Here are our top 10 AML Red Flags Transactions Monitoring

Bachir El Nakib Founder Compliance Alert 

Monday July 29,2024

What is an AML red flag?

AML red flags are warning signs, such as unusually large transactions, which indicate signs of money laundering activity. If a company detects one or more red flags in a customer’s activity, it should pay closer attention. In many cases, companies have to submit suspicious activity reports to authorities. However, the presence of a red flag does not necessarily mean that the customer is a criminal by default. 

Categories of red flags

The FATF indicates 42 red flags that companies should be aware of, dividing them into the following four categories:

Red flags about the client—for example, the client is overly secretive or evasive about their identity

Red flags in the source of funds—for example, the client is using multiple bank accounts for no good reason

Red flags in the choice of lawyer—for example, the client has changed advisors multiple times in a short timespan

Red flags in the nature of the retainer—for example, the client is involved in transactions that do not correspond to their usual business activities

FATF warnings

The FATF warns that criminals use one or a combination of the following methods to launder money:

Misuse of client accounts—use of corporate account for personal purposes, carding fraud, money mules

Property purchases—investing the proceeds of crime in real estate

Creation of companies and trusts—retaining control over criminally-derived assets while inhibiting law enforcement from tracing the origin and ownership of the assets

Managing client affairs and making introductions—use of bogus representatives to make companies and trusts look more legitimate and avoid additional checks

Lending—when one company lends money to another in cash, which is paid back in non-cash

We’ve chosen the ten most common types of red flags in money laundering. The full version of the report “Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals” can be found here.

There are red flags to be considered in transaction monitoring. All the activities and transactions that fall outside the expected customer activity or certain predefined threshold should generate a “red flag” or alert, for review and investigation by the MLRO or AML team, in coordination with other relevant staff. 

MLRO must ensure that the red flag mechanism incorporates the possible risk factors considering the customers’ risk profiles.

Red alert thresholds are set for transaction monitoring purposes and are marked in the automated transaction monitoring system.

Alerts are generated on the breach of the thresholds or occurrence of unusual transactions or activity.

What are red flags in AML?

AML red flags are common warning signs alerting firms and law enforcement to a suspicious transaction that may involve money laundering.

The Financial Action Task Force’s (FATF) international standards to fight money laundering and the financing of terrorism and proliferation provides a comprehensive and consistent framework of measures for firms to follow.

Here are our top 10 AML red flag indicators:

1. Secretive new clients who avoid personal contact

Firms should have Know Your Customer (KYC) and customer due diligence (CDD) procedures in place when onboarding new clients. If a customer refuses to answer questions about themselves, firms should consider whether this is suspicious, especially if they have criminal associations, or know an unusual amount about the money laundering process. 

2. Unusual transactions

Customers trying to launder funds may carry out unusual transactions. Firms should look out for activity that is inconsistent with their expected behavior, such as large cash payments, unexplained payments from a third party, or use of multiple or foreign accounts. These are all AML red flags.

3. Unusual source of funds

Transactions involving large amounts of cash or private funding could indicate money laundering, and if cash deposits or complex crypto assets are involved, identifying the source can be difficult.

4. Transaction has unusual features

The size, nature or frequency of transactions, or repetitive instructions involving common features, are all AML red flags. Firms should be particularly alert if a transaction appears unusual for the customer’s profile, or if there is unexplained urgency.

5. Geographic concerns

If a firm is not local to the customer, why are they using it? Unexplained connections with – and movement of money between – jurisdictions should also raise suspicions.

6. Politically exposed persons

Individuals – and their family and associates – in high positions are more vulnerable to corruption and could pose a higher risk of money laundering for quid-pro-quo favors or kickbacks. While no standardized global definition exists, PEPs typically include heads of state, senior politicians or government officials, judicial or military officials, senior executives of state-owned corporations, or important political party officials. 

7. Ultimate beneficial ownership is unclear

Ultimate beneficial owners are the people who ultimately own or manage a company. Complex ownership structures, or the use of shell companies, could be an attempt to disguise criminal activities and carry out financial crime. 

8. Jurisdiction risk

Some countries or jurisdictions have high levels of corruption, unstable governments, or are known as money laundering havens. They could also have inadequate AML/CFT regulatory and judicial frameworks, or be subject to economic sanctions. Transactions that involve these countries should be carefully monitored as AML red flags.

9. Sanctions exposure

It is important that firms review relevant international sanctions lists to ensure that customers are not sanctioned themselves, or involved, or transacting with, a sanctioned entity. As Russia’s invasion of Ukraine has demonstrated, sanctions lists are subject to change at short notice. This means firms need to ensure they have a real-time plan for managing rapid changes. 

10. Adverse media

Additional checks may also be needed if the customer is a subject of negative news media in any part of the world, as this could increase AML risk. Firms should ensure their adverse media screening is appropriately aligned with common predicate offenses. 

Red Flags to be Considered in Transaction Monitoring

Responses are sought from the customer on the alert generation and the satisfactory provision of information from the respective customer.

Then, the AML analyst or reviewer marks the alert as closed. 

The number of alerts generated within each bank varies based on several factors, including the number of transactions running through the monitoring system, as well as the rules and thresholds the bank employs within the system to generate the alerts.

Banks typically score alerts based on elements contained in the alert, which determines the alert’s priority. 

Banks typically review and re-optimize their alert programs every 12-18 months. Banks noted that many alerts are ultimately determined to be “noise” generated by the software. One bank noted that it is working continuously to reduce the “noise” generated by the software and to develop typologies to enrich the data and reveal the most critical information.

The following are red flags that might indicate money laundering activity and/or terrorist financing in this case:

Quite a wide range of activities carried out by the company

Lack of substance and employees

Impairment of assets

Loans that have been granted without proper due diligence being carried out or without appropriate collaterals, appropriate guarantees, appropriate securities, a commercial rate of interest, or a repayment period, or

The issue of a power of attorney to various individuals, especially those quite wide and general.

Red Flags

The following are some examples of event-based trigger points that are considered red alerts for money laundering and require the performance of investigation and monitoring of relevant transactions:

Frequent cross-border flow of transactions, especially with high-risk countries

A large amount of cash deposited in smaller portions

A large amount of cash deposited in an account at once

Payment received in account, not matched with goods shipped or trade-based money laundering

Unexpected repayment of overdue credit amount 

Transaction inconsistent with customer’s business profile

Deposit or transfer of funds without any specific justification

Transactions made for significant investment

A sudden increase in the number or value of deposits or credits, or

The sudden increase in the large deposit in the dormant accounts 

Final Thoughts

Transaction monitoring is an essential process used by financial institutions to detect and prevent money laundering, terrorist financing, fraud, and other financial crimes.

Red flags are specific indicators or patterns in financial transactions that suggest potential illegal activity. Effective transaction monitoring systems use a combination of automated tools and human analysis to identify and investigate suspicious transactions.