Red Flag Indicators For AML/CFT

Red flag indicators for AML/CFT​

AML UAE, with its vast experience and on the basis of the AML/CFT guidelines, has systematically prepared Red flag indicators for AML/CFT pertaining to different aspects such as customers, their source of funds, etc.

Money laundering can cause a lot of troubles in both qualitative and quantitative manner on the business organization. Money laundering primarily hides the income and the source of funds of the criminals or money launderers, as the same is illicit or unexplained. In addition to that, Red flag indicators for AML/CFT also harm the overall economy and poses several risks to the business enterprise.

Facilitating criminal activities like money laundering either directly or indirectly through one’s business may lead to dramatic challenges in managing the assets of the business organization. Furthermore, Red flag indicators for AML/CFT may add to high legal costs and penalties if any sort of money laundering activities is taking place involving one’s business organization or the organization is not abiding by the anti-money laundering compliance regulations.

Surprisingly, a humongous amount of money is being laundered every year. In order to avoid that, one has to be very mindful of the Red flag indicators for AML/CFT and constantly monitor the same where something unusual is observed. The Sooner the identification of the Red flag indicators for AML/CFT, the more efficient would be the measures to avoid/control the damage or restrict the intensity of the same.

What is the meaning of Red flag indicators for AML/CFT?

It is essential to be well aware of and act according to the red flags indications that pinpoint involvement of any fraud or suspicious activities in a financial transaction. In a few complex cases, one may experience the need to obtain more information from the customers. For example, suppose certain essential questions or details pertaining to the customers remain unaddressed or unanswered. In that case, the AML Compliance Officer should evaluate the reasonableness of suspicion involved and, if needed, filing a Suspicious Transaction Report with the Financial Intelligence Unit.

Red flags indicators also aid financial institutions in order to apply a risk-based approach to meet customer due diligence (CDD) requirements like knowing about the beneficial owners and understanding the legitimacy of the source of funds. If there is a red flag indication, the regulators might suspect the occurrence of either terrorist financing or money laundering, or any funding of illegal organizations. Law enforcement officers find these red-flag indicators helpful when monitoring the behavior of the professionals or even the customers. A report from Financial Action Task Force or FATF highlights the following red flags related to terrorist financing and money laundering:

Red flags about the customer

Here are a few red flags about the customers.

The customer is extraordinarily secretive or tries to evade information related to the following aspects.

  • Who the customer is
  • What precisely the bigger picture is, and is there anything that is lying under the table
  • What is the source of the enormous sum of money
  • Who exactly is the beneficial owner
  • Why are they carrying out a particular financial transaction in a different or unusual manner
Red flag image one
Red flag image two

Customers are looking up to these things

  • Customers are actively avoiding any sort of direct or personal contact​
  • Uses an email address that is not found on the internet
  • If the customer clearly refuse to provide information, necessary documents, or data
  • Upon asking, the customer offers irrelevant or fake documents
  • An associated partner, or any known or unknown person involved in any kind of suspected criminal activities like terrorist financing and money laundering

Red flags alerts for parties are generated when

  • When the parties or their representatives are situated in a country that is prone to high-risks
  • The parties involved in any financial transaction are tied for no apparent commercial reason
  • The links between the families, employment, institution of the parties may raise doubts about the legitimacy or authenticity of the parties
  • The individual who directs the operation is not amongst the official parties of the transaction or its representatives
  • A natural person working as a representative or a director is not appropriate in many terms, and even his behavior is not right
Red flag image three

Red flags in the source of funds

Here are a few red flags that should look forward to in order to minimize the intensity of the damage:

Red flags

1. The financial transactions are expressly inconsistent with the socio-economic profile of the individuals.

2. If one finds out that the actual source of funding is illicit

3. If the customer uses more than one national or foreign bank account under his name

4. The choice of payment mode or method has been postponed to a highly close time to the time of notarization without any explainable or logical reason.

5. If there is any unexplained or suspiciously short payback period

6. Mortgages are repaid quickly without any sustainable explanation, even before the first due date

7. If the assets are being purchased in cash and rapidly used as a guarantee for the loan

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8. If any prompt request comes in order to moderate the previously agreed payment procedures without a good experience

9. Finance is provided by the lender without any logical explanation outside of the credit institution

10. The collateral provided for the transaction is located in a country that is categorized as high-risk.

11. If there has been an exponential increase or consecutive contributions to the same business enterprise without having any recent logical statement in favor of that same business unit.

12. If there is an unrelated increase in the capital from a company or from a foreign company.

13. If the business enterprise has received a relatively high sum of capital or fixed assets.

14. If there is an unnecessarily high or low price for the transfer of the securities.

15. If recently incorporated, companies are also making large financial transactions without any justification or logical reason.

Red flags related to behaviour

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FAQs: Red flag indicators for AML/CFT​

Red flags in AML means a warning or an alert that there is an undesirable characteristic or threat in a transaction, customer, or entity.  

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About the Author

Pathik Shah

CISA, FCA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a multi-disciplinary professional with more than 22 years of experience in compliance, risk management, accounting, system audits, IT consultancy, and digital marketing. He has extensive knowledge of Anti-Money Laundering rules and regulations, and he helps companies comply with legal requirements. Pathik also helps companies generate value from their IT investments.