Evidently, financial crime has surged to the roots of our global financial system. This has increased the focus of regulators and law enforcement agencies to crack down money laundering system. Also, exposing Money Laundering is a challenging task. So, the Red Flags are a tool in the Anti-Money Laundering process that helps expose the Fincrime. This editorial explains the Red Flags for Money Laundering and the ways of exposing criminals. Also, we shall discuss the predicted indicators of a Red Flag in 2023.
What is “Red Flags for Money Laundering”?
Commonly, a Red Flag indicates a warning sign in a procedure. It suggests that there is a potential threat of a problem ahead. Further Investigation is suggested if a red flag is raised. A company’s stock, financial record and other reports can have red flags in them. Also, Red Flag is undesirable for an investor and other stakeholders.
Contextually, in Money Laundering, a Red Flag is a suspicious transaction that indicates a possible Money Laundering activity. Commonly, these are the warning signs that a Money Launderer is using the system.
FATF Recommendations for AML
The Financial Action Task Force (FATF) provides a framework that is consistent and comprehensive for measures against Money Laundering.
What comes under a Red Flag for Money Laundering?
Generally, Red Flags are raised by regulatory bodies or compliance professionals. Mainly, the following suspicious activities are considered to be red flags:
- A notable amount of private funding in a cash-intensive business.
- Third-party private funder’s involvement without a connection to the business. Also, if there’s no legal explanation for their participation.
- Unusually, proportionate or disproportionate private funding or cash is involved with an individual’s profile. Also, the inconsistency in the said amounts as compared to the socio-economic profile of the individuals.
- Funding by a lender other than a financial institution without any legal or economic justification.
Moreover, the businesses themselves might be of such a nature that can raise Red Flags for Money Laundering as follows:
- Unjustifiably, the intricate ownership arrangements pose a hindrance.
- Cross-border dealings in regions with elevated threats of financial crime and terror financing.
- Transactions backed by questionable or falsified documentation.
- Abnormal levels of activity raise concerns about the alignment of the client's business and actual sources of legitimate revenue.
Top 10 Red Flags Indicators for AML - 2023
Initially, the Red Flag Indicators for this year shall be more or less the same. However, the implications and compliance strategy of AML can evolve accordingly. Now, we shall explain these 10 Red Flags Indicators for AML:
1. Stealthy new clients avoiding personal contacts
Firstly, the secretive nature of a newly onboarded client through KYC onboarding is a red flag indicator. Primarily, the Firms must have a robust KYC (Know Your Customer) and CDD (Customer Due Diligence). Here, if any customer is refusing to answer an imperative question, the regulators should be Red Flagged.
2. Unusual Transactions
Secondly, money launderers can conduct unusual transactions. Notably, firms should look for such transactions in financial statements. There can be large cash payments, unusually small payments and others coinciding with the customer’s typical behavior. All such transactions and trends would be considered Red Flags for Money Laundering.
3. Suspicious Funding Sources
Privately, funding could be suspicious, indicating money laundering activity. If the cash deposit or crypto assets are involved in an unusual way in customer’s trends, they are Red Flags.
4. Unusually featured transactions
Similarly, the size and purpose of the transaction can be unusually repetitive or unique. AML Red Flags are raised. Particularly, firms must be alert to such transaction trends and link them to the customer’s profile against unwanted urgency.
5. Overseas UBOs (Geographic concerns)
Usually, the customers are considered Red Flags in Money Laundering in the UK if the firm is overseas. Unexplained connections and money trails might be visible in this case. Hence, jurisdictions of that geographical location must raise a concern in this case.
6. PEPs (Politically Exposed Persons) as Red Flags for AML
Sensitive individuals, families and associates in high positions or power are known as PEPs (Politically Exposed Persons). Mostly, PEPs are found to be money launderers if their involvement in a crime or corruption is proven by the court. This is why the firms should Red Flag all PEPs to stay secure.
7. Unclear UBO status
When an Ultimate Beneficial Owner is unwilling to declare his status but owns a company. Especially when a UBO owns an overseas company, then the host country firms must raise Red Flags. The reason is that complex ownership structures use of shell companies is a high possibility of hiding illicit funds. Ultimately, it can lead to criminal activity that is disguised under Money Laundering.
8. Bylaws Risk
Notably, many countries have high rates of corruption, unstable governments and economic instability. Such economies are also known as Money Laundering havens. Furthermore, the inadequacy in the AML (Anti-money Laundering) regulations and the weak CFT (Counter Terrorist Financing) will trigger Red Flags too.
9. Exposure to sanctions
Likewise, firms should keep themselves updated with the sanction lists and ensure that their customers are not sanctioned. Moreover, the customers should not be involved in transacting with a sanctioned business.
10. Adverse Media
Consequently, if a customer is notorious as per media and news, then Red Flag should be raised. So, Adverse media screening will be appropriate to align with the AML rules.
Conclusion
Conclusively, it is evident that Red Flags for Money Laundering are necessary for exposing Illicit Transactions. Criminals disguise their dirty money and hide it under different patterns of transactions. Hence, it becomes easier to outwit the regulatory and compliance system. This is why Red Flag Indicators are necessary knowledge for firms every year. In this way, they can identify and highlight the Money Laundering risks better.
