When observing potential cases of money laundering, it is important that businesses understand the key red flags to watch out for.
In a recent post by RegTech firm Sigma Ratings, the company outlined 12 red flag indicators that point to illegal activities so that firms can protect themselves from financial crimes and penalties from AML regulators.
The first key red flag highlighted is frequent cross-border money transfers to different accounts.
According to Sigma, this red flag can include rapid transfers that are sent in large round dollar, hundred dollar or thousand-dollar amounts, significant incoming funds transfers received on behalf of a foreign client with little or not reason and payments or receipts with no apparent links to legitimate contracts, goods or services received.
Another red flag is unusual transaction patterns. Sigma said, “Firms should look out for large or multiple transactions that don’t follow a customer’s typical behaviour. Sudden increases in customer activity and transactions with no apparent economic purpose can suggest criminal activity.”
A complex ownership structure or use of shell companies are also something to watch out for. Sigma explained that shell companies are often used to hide the identity of true owners behind nominees and trusts.
Concerns around ultimate beneficial ownership was also mentioned. “It is important to identify the persons who ultimately own or control a customer and/or on whose behalf a transaction is being conducted. Any discrepancies or inconsistencies in UBO information can serve as a red flag for potential money laundering or terrorist financing activities,” said Sigma.
Another red flag highlighted was individuals with high positions. This commonly relates to politically exposed persons such as heads of state, legislators or military officials, officials in political parties or other more senior appointed officials. “Through their public positions, these individuals may be more vulnerable to corruption and could pose a higher risk of money laundering,” said Sigma.
Appearing on relevant sanctions lists is also something Sigma believes should be watched out for. Sigma quipped, “Firms should review relevant international sanctions lists to ensure that customers are not sanctioned themselves or transacting with a sanctioned entity. Criminals are finding new ways, both high and low-tech, to evade institutional controls set up to prevent the movement of funds by sanctioned individuals/entities. To stay on top of this red flag, firms need to have a real-time plan for managing rapid changes to sanctions lists.”
An association with adverse media must also lead to a watchful eye, Sigma claims. Adverse media screening are often critical to discovering a client’s involvement in activities related to financial crime or ones that pose a reputational risk.
Account profile inconsistencies are also an important red flag. Such inconsistencies, Sigma claims, can include false identification documentation to conduct transactions and variations in the spelling of names, addresses and value of funds transfers that are inconsistent with a customer’s profile.
Customer due diligence irregularities must also be watched out for. “CDD is a series of checks done to verify identities and assess risk as part of KYC. Any customers flagged during CDD for higher money laundering or terrorist financing risks (i.e., higher risk profile customers) present increased risk exposure. Those customers flagged for CDD irregularities require Enhanced Due Diligence steps to ensure it’s safe to onboard them,” said Sigma.
Suspicious employee activity was also highlighted as a key red flag. For example, if an employee lives a lavish lifestyle that cannot be supported by their salary, this is a red flag.
The purchasing of precious metals could also ring alarm bells. Sigma stated that money launderers value precious metals in their trade because of their high intrinsic value, convertibility and potential for anonymity in transfers.
The last red flag noted by Sigma is high-risk countries. “Publicly identified jurisdictions with significant strategic deficiencies in their AML/CFT/CPF is cause for concern because criminals can exploit countries with weak or absent national measures for AML laws and regulations,” Sigma said.
Read the full post here.
Copyright © 2018 RegTech Analyst
