Identifying Money Laundering Red Flags

As you might recall from our previous Introduction to AML and CFT Compliance Programmes blog, Money Laundering (“ML”) is the process of taking money that was made illegally and making it appear legal. Similarly, the Financing of Terrorism (“FT”) is another financial crime involving the collection or provision of funds for terrorist purposes. To combat these, countering the financing of terrorism (“CFT”) and Anti Money Laundering (“AML”) methods work to prevent terrorist organisations from acquiring funding to carry out their aims.

In an organisation, it is imperative to be wary of suspicious activities to ensure that your business is protected from financial crimes and consequent penalties issued by AML. Identifying suspicious transactions and being vigilant at all times to identify the risks of ML is a crucial part of being AML compliant. With this in mind, here is a list of red flags to watch out for.

The Red Flags of Money Laundering 

During the lifespan of your relationship with a customer of your organisation, you should always be aware of some behaviours that indicate that they may be undertaking ML or FT. Listed below are a few:

  1. Overly Secretive at the time of Onboarding

Clients or customers that seem to avoid recordkeeping requirements call for special attention. Some red flags to be wary of at the time of onboarding a new client to the financial organisation would be – 

  1. If a client tends to be overly secretive or evasive regarding their underlying client.
  2. If the person actually directing, the operation is not one of the formal parties to the transaction or their representative.
  3. If the customer is hostile at the time of being asked routine due diligence questions.
  4. If the client as an organisation has unreasonable complex ownership structures with different suspicious layers across jurisdictions. This could also mean that the ultimate beneficial owners (or the people who ultimately own or manage a company) are hard to find. Complex ownership structures, or the use of shell companies, are often an attempt to disguise criminal activities and carry out financial crime. 
  5. If the client is reluctant or refuses to provide information, data, and documents usually required to enable the transaction’s execution.
  6. If the client provides counterfeit documentation.
  7. If the client cannot be found on the internet. 
  8. If the client’s website does not fit with their explanation of their product and services.

  1.  Sanctions exposure

It is essential that you review relevant global sanctions lists to ensure that customers are not sanctioned themselves or involved, or transacting with, a sanctioned entity. 

Recent political events have shown us that countries’ policies and global sanctions can change on short notice. This means that organisations must have a real-time plan for managing rapid changes. 

  1. Funding from Cash-intensive Businesses
  1. Personnel must be wary if there is a significant amount of private funding from an individual running a cash-intensive business.
  2. If you notice large-value, automated clearing house transactions that are frequently initiated through third-party service providers (“TPSPs”) by originators that are not members and for which the credit union has no sufficient due diligence, this may be a sign that the business is engaged in nefarious activity. 
  3. Multiple layers of TPSPs appear to be involved in transactions, which appear to be unnecessary.
  4. An unusually high level of transactions initiated over the Internet or by telephone.
  5. If the funding is provided by a lender rather than a financial institution with no logical explanation or economic justification.

  1. Activity Inconsistent With Member’s Business

An entity engaged in ML or FT may be undertaking ML if they are spotted – 

  1. Carrying out unusual transactions or activities that are inconsistent with the client’s everyday dealings. 
  2. Making unjustified large cash deposits followed by a large number of withdrawals. 
  3. Constantly changing their business addresses for no legitimate reason.

  1. Geographical Concerns

Unexplained ties with jurisdictions should also raise suspicions. More so if there is the movement of money between these jurisdictions. If the client does not sufficiently answer these questions, ensure that this is marked as a red flag.

  1. PEP

A PEP, as you may recall from our Guide To AML & CFT Acronyms, is someone who, through their prominent position or influence, is more susceptible to being involved in bribery or corruption. PEPs include individuals – and their families and associates – in high positions. These individuals are more vulnerable to corruption and could pose a higher risk of money laundering for quid-pro-quo favours.

 

Conclusion

Identifying red flags should be a fundamental part of any AML programme within a business.

Remember that red flag awareness is not just a one-time occurrence and must be kept tabs on even once the relationship with the client has been established. The list provided above is by no means exhaustive; you must assess situations on a case-by-case basis and against the background of the specific customer. We understand that keeping count of all these steps might be challenging, so allow us to assist you – One AML would be more than happy to help. Book a free 15-minute audit today!

Disclaimer

This information is only to serve as a guide for those living and doing business in New Zealand and is not a substitute for the provisions or information in the “Anti-Money Laundering and Countering Financing of Terrorism Act 2009” (AML CFT Act) or any of its allied statutes and provisions. The above information is not a substitute for independent, professional legal advice but is for general information only. The examples in the guidelines are merely suggestions, are not exhaustive, and are illustrative.

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