Each year, criminal organizations, rogue governments, and crooked businesses move billions of dollars across borders to fund all kinds of illegal activities, causing misery and hardship to communities all over the world. All these entities often require the services of banks and other financial institutions (FIs) to make these transfers possible. Given this fact, proper sanctions screening is as much a core responsibility of banks and FIs as it is of the world’s governments.
Naturally, the vast majority of banks do not want to be involved in financial crimes because of the reputational damage and regulatory issues these activities can cause. Unfortunately, financial criminals are known for their ability to innovate new methods to transfer dirty money. Additionally, they also have a number of tried-and-true strategies that continue to make it challenging to detect their activities.
Over the decades, however, banks and intergovernmental anticrime organizations have learned how to identify some tell-tale signs of financial crimes, diminishing the ability of bad actors to transfer and launder funds. Here are 8 major financial red flags according to the Financial Action Task Force (FATF) and other leading anti-money laundering (AML) authorities:
1. The Customer Cannot Immediately Comply With AML Requirements
People who intend to do illegal activities may be reluctant to submit themselves to the usual AML and know your client (KYC) procedures. This is especially true of members of organized criminal enterprises and agents acting on the behalf of a rogue state.
When these parties do comply, there may be issues with the documents or the verification process. Discrepancies may appear at different points of the customer due diligence (CDD) procedure, such as biometric data problems or birthdates and other personal details not matching exactly.
It’s worth noting that there may be legitimate reasons for noncompliance with AML and KYC standards. For instance, in some emerging financial markets, many individuals may simply not have the means to obtain the right documents, leading to non-compliance. Of course, it ultimately remains up to the bank whether they will handle a client with these kinds of AML and KYC compliance issues.
2. Unusual Transfers and Immediate Withdrawals
A classic red flag is when an account has not experienced any activity for several months then suddenly receives a large amount of cash, only to transfer the whole fund immediately. While there is usually an innocent explanation for this, a lack of regular activity may suggest that the customer opened the account primarily to circumvent AML procedures.
Accounts that register multiple high-volume transfers and withdrawals are generally considered to be suspicious under FATF guidelines. This is especially the case if the account is normally inactive or there are no events that may justify such transactions. Consistently withdrawing the entirety of regularly transferred amounts may also indicate fraudulent activity.
In these cases, banks may be justified in temporarily freezing the account and informing the customer so that an explanation can be given. Using better software that can better cross-reference past account activity may also help reduce the number of false positives and the potential damage to client satisfaction.
3. Unusual Trading and Conversion to Virtual Assets
Virtual assets (VAs) such as cryptocurrencies and non-fungible tokens (NFTs) are now extremely popular with international money launderers due to the extra challenges they present to AML experts. This is especially true for certain VA types that are expressly designed to obscure the paths taken by funds.
Transactions that involve large amounts of VAs as well as transactions where entire account holdings are converted to VAs should merit closer attention from banks and other lenders.
4. Accountholders from Flagged Countries
The FATF has flagged certain countries as “gray list” and “high-risk” areas, which means that these jurisdictions have strategic AML deficiencies.
The vast majority of individuals from these countries are not going to be a problem. However, banks and other financial institutions are obliged to monitor their accounts more closely due to the higher volume of financial crimes occurring in these countries.
5. Transactions with Flagged Countries
Even if an accountholder comes from a country that is not on the FATF’s gray list, they may still present a risk if they have transactions from these countries, particularly if they involve large amounts or high volumes.
While most of these cross-border transactions are likely to be innocent remittances or legitimate business transactions, they still carry a greater-than-normal risk of being related to money-laundering activities. In these cases, it may be a good idea to immediately investigate the matter to clear up any confusion.
6. Owning Multiple Accounts
There are plenty of legitimate reasons for an individual to own multiple bank accounts. However, having multiple accounts does make it much easier for someone to be a party to a money mule scheme.
Money launderers are extremely likely to hold multiple accounts primarily to facilitate this type of scam. For this reason, clients who hold more than two accounts may need to receive more scrutiny.
7. Clients Doing Business with Flagged Parties
AML activities involve tracing relationships between different accountholders. Clients who do a significant amount of business with parties that have been flagged for fraudulent activity should be flagged as well. The same applies to their business partners and other closely related parties.
8. The Client Refuses to Verify Their Source of Income
If a potential client is secretive about how they make their money, this should be a basis to refuse them an account in your institution. These clients are, more likely than not, involved in illegal or questionable activities. Facilitating their transactions may reflect badly on your institution and cause regulatory compliance issues.
What Should Banks and FIs Do to Stop Financial Crimes?
In practical terms, it may be impossible to stop all money laundering and sanctions evasion efforts, especially given innovations in virtual assets and the sheer amount of resources available to many bad actors.
However, by understanding common red flags and following accepted international finance guidelines in AML, KYC, and CDD, the banks and other financial institutions involved can greatly reduce the incidence of cross-border financial crimes. Ultimately, the barrier to perpetuating financial crimes may become high enough to prevent most criminals from engaging in money-laundering and other criminal activities.