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Money laundering warning signs to look for

As a financial institution, it’s vital that you make fully informed and risk-based decisions. In order to accurately assess the level of risk posed by your customers, you need to understand why they’ve chosen to use your firm and the type of business relationship you should expect to enjoy with them.

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December 19, 2022
Blog Post

Financial institutions have an obligation to stop laundered money from entering the financial system. As well as understanding what money laundering is and how it occurs, your business must have proper money laundering detection systems in place. It must also know about the signs of money laundering and how these should be dealt with.  

To help with your anti-money laundering (AML) efforts, here we’ve detailed some of the biggest red flags your business should look out for.

Large cash deposits

Businesses in certain sectors are more susceptible to money laundering than others. For example, cash-based businesses like takeaways, launderettes, and nail salons are considered to be archetypal money laundering businesses. This is because, due to the high volume of cash transactions, dirty money can be added to the takings and the turnover can be inflated.

In instances such as this, suspicion is generally aroused when there are no records (such as receipts or invoices) that back up the cash volume. Suspicion is also aroused if the turnover for a business is unusually high.

Of course, the funds from cash-based businesses can be legitimate and only a small number of cash-based businesses are involved in money laundering. Due to this, you need to know about the exact warning signs to look out for. These include:

  • Regular large cash deposits made by businesses that don’t usually deal in cash
  • Businesses that make large cash deposits using night safe facilities and cash deposit machines to avoid direct contact with the bank
  • A business that deposits a large aggregate amount of cash in numerous small amounts, or at different branches, in an attempt to avoid scrutiny and reporting requirements

Unusual transactions

If a customer is attempting to launder funds, they will usually carry out a number of unusual transactions. These transactions may be unusual:

  • For your business and the way it operates
  • For your understanding of the customer and their financial position
  • Due to the person/firm they’re sending the money to
  • Due to the geographic location they’re sending it to

Any individual transaction that is disproportionate or doesn’t fit the customer’s risk profile is a cause for concern and will likely need to be followed up with an assessment. However, there are occasions when an isolated transaction will not be enough to arouse suspicion on its own. 

Although you should be suspicious if a customer attempts to make unusual transactions, you should also be suspicious if their behavior is unusual or out of character. For example, if a customer asks you to short-cut normal processes or expedite a transaction, this should raise alarm bells.

Evasive or defensive account owners

The Financial Action Task Force (FATF) says that evasiveness and a general reluctance to disclose information are considered to be red flags. Evasive actions taken by customers include: 

  • A refusal to disclose beneficial ownership
  • A refusal to disclose what the source of their income is
  • An unwillingness to disclose data or documents required to enable a transaction
  • A refusal to engage with a money laundering detection system or piece of software

As a financial institution, it’s vital that you make fully informed and risk-based decisions. In order to accurately assess the level of risk posed by your customers, you need to understand why they’ve chosen to use your firm and the type of business relationship you should expect to enjoy with them.

You should have customer due diligence (CDD) procedures in place that help you identify your clients. These processes should also help you identify the level of risk you’ll experience by dealing with this client. If a client refuses to answer questions or give you information about themselves or their business practices, you should consider whether this is suspicious. This is particularly applicable if there isn’t an obvious reason why a new client has chosen to use your business. For example, if the client lives far away from your firm or lives in another country entirely.

Once onboarded, your ongoing customer due diligence should help you flag any suspicious activities (for example if the customer starts to make large cash deposits or starts making overseas transfers). These transactions may be legitimate, but they’ll likely be flagged by your money laundering detection system. As a result, you should question the customer about them. If they’re evasive about why they made these transactions or are defensive about their actions, this may again be a red flag.

Data discrepancies

Economic criminals are reluctant to go through anti-money laundering (AML) checks. As a result, customers looking to launder money may even attempt to circumvent or cheat the system. 

Commonly, this involves customers submitting the wrong documents as part of the due diligence process. They may also attempt to submit doctored documents, or attempt to bypass your money laundering detection system or your identity verification methods entirely. 

If you notice any discrepancy in the information provided by the customer, then you must investigate why this has occurred. Of course, there’s a chance the customer has made an honest mistake that can be rectified immediately. However, if you encounter difficulties during the due diligence process and the customer cannot give you a reason why data discrepancies are apparent, it is usually better to not onboard the customer.

Large third-party investments

Third-party investments could be a sign of money laundering. For this reason, if a third-party funder is present, you need to decide whether you also need to perform checks on this individual and their source of funds.

As part of this, you must be particularly wary if these third-party funds have been transferred to/from high-risk or non-cooperative jurisdictions. On top of this, you should also investigate whether there is a business relationship between your customer and the third party, or whether the funds are coming from a cash-based business.

Specific signals to look out for include: 

  • A disproportionate amount of private funding or cash which is inconsistent with the socio-economic profile of the individuals involved
  • Instances where there is no logical explanation or economic justification for the finance being provided

Remember that some criminal schemes use complex structures to disguise the source and ownership of assets. If a group is structured in an unusual way or if the group makes frequent investments in areas with no obvious geographic connections, it may be an indicator of layering and integration. These are key steps in the money laundering process.

Increase in complicated transactions

Due to the fast-paced nature of the global economy and the uncertain economic times we’re living in, the nature of a client’s transactions can change quickly and with very little warning.

However, if one of your customers suddenly starts executing a number of complex transactions (such as transactions that cross multiple borders or involve opaque group structures or PEPs), this could be a red flag for money laundering. As a result, you must first ask yourself whether there is a reasonable explanation for the customer’s change in behavior.

If you do not believe there is a reasonable explanation, you should ask the customer about their activities. If their answers are insufficient, then you should file a suspicious activity report with the relevant authorities.

Conversions to and from virtual assets

Virtual assets such as non-fungible tokens (NFTs) pose significant money laundering and criminal financing risks. If you notice that a customer quickly withdraws deposited funds and converts these funds into virtual assets, then this may be a cause for concern. The level of concern is heightened if the customer converts these funds in small increments in an attempt to avoid detection.

Similarly, the opposite scenario is also a red flag for money laundering. This is because if a customer converts virtual assets into a fiat currency and makes numerous small deposits using that currency, this is likely an attempt to conceal the source of their money.

See how Veriff’s AML screening solutions can help you - Book a demo

At Veriff, we’ve developed a money laundering detection tool that can help you prevent fraud and guarantee compliance.

Our AML screening solution deploys our identity verification service alongside politically exposed persons and sanctions checks. It also screens for adverse media and then monitors your clients on an ongoing basis. As a result, it reduces money laundering risk for your business at every turn.

With the help of our AML screening service, you can show regulators that you take financial crime seriously. You can also convert up to 30% more customers and ensure regulatory compliance. To discover more about how we can help your business achieve AML compliance, book a demo with our experienced and knowledgeable team today.