AML/CTF Red Flags and Indications of Suspicious Activity

Identifying AML/CTF red flags and atypical customer behavior involves the entire customer lifecycle and virtually every touchpoint. All of this is quite specific to a particular organization and the products and services it offers. However, there are some general red flags and behaviors to look out for that could indicate financial crimes, including money laundering and terrorist financing.

AML/CTF Red Flags

Money laundering harms organizations and countries in a variety of ways. Allowing money laundering to occur through your business can result in high legal costs if discovered by authorities. Every year, criminals launder millions of dollars in “dirty” money, and many are caught. To protect your business from financial crimes and fines from Anti-Money Laundering Regulators, it is crucial to be aware of the red flag indicators of illegal activity.

Crime is on the rise in the modern world and with the advancement in technology, fraudsters are coming up with new ways to carry out their malicious plans. Money laundering is one such crime that has long been used to exploit businesses. The traditional methods of laundering money have gone virtual. Criminals have come up with sophisticated methods to hide the source of illegally obtained funds. Financial institutions, cryptocurrency exchanges, and Fintech companies are the most vulnerable to money laundering.

A substantial amount of private financing from a single individual running a cash-intensive business. The participation of a third-party private financier who has no apparent connection to the business or a legitimate reason for their participation.

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 to be suspicious 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 point in the chain, or a customer representative who is under pressure or influenced.

What is also atypical is if the client chooses an advisor who is geographically distant from themselves or the transaction location, and there is no legitimate reason to choose that advisor over one who is closer. The client 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 client may pressure the client representative not to look too closely at the ID card. If the client is attempting to disguise the true owner of the business or the parties to the business transaction, this is almost always something to be sensitive about.

The next thing to consider is the source of the funds. Sometimes the source of the funds 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 that is known to have major drug cartels, you should also 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 is running a business that costs a lot of money. 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.

In addition, it is always best to consider the way a company is structured. Be careful if the ownership structure is too complicated if there is no legitimate or economic reason. This 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, your mind should make the connection with offshore shell companies and 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. We’ve established that you need to make sure your monitoring system alerts you to unusual, large, or complex transactions or patterns of transactions. This can be done by making your employees 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.

The process of opening an account with a bank or any other business that handles money requires a lot of information. How would you find out about a suspicious client? Your clients are not aware of the bigger picture of their business. They are afraid to reveal personal information. In the worst case, your client reveals one of their partners who is named in PEPs or sanctions. If your clients are secretive about their business or source of income, you should decline their request to open an account. Future transactions could be suspicious and cause you problems.

Five Cases of Transaction Monitoring

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.
• This directly concerns the next thing, namely whether payments are sent to or come from a person or organization on a sanctions list.
• 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.

There are many other customer transactions, activities and types of behavior that raise a red flag 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.

What do AML-CTF red flag indicators mean?

Being aware of suspicious activities is crucial. Red flag indicators make it easier for businesses to detect and report suspicious activities. It helps Money Laundering Reporting Officers (MLRO) categorize suspicious activities and helps them write Suspicious Activity Reports (SAR) and report to the Financial Crimes Enforcement Network (FinCEN) if necessary. The Financial Action Task Force (FATF) also emphasized the importance of red flags.

Final thoughts

Given the recent rapid increase in money laundering, all businesses expect an increase in the future. The regulatory authorities of all countries are working to prevent money laundering. Every business must follow the guidelines of the Financial Actions Task Force (FATF). These recommendations are designed to protect businesses from various types of criminal activities, especially money laundering. In addition, the guidelines have identified specific actions that can help businesses detect money laundering activities. FATF refers to these actions as red flags and they help identify money laundering.