful that money laundering or terrorist financing may exist constitutes a reportable suspicion. The firm should document reasons for suspicion in as much detail as possible.

Include information per the guidelines, including:

  • Reasons for suspicion
  • Glossary codes 
  • Bank/transaction information
  • Previous SAR reference numbers (if relevant)
  • Identifying information 


Conclusion

Money laundering is on the rise, and while the guidelines to combat financial crime may seem challenging, simply understanding the red flags and implementing processes to identify and combat money laundering is your best defense. Utilizing an advanced Sanctions / AML Screening Solution like sanctions.io is the base for any effective AML process. Start your free trial today.

Photo by Aidan Bartos on Unsplash

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