4 Red Flags of Money Laundering or Terrorist Financing
One of the most important aspects of BSA/AML compliance is the responsibility it places on regulated financial entities to report suspicious transactions. This responsibility requires an organization to be able to monitor and identify transactions, evaluate them in real time, and flag the ones that are suspicious. In many cases, a Suspicious Activity Report (SAR) should be filed with the Financial Crimes Enforcement Network (FinCEN).
Financial organizations need to build AML compliance systems that assist trained employees to flag suspicious transactions as efficiently as possible. Internal controls and procedures should have the means to recognize clues that a transaction is potentially illegal, and ensure that employees know it. There are a number of factors these controls would monitor, mostly concerning a customer’s behavior.
1. Insufficient or Suspicious Information
BSA/AML compliance involves due diligence in the scrutiny of a customer. One of the first clues something is wrong would be that the customer provides dubious information. For examples:
- Documents that cannot be verified.
- Multiple tax ID numbers.
- Reluctance to provide detailed information about the business.
- Large cash transactions with no history of prior business experience.
- Shielding the identity of beneficial partners or owners.
2. Avoiding the Recordkeeping Requirements
AML compliance rules mandate recordkeeping and reporting. Customers that resist complying with these requirements may be evading detection.
3. Inconsistent Business Activity
Financial institutions need to know what their customers do, first in order to assess business risks, and second in order to assess money laundering risks. When a customer initiates transactions that are outside the scope of routine or established activity, the change may cover an illegal activity. For instance:
- Currency transactions change in number, type, or volume.
- Cash transactions are made that do not appear related to the customer’s business needs.
- Transaction patterns for the customer are significantly different than those for other similar businesses.
4. Changes in Transaction Patterns
Sudden unanticipated changes in a customer’s transaction pattern may justify a closer look to see if illegal activity is possible. If these changes are unusual due to the kind of business, or simply seem out of scope for the business type, employees should investigate for suspicious activity. Simply using an unusual number of large denomination bills in cash transactions in a way that diverges from normal activity may be significant.
Some of these “red flags” are easier to spot by employees during the due diligence research on a customer. Others, such as cash transactions patterns, might be built into digital controls that can be set to alert employees. In either case, employees and managers have to be trained to recognize potential risks, and put them under a magnifying lens for a closer look. Submitting a SAR is not a legal action against a customer—it is just prudent activity that helps the financial business stay in compliance.