Unlocking AML Red Flags: Detecting and preventing money laundering

Money laundering is not only a crime in itself – with significant financial and legal consequences for those that participate in it, knowingly or unknowingly – but is also an enabler of serious crime, including drug smuggling, people trafficking and terrorism.

It is therefore absolutely vital that all businesses that handle large sums of money have comprehensive anti-money laundering (AML) procedures in place.

This means having thorough Know Your Customer (KYC) and Know Your Business (KYB) processes, including identification, verification, screening and monitoring of all customers – individual and corporate.

As part of this process, it is also important that businesses are aware of the ‘Red Flags’ that indicate money laundering could be taking place.

By having a comprehensive understanding of the behaviours and financial anomalies that could indicate illegal financial activity, firms are able to take a proactive approach to detecting illegal financial activity, preventing it, and protecting their businesses from financial crime and the consequences of an AML breach.

Types of AML Red Flags

According to the Financial Action Task Force (FATF) - the independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing – Red Flags can be divided into four categories:

• Client - this will include things to do with the client themselves i.e. one that is overly secretive or evasive about proving their identity.

• Source of Funds – this includes things like using multiple bank accounts for no good reason, transactions that are structured to avoid reporting requirements, and large transactions involving cash or virtual currencies.

• Professional advice – this refers to odd behaviour around how professional advice is used by the individual or business, for example, they change lawyer or accountant multiple times in a short time span.

• Nature of the transaction – this is where the client suddenly becomes involved in transactions that do not correspond to their usual business activities or starts working with clients or businesses in countries known for money laundering or terrorist financing.

Top 10 AML Red Flags to look out for

Within these categories are a number of specific Red Flags to look out for. FATF names 42, but below, we have summarised the 10 most common Red Flags to be aware of.

1.  Secretive clients

If, when you are running your initial KYC checks on a client, you have a customer who does not want to provide you with the personal information you need to process an AML check, it should be treated as a Red Flag. According to FATF, ‘secretive’ client behaviour includes things like deliberately hiding their own identity, refusing to provide UBO information and not being clear about where the money for the transaction is coming from or why the transaction is being performed in the first place.

You should also look out for inconsistencies in the spelling of names and addresses as this could be evidence of false documentation.

2.  Complex ownership structures and shell companies

Shell companies – businesses that exist on paper but have no physical location, staff, revenue, or significant assets, but may have bank accounts or investments – are frequently used in money laundering because they are easy to set up and difficult to trace. Those behind shell companies – especially those set up in a different country – are not generally required to provide much information about the shell company’s ownership, management and financial standing, which allows the ultimate beneficial owner (UBO) to remain anonymous.

While owning a shell company is not illegal, it is easy to hide taxable income and financial assets within one, increasing the risk of money laundering. One of the most common ways in which money launderers use shell companies is to buy UK property with illegitimate funds, as in the UK, property can be owned by a business.

Therefore, it is vital, not only to run a thorough business check on any corporate customers – including one that identifies the UBO – but also to run a comprehensive individual check on the UBO and any other directors in the company to ensure the business is not a bogus one being used to hide illegal activity.

3.  PEPs, RCAs, SIPs and sanctions

A Politically Exposed Person (PEP) is someone who either holds, or has held a prominent public/political position, or has a close association with a high-ranking Government official.

Because of their high-profile roles, influence, and often, high levels of wealth, PEPs are more susceptible to bribery, and corruption, and therefore, present a greater risk to businesses in terms of fraud, money laundering and other financial crimes.

An RCA is a Relative or Close Associate of a PEP; PEPs and RCAs are Red Flags and businesses need to run thorough KYC checks on such individuals before entering into a business relationship with them.

A SIP is a Special Interest Person, which is generally defined as someone who has been involved in - or is involved with - serious organised or financial crime. SIPs are likely to have been convicted in the past or have evidence against them that substantiates their involvement in criminal activities.

A SIP is a major red flag, and while it isn’t illegal to go into business with a SIP, the decision to do so is at the business’ own discretion and should be a highly informed one.  If the individual becomes a client, they should be monitored very carefully.

However, if a client appears on sanctions lists, it is illegal to go into business with them, so companies need to ensure both that the client does not appear on any sanction lists at onboarding, and – importantly – that they do not appear on any sanctions lists at a later date once already onboarded. That is why it is imperative that businesses have ongoing monitoring in place, so that if a customer’s sanction status changes (for example, when multiple sanctions were imposed on Russia following Putin’s invasion of the Ukraine) they are made aware of it immediately.

4.  Adverse media coverage

If the client has appeared in negative media reports, it should raise suspicion. In order to check this, you will need the means to name-check the client for mentions in a wide range of media - from traditional news sources such as the BBC and national newspapers to news websites, bona fide blogs and social media. If searches of these channels unearth adverse media coverage, further investigation needs to be done, which could uncover further compromising information, including exposure of complicity in money laundering, terrorist financing and other financial crimes.

