Beneficial Ownership: 8 Red Flags to Detect Money Laundering

In the world of anti-money laundering (AML) compliance, understanding who truly controls a company or financial entity — known as the beneficial owner — is crucial. Beneficial ownership refers to the individual or group that ultimately owns or controls an asset, even if it is registered under someone else’s name. Criminals often conceal beneficial ownership to mask illicit activities like money laundering, terrorist financing, or tax evasion.

Identifying the true beneficial owner isn’t always straightforward, especially in today’s globalised economy where complex corporate structures and offshore entities are common. This is why FATF Recommendations particularly Recommendation 24 emphasise the need for financial institutions and other regulated entities to identify and verify beneficial ownership.

In this post, we'll explore eight red flags that may indicate hidden or suspicious beneficial ownership.

1. Unclear or Complex Corporate Structures

One of the most common methods for hiding beneficial ownership is through overly complex or opaque corporate structures. These can involve multiple layers of ownership, often spread across different countries with lax transparency requirements. While some complexity is legitimate, overly convoluted structures are a red flag.

Red Flag

Complex ownership chains make it difficult to determine who actually controls a company or asset. This complexity is often used to obscure illicit activities or evade tax laws.

What to Do

Enhanced due diligence (EDD) for entities with multiple ownership layers, especially if they cross jurisdictions with weak AML regulations. 

 2. Use of Nominees or Third-Party Agents

Nominee shareholders or directors are often appointed to act as the legal owners of assets, but they do not have real control. This separation between legal and beneficial ownership can be used to shield the true owners from scrutiny.

Red Flag

When the entity’s shareholders or directors appear to have no legitimate connection to the business activities or lack expertise in the industry, it could be a sign that they are simply "fronts" for the actual owners.

What to Do

Scrutinise the relationship between the nominee and the entity. Conduct Know Your Customer (KYC) on both the nominee and any entities they represent.

3. Use of Offshore Accounts or Shell Companies

Shell companies and offshore accounts located in jurisdictions with limited transparency requirements are common vehicles for hiding beneficial ownership. Criminals often use these entities to obscure the flow of funds, making it difficult to trace illicit activities.

Red Flag

If a company is based in or owns subsidiaries in offshore tax havens, particularly where the legal system does not require disclosure of beneficial owners, this should raise concerns.

What to Do

Verify the legitimacy of the offshore entity and the necessity of its involvement in the corporate structure. Use automated screening systems to monitor transactions linked to high-risk jurisdictions.

4. Frequent Changes in Ownership or Management

Frequent or unexplained changes in the company’s ownership or management structure can indicate an attempt to disguise the true beneficial owner or avoid regulatory scrutiny.

Red Flag

If changes in shareholders, directors, or other key management positions occur often and without a clear business rationale, it could be a sign that someone is trying to stay under the radar.

What to Do

Investigate the reasons behind these frequent changes. Conduct a thorough review of past and current owners to ensure that the company isn’t engaging in illicit activity or deliberately obscuring ownership.

5. Unexplained Source of Wealth or Funds

Beneficial owners with large amounts of wealth but no clear explanation for its origin can signal potential money laundering. Financial institutions must be vigilant in verifying the source of funds and the source of wealth for high-risk customers.

Red Flag

When individuals or entities control significant assets without a documented, legitimate source of income, this could indicate that the assets were acquired through illegal means.

What to Do

Implement enhanced due diligence, requiring detailed documentation and proof of the source of funds, particularly for high-net-worth individuals and high-risk clients.

6. Unusual or Inconsistent Business Activity

Companies whose business activities don’t align with their stated purpose or whose transactions are inconsistent with typical behaviour for their industry or size can signal suspicious beneficial ownership. For example, a small company engaging in multimillion-dollar international transactions raises red flags.

Red Flag

If the entity’s transactional patterns don’t make sense for its industry or if its activities are not consistent with normal business operations, this warrants further investigation.

What to Do

Implement robust transaction monitoring systems to detect unusual behaviour. Train staff to spot discrepancies in business activity.

7. Reluctance to Provide Beneficial Ownership Information

When a customer or entity is reluctant to provide beneficial ownership information or delays the process without justification, this is a major red flag. Legitimate entities should have no problem disclosing this information.

Red Flag

If you encounter resistance or vague responses when requesting beneficial ownership information, it could indicate an attempt to conceal the true owner.

What to Do

Escalate the case to your compliance team and apply enhanced due diligence to verify the ownership information independently. If necessary, consider filing a Suspicious Transaction Report (STR).

8. Politically Exposed Persons (PEPs)

Politically Exposed Persons (PEPs) pose higher risks due to their positions of influence, which could be exploited for money laundering or corruption. FATF’s Recommendation 12 emphasises the need for enhanced due diligence when dealing with PEPs or their associates.

Red Flag

If a PEP is found to be the beneficial owner of a company or asset, particularly in high-risk jurisdictions or industries, this should trigger enhanced due diligence and closer monitoring.

What to Do

Screen for PEPs and their close associates using automated screening tools and implement ongoing monitoring for any changes in PEP status.

Conclusion

Understanding beneficial ownership is a critical component of AML compliance. These red flags serve as important signals that further investigation may be required. By implementing robust due diligence processes, staying vigilant to signs of suspicious ownership, and complying with FATF Recommendations you can better protect your organisation from the risks of money laundering, corruption, and other financial crimes.

Ensure your AML program is equipped to handle complex ownership structures, offshore accounts, and beneficial owners that may not be immediately apparent. With enhanced due diligence and a comprehensive compliance framework, your organisation will be better prepared to identify and mitigate the risks posed by hidden beneficial ownership.

To discover how SmartSearch can future-proof your organisations AML and compliance process, speak to an AML expert today.