Every year, billions of cash are moved across borders by criminal organisations, despotic regimes, and corrupt corporations to finance various unlawful operations, bringing pain and hardship to communities around the globe. To make these transfers happen, all of these entities frequently need the assistance of banks and other financial institutions (FIs). Given this, effective sanctions screening is the responsibility of banks and FIs as much as it is of the governments of the globe.
The vast majority of banks understandably do not want to engage in financial crimes due to the potential harm to their reputations and regulatory concerns that can result. Unfortunately, financial thieves are renowned for developing fresh ways to transmit illicit funds. They also employ a number of tried-and-true techniques that make it difficult to uncover their activities.
Banks and intergovernmental anticrime agencies, however, have developed the ability to spot some telltale indicators of financial crimes over the years, which has reduced the ability of criminal actors to transfer and launder money. The Financial Action Task Force (FATF) and other top anti-money laundering (AML) authorities have identified the following eight significant financial red flags:
1. The Customer Cannot Instantaneously Meet AML Requirements
People who want to engage in illicit activity could be hesitant to comply to the standard AML and know your client (KYC) processes. Members of organised crime organisations and agents working for rogue states are particularly affected by this.
There can be problems with the documentation or the verification process when these parties complies. The customer due diligence (CDD) process may encounter discrepancies at several stages, such as issues with biometric data or inaccuracies in birthdates and other personal information.
It's important to remember that criteria for AML and KYC may not be followed for valid reasons. For instance, in some developing financial markets, many people might not have the resources to obtain the necessary paperwork, which would result in non-compliance. Of course, the decision as to how to handle a client with such AML and KYC compliance difficulties ultimately rests with the bank.
2. Weird Transfers and Quick Withdrawals
When an account has been inactive for several months and then unexpectedly receives a significant cash infusion, only to transfer the entire sum at once, it is a classic red flag. Although there is typically a good reason for this, a lack of consistent activity may indicate that the consumer opened the account specifically to get around AML regulations.
According to FATF standards, accounts that record many, large-volume transactions and withdrawals are typically seen as suspicious. This is particularly true if the account is inactive regularly or if there are no circumstances that may explain such transactions. Complete withdrawals of funds that are consistently transferred may also be a sign of fraud.
In these circumstances, banks may be justified in notifying the consumer and temporarily freezing the account so that an explanation can be provided. Reducing the amount of false positives and the potential harm to client satisfaction may also be accomplished by using improved technologies that can more effectively cross-reference previous account activity.
3. Weird Trading And Conversion Of Real Assets To Virtual Assets
Due to the additional difficulties they pose to AML experts, virtual assets (VAs) like cryptocurrencies and non-fungible tokens (NFTs) are currently quite popular with international money launderers. This is particularly true for specific VA kinds that are created with the intent of hiding the routes travelled by money.
Banks and other lenders should pay closer attention to transactions involving significant VA sums and transactions in which all account holdings are converted to VAs.
4. Accountholders From Countries With Flags
Certain nations have been designated as "grey list" and "high risk" locations by the FATF, indicating that they have strategic AML flaws.
The great majority of people from these nations won't cause any issues. Banks and other financial institutions must, however, keep a closer eye on their accounts because there are more financial crimes committed in these nations.
5. Dealings With Flagged Nations
If an accountholder has transactions from these nations, particularly if they involve significant sums or high quantities, they may still pose a risk, even if their country is not on the FATF's grey list.
Although the majority of these cross-border transactions are probably honest remittances or legal business dealings, there is still a higher-than-average chance that they are associated with money-laundering activities. In these situations, it can be a good idea to look into the situation right away to eliminate any misunderstandings.
6. Having Several Accounts
There are many good reasons for someone to have several bank accounts. However, if someone has many accounts, it is considerably simpler for them to participate in a money mule scam.
The main reason money launderers retain many accounts is to support this kind of deception. Clients with more than two accounts may therefore require additional investigation.
7. Customers Dealing With Flagged Parties
Tracing connections between different accountholders is a component of AML activity. Clients should also be highlighted if they frequently do business with parties that have been reported for engaging in fraudulent behaviour. The same holds true for their business associates and other relatives.
8. The Customer Declines To Provide Proof Of Their Income.
A reason to deny a prospective customer an account in your institution should be if they are secretive about their source of income. These customers almost certainly engage in illegal or dubious activities. Facilitating these transactions could damage your institution's reputation and create problems with regulatory compliance.
What Can FIs And Banks Do to Prevent Financial Crime?
Practically speaking, it might be impossible to thwart every attempt at money laundering and sanction evasion, especially in light of advancements in virtual assets and the vast resources that many bad actors have at their disposal.
The prevalence of cross-border financial crimes can be significantly reduced by the banks and other financial institutions involved by knowing common red flags and adhering to agreed international finance norms in AML, KYC, and CDD. The cost of committing financial crimes may eventually rise to the point that most offenders are discouraged from engaging in money-laundering and other illicit activities.