Anti-money laundering checks and red flags you need to look out for

For any financial professional or business owner, anti-money laundering (AML) checks and compliance can easily feel like a mountain of paperwork needs to be tackled, not to mention the endless amount of admin tasks that need to be completed. But it’s a very necessary and important process that needs to be implemented, and being able to spot a red flag becomes important, too. 

You’re probably already aware of how important anti-money laundering checks are, but these days,  where financial crime is becoming increasingly sophisticated, you need to understand your customers’ patterns so that you can spot red flags a mile away. 

Here, we’ll go through what an anti-money laundering check is and the red flags that you need to keep an eye out for when dealing with your customers. 

The anatomy of anti-money laundering checks

Before we take a more detailed look at these red flags, let’s go over the three pillars of a standard AML check.  

  1. Identification: Gathering the basic facts (Name, DOB, Address).
  2. Verification: Proving those facts with independent, reliable sources.
  3. Assessment: Asking whether or not the transaction makes sense for the specific client

It is usually within this third phase that red flags start appearing. So, let’s take a closer look at the different red flags that can crop up during an anti-money laundering check. 

1. Behavioural red flags

Often, money launderers will hide behind a mask of legitimacy, and that is why it is so important to keep an eye out for their behavioural nuances. Here are three types of clients that you might come across that will give off red flags. 

  • The secretive client:  when a client is reluctant to provide information about their business model, source of wealth or the reason for their transaction, you should be wary.
  • The gatekeeper: if you come across a client who doesn’t communicate with you directly and insists on communicating through a third party, this can often be a sign of the criminal wanting to distance themselves from the ‘dirty’ money. 
  • Unexplained urgency: if your client is pressuring you to rush a transaction by bypassing standard procedures, this is also usually a red flag. They are likely trying to avoid a deep-dive check. 

2. Transactional red flags

It can be tricky for a criminal to hide the movement of money, so look out for patterns that deviate from the norm. For example: 

  • Structuring (smurfing): Smurfing refers to a large sum of money being broken down into several smaller deposits (usually under the reporting threshold) to escape detection. 
  • The "u-turn" transaction: This takes place when funds are deposited and then quickly transferred into another jurisdiction or converted into another asset. There is usually no apparent business function for this. 
  • Third-party funding: if a client is being funded by another entity that has no connection with the client, you should look into finding out more. 

3. Documentation and entity red flags

Nowadays, money laundering can often utilise complex corporate shells in order to create a paper trail that will lead nowhere. 

  • The shell company: if there is a company that has no physical presence or any employees, this is usually a classic vehicle for layering funds. 
  • Obscure beneficial ownership: if the corporate structure of the business is a nested doll of companies that are owned by different companies in other countries, this is seen as a deliberate attempt to hide the UBO. 
  • Inconsistent documentation: Look for IDs that seem too new, any inconsistent signatures or any financial statements that don’t match the scale of the business described. 

4. Geographical and political risks

When looking into the world of anti-money laundering checks, location can be one of the strongest indicators of risk. Here’s how you can keep on top of this: 

  • High-risk jurisdictions: Keep note of any transactions that involve countries on the FATF grey or black lists. These will require enhanced due diligence (EDD) and are classified as regions with weak financial controls or high levels of corruption. 
  • Politically Exposed Persons (PEPs): Keep an eye out for any clients who are, or have previously been, a politically exposed person (PEP). This risk extends to their family members, too. 

Anti-money laundering check risk assessment

Another precaution that you can take is to implement an AML risk assessment, as this will be the foundational pillar of any effective money laundering strategy. With an AML risk assessment, you’ll be able to evaluate a business’s overall vulnerability to being used for money laundering or terrorist financing. 

This can be a dynamic analysis, too, rather than being a one-time exercise. You’ll be able to examine specific threats that a company faces based on its industry, location and the types of products or services it provides. 

Strategic defence

The idea is to go from being reactive to using a proactive strategy that has a risk-based approach. When you identify weak spots within a business model, an organisation can allocate its resources more effectively. So, instead of applying the same level of scrutiny to every customer, you can now design targeted policies and controls that focus on the areas of highest risk. 

Macro to micro

A comprehensive aml risk assessment should cover two distinct levels, for example: 

  • Firm-wide assessment: this area will look at the bigger picture and will analyse how the company’s global footprint, its delivery channels and internal culture may create systemic vulnerabilities. 
  • Individual assessment: this area focuses on the more individual areas by evaluating the risk profiles of specific clients and individual transactions. Here, you’ll be analysing Know Your Customer (KYC) data to be able to see whether or not a client’s behaviour aligns with their profile or not. 

Trust your scepticism

Implementing anti-money laundering checks and being compliant is not only about avoiding fines, but also about protecting the integrity of your business. So, if you feel that a certain transaction doesn’t make sense, this is a very strong red flag. Make sure that you document everything, so that if the time comes and your hunch was right, you can prove that you did everything in your power to prevent the risk. 

 

If you’re looking to implement anti-money laundering checks, be sure to get in touch with Creditserve today! We have the knowledge and expertise to walk you through every step of the process.