Safeguard Your Business
Red flags in AML/KYC compliance indicate increased risks associated with potential money laundering and illicit financial activities. All these must be recognized and prevented in the future. Systematic and consistent procedures for identifying red flags help regulated enterprises optimize their anti-money laundering processes and deal effectively with compliance issues. ALM platforms are supported with AML foundation courses that significantly raise the level of awareness of businesses on how to combat common financial frauds such as money laundering.
What are the “Red Flags” in AML?
“Red flags” indicate possible money laundering or criminal activity. They represent a warning in the form of transactions involving sanctioned entities, large volumes of transactions, or funds from unknown sources. Recognizing these red flags is critical to implementing anti-money laundering strategies.
Regulated enterprises should have clear protocols for identifying and promptly investigating suspicious activity. In some cases, once red flags are identified among clients, they should be reported to the appropriate authorities.
Top AML Red Flags
1) Suspicious sources of funding:
The first and most common red flag is when funds come from the shadows. Obscurity of the source is not the same as transparency. Such suspicious funding sources are alarming and point to the need to pay closer attention to what is happening in the financial sector.
2) Suspicious track record:
The main indications that such a track record is considered a "red light" are identified irregularities and suspicious transactions; AML due diligence is enhanced when past behaviour leaves a suspicious trail, prompting scrutiny to identify potential illegal activities and protect the financial field.
3) Being on a sanctions list:
Such lists, whether national or international, are closely monitored. Individuals or entities on sanctions lists are red flags indicating they may be involved in illicit activities. As a result, heightened caution is required to prevent illegal transactions and protect the financial system from the risks associated with sanctioned entities.
4) New customers refuse to cooperate:
Of course, companies cannot afford to be suspicious of every new customer. However, procedures like KYC and CDD must ensure that new customers are welcomed safely. If a customer refuses to answer questions or their behaviour seems suspicious, the next step is to flag potential customers and monitor the sender/receiver's profile for unusual or illegal behaviour.
5) Unusual transactions:
Several factors often indicate that a transaction is a 'red flag,' including the transaction's size, nature, and frequency. In the case of a transaction, one or more factors are likely to be abnormal. Money laundering typically involves large cash transfers, third-party payments, and multiple offshore accounts. Transactions with atypical factors are considered red flags for monitoring similar transactions.
6) Inconsistencies in company profiles:
One of the most important examples of suspicious discrepancies is between company documents and actual transactions. This may indicate possible fraud or attempts to conceal illegal activities.
7) Politically exposed individuals:
Individuals with high political status may be at high risk of money laundering and illicit activities. They may be a red light as their level increases vulnerability to corruption for themselves and their family and friends.
8) Shell companies:
The use of shell companies is a red light for anti-money laundering as it may be an attempt to hide funds or sources of funds. The location of shell companies can also be an indicator, as money launderers tend to use countries with weak domestic measures on virtual assets.
9) High-risk countries:
International transactions with high-risk countries are considered a 'red light' in the anti-money laundering field, as they are regarded as high risk for money laundering and are therefore more closely monitored.
10) Negative media coverage:
Adverse publicity or negative media coverage of a person, institution, or organisation is considered a money laundering 'red light.' This means that public opinion against an organisation, as expressed in the news, social media, court documents, etc., may indicate an increased risk of money laundering.
Conclusion
Companies must implement appropriate anti-money laundering measures to detect and deter suspicious activity and foreign exchange transactions. By investing in an anti-money laundering solution, companies can comply with legal requirements and better track customer activity.