Red Flags and Atypical Customer Behavior: Awareness of Anti-Money Laundering Practices

Identifying red flags and atypical customer behavior involves the entire customer lifecycle and virtually every touchpoint. It is specific to a particular organization and its products and services.

However, there are some common warning signs and atypical customer behavior that you should be aware of. These signs could indicate financial crimes, including money laundering and terrorist financing.

Identifying atypical customer behavior

First, let’s look at the human behavior of your customer.

From the first point of contact throughout the ongoing customer relationship, your customer will display certain human customer behaviors. What can give you reason for distrust is if the customer changes customer contact person frequently, sometimes in a short period of time without a legitimate reason. He may do this to find the weakest part of the chain or a customer representative who is under pressure or influenced.

Another atypical customer behavior is when the customer chooses an advisor who is geographically far away from them or the transaction location, and there is no legitimate reason to choose that advisor over someone who is closer. The customer may also request shortcuts that are unexplained or at an unusual speed. This is especially true for determining and verifying their identity or background information. The customer may pressure the customer representative not to look too closely at the ID card. Suppose the customer is trying to disguise the real owner of the company or the parties to the business transaction. In that case, this is almost always something to be sensitive about and atypical customer behavior.

The next thing to consider is the source of the funds. Sometimes the source of the funding does not make sense and raises questions about the basis of the transaction. If you are an exporter of goods and have a client from a country where large drug cartels are located, you also need to consider things like the black market for pesos. In general, you should be on the lookout for large amounts of cash or a significant amount of private financing from an individual who runs a business that uses a lot of cash. In addition, it is advisable to be sensitive to a disproportionate amount of private financing or cash that does not match the socio-economic profile of the individuals involved.

Furthermore, it is always best to consider how a company is structured. Be careful if the ownership structure is too complicated if there is no legitimate or economic reason. It also applies to business transactions with countries with a high risk of money laundering or if false or suspicious documents are used to substantiate transactions. In this regard, you should think about offshore shell companies, fictitious invoices, false loans and the like.

Identifying transaction red flags

Let’s take a closer look at transaction monitoring in terms of potential red flags and atypical customer behavior. We’ve established that you need to make sure your monitoring system alerts you to unusual, large, or complex transactions or transaction patterns. This can be done by your staff being aware and vigilant, or you can use automated systems.

However, what makes a transaction large or unusual depends on the size of your business or organization and the services you offer. It also depends on the types of customers and transaction activities you normally deal with.

As a rule of thumb, transaction monitoring should alert you to the following five instances, which can be considered red flags for potential money laundering:

• The first warning sign is when a customer makes transactions that are much larger or more frequent than normal.
• The second warning sign is when a customer’s balance or account activity is much higher or more frequent than normal.
• The third warning sign is if transactions are sent to or originate from a high-risk country or region.
• The fourth warning sign is when payments are sent to or come from a person or organization on a sanctions list.
• And finally, your system should alert you if a customer has money in their account in some other, unexpected way, which could indicate money laundering or terrorist financing.

Many other customer transactions, activities and types of behavior raise red flags about the possibility that your company or organization is being exploited for money laundering purposes. You should always be aware of this common possibility and apply common sense to what is happening in your organization.

Final thoughts

It is critical to recognize and act on red flags and atypical customer behavior indicators that indicate a transaction may be suspicious. Any of the following scenarios may warrant further investigation of your customer. Combined red flag indicators, without reasonable explanation, are more likely to raise suspicion.

Unexpected changes in a customer’s transaction pattern may warrant a closer look to determine if illegal activity is occurring. Employees should investigate suspicious activity if the changes are unusual for the type of business or seem outside the scope of the type of business. Simply using an unusually large number of large denominations in cash transactions that deviate from normal practice can be significant.

These red flags and atypical customer behaviors are easier for employees to spot during a customer’s due diligence. Others, such as cash transaction patterns, can be built into digital controls that can be configured to alert employees.

In either case, employees and managers should be trained to identify potential risks and examine them with a magnifying glass. Filing a Suspicious Activity Report, or SAR, is not legal action against a customer; it is simply atypical customer behavior that helps the financial institution stay in compliance.