Identifying Money Laundering Red Flags

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| Courtney Price

Money laundering is a critical issue that financial institutions and businesses must vigilantly guard against. It involves the process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source.

In Anti-Money Laundering Planning for 2024, Elaine Jackson explained that the fight against this illicit activity is ongoing, and recognising the red flag indicators is crucial for prevention.

Red Flag Indicators of Money Laundering

Red flag indicators are warning signs that may suggest money laundering activities. These can manifest in various client behaviours and transaction patterns that seem out of the ordinary. For instance, clients may exhibit reluctance to provide personal information, identification, or details about the beneficial owners of an entity. They might also be evasive when discussing their company's objectives or demonstrate anger or silence when asked for further information.

Other red flags include poor record-keeping, frequent changes in advisors or accounts staff, and links or frequent travel to high-risk countries. Transactions that lack commercial rationale, excessive focus on tax avoidance, and a history of criminal activity are also warning signs. Additionally, the use of suspense accounts, unwillingness to meet face-to-face, and the provision of falsified documentation are indicators that should raise suspicion.

Actions at the Onboarding Stage

During the client onboarding stage, encountering any red flag indicators should prompt immediate action. If a potential client is hesitant to provide necessary information or identification, or if there is secrecy around the beneficial ownership, it is advisable not to accept them as a client. Frequent changes in advisors may warrant the application of Enhanced Customer Due Diligence (CDD), especially if the client has links to high-risk third countries, where Enhanced CDD becomes a requirement.

Actions at the Accounts Preparation Stage

When preparing accounts, large, unusual, or complex transactions that stand out as irregular for the business type should trigger further inquiry. However, care must be taken to avoid tipping off the client that they are under suspicion. It is essential to always consider the context of the business and whether such transactions are typical for that industry.

Actions at the Accounts Pre-Completion Stage

Before completing and signing off on accounts, it is vital to review all information in light of the red flags. If suspicious activity is detected, an Internal Suspicious Activity Report (SAR) should be filed with the Money Laundering Reporting Officer (MLRO). The MLRO may then seek expert advice or make an external report to the appropriate authorities.

Being aware of the red flag indicators of money laundering and knowing what steps to take at each stage of client engagement are fundamental to preventing this illegal activity. Financial institutions and businesses must remain vigilant and proactive in their anti-money laundering efforts to protect the integrity of the financial system.

For the full session, please click here. In this course, Elaine Jackson covers the following topics:

  • Key actions to put in place (Plan, Do, Act)
  • Red Flag Indicators and AML Awareness
  • Assessing your Client List and its impact
  • Accountability and the Role of the MLRO

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.

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About the Author

Courtney Price is a content creator for CPDStore UK. Courtney joined us during the COVID-19 pandemic and has been involved in the ever-evolving world of accounting ever since. Her passion for reading and writing, coupled with her degree in copywriting from Vega School has allowed her to channel her creativity and expertise into crafting engaging and informative content.


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