5.  Suspicious source of funds

If you are working with a client, and they use third-party funding – either for the transaction or any associated costs – and the third party has no apparent connection with the transaction - then this is a Red Flag. You should also be wary of any funds that are received from a foreign country when there is no apparent connection between the country and the client, and any funds that have been received from high-risk countries.

6.  Unusual choice of professional services

Generally, businesses and individuals use professional services – lawyers, accountants etc – that meet their needs - both industry-wise and region-wise. Therefore, if a client decides to hire a lawyer who does not generally work within their industry, is based in a different country, or has been connected with other suspicious activity, it should be immediately considered a Red Flag.  It should also be seen as suspicious if a client suddenly changes their professional services for no obvious reason, especially if any of the indicators above are apparent.

7.  Unusual transactions

If you spot a customer receiving or withdrawing large amounts of money on a regular basis without a clear economic purpose, you should investigate, as this is a huge Red Flag. You should also be wary of any deposits with an unusually large amount of private funding, especially in cash, as well as clients using multiple bank accounts or foreign accounts without good reason.

Large or multiple transactions that do not follow a client’s usual behaviour are also Red Flags, as well as sudden increases in client activity with no obvious explanation. And, while the use of cryptocurrencies or any other virtual assets is not a Red Flag on its own, you should be suspicious if a client exchanges funds into crypto – either as a one-off or on a regular basis – for no obvious reason

Another Red Flag related to transactional activity would be a client who has repaid a mortgage or loan unexpectedly quickly i.e. much earlier than the agreed term – or has secured a loan with a third party that has no obvious connection with them or their business.

8.  Lifestyle inconsistencies

If a client lives a lavish lifestyle that cannot be supported by their salary this should be a Red Flag. As an employer, you should also be suspicious of any employees who appear to live a luxurious lifestyle but are reluctant to take any time off – this could suggest they are enabling financial crime through their position at work and are nervous about taking time off as they would no longer be able to cover their tracks.

9.  Purchase of precious metals

While the purchase of gold bullion bars or expensive jewellery is not a crime – and would be perfectly normal behaviour for a business in the gold or jewellery trade – if a client buys and sells precious metals where there is no obvious connection with the business, treat it as a Red Flag. Gold and other precious metals have a high intrinsic value, convertibility and anonymity, and the sellers do not have to declare their profits, making them a popular ‘currency’ for money launderers.

10.  Geographic inconsistencies

If a customer receives or sends money to unusual geographic locations that have nothing to do with their background or area of expertise, this can be considered an AML Red Flag, especially if those countries have weak or absent AML regulations. You should also be concerned if the location or destination of the funds can’t be tracked or is a high-risk country.

Property sector specific AML Red Flags

The property market in the UK is one of the most vulnerable in terms of money laundering for many reasons, but notably because the sums of money being moved around are large, businesses can buy properties allowing the real buyers to stay anonymous, and the up and down nature of the market means buyers and sellers can get away with significantly under or overvaluing properties.

Below we have outlined some property sector specific Red Flags that you should be aware of:

• Anonymous buyers and the use of shell companies – if the buyer is trying to remain anonymous, or the property is being purchased by a shell company. You will need to run a UBO (Ultimate Beneficial Owner) check to identify who is buying the property and then run checks on that individual to ensure the purchase is legitimate.

• Foreign buyers – if there is an unexplained distance between the buyer and the property, or the buyer or funds are in a country with a weak AML regime, high corruption, or known support for terrorism.

• Income discrepancy – if there are inconsistencies between the buyer’s official income and the property value.

• Under - or overpriced property value – if a property is being bought or sold at a price that is inconsistent with its true market value.

• Large amounts of cash used – generally buyers do not purchase property with cash – any buyer that does should raise suspicion.

How to monitor AML Red Flags

Having processes in place that can monitor for these Red Flags is absolutely vital for regulated firms that are dealing with customer funds, and the most reliable and efficient way to do this is to use a third-party AML and compliance system.

SmartSearch is a digital, cloud-based AML and compliance platform designed to help businesses both with initial checks and ongoing monitoring.

Our award-winning verification checks identity, verify and screen business and individual customers for the Red Flags outlined above – PEPs, RCAs, SIPs, appearance on sanctions lists and adverse media – and will also be able to identify any inconsistencies with names, addresses etc. Our business checks are able to determine the UBO and any directors, as well as the corporate organisation of any business clients, flagging any shell companies or suspicious ownership structures or anonymous buyers.

Our ongoing monitoring is run in real-time, using the Dow Jones Watch List ensuring any changes in a client’s status is immediately flagged, while our anti-fraud and source of funds checks enable clients to detect any suspicious transactions or discrepancies when it comes to funding.

To discover more, visit SmartSearch.com