Top 10 FATF Money Laundering Red Flags to Look Out for in 2024

Money laundering ranks as the world’s third-largest "industry," with an estimated $2 trillion laundered annually. This staggering amount fuels global criminal activities and poses a significant threat to the global economy. To combat this, regulators have enforced strict measures for financial institutions, which are on the front lines of fighting financial crimes.

While combating money laundering is a corporate responsibility, the compliance team bears a significant portion of the burden. They must identify money laundering red flags and early signs of financial crimes promptly to intervene effectively.

What are Red Flags in Money Laundering?

Money laundering red flags refer to the signs that are indicative of possible money laundering activities. Criminals employ sophisticated money laundering activities today to launder money, therefore, financial institutions need to stay on top of new trends and signs that may indicate criminal activities.

The Financial Action Task Force (FATF) provides insights in its recommendation into strategies used by criminals to launder illicit funds. This is often conducted through traditional financial institutions and Virtual Assets Service Providers (VASPs). It could include: 

• Exploiting corporate accounts of legitimate businesses to conduct personal transactions
• Acquiring valuable assets through illegal funds
• Creating shell companies to obscure ownership of assets or to transact with laundered money
• Use of fake identities to transact and manage illicit funds while the real players hide behind a mask
• Providing loans with laundered money to criminals to make it appear like a legitimate transaction, etc

Top 10 Money Laundering Red Flags in 2024

Here are some of the top 10 money laundering red flags to look out for in 2024 in line with FATF recommendations: 

1. Suspicious or Unexplainable Sources of Funds

A suspicious or unexplainable source of funds is one of the biggest red flags that are indicative of possible money laundering. An alarming sign is when accounts or online wallets receive unusually high deposits compared to typical amounts, with no clear explanation for the source of these funds. These funds are often quickly converted to fiat currency, which could indicate an attempt to legitimise money obtained from theft or other illegal sources. Additionally, suppose a substantial portion of a client's wealth originates from high-risk investments such as virtual assets (VAs), Initial Coin Offerings (ICOs), or specifically fraudulent ICOs. In that case, this too raises concerns about the legality and legitimacy of their financial activities.

Further red flags include transactions linked to addresses or accounts associated with known fraudulent activities, extortion, ransomware schemes, sanctioned entities, or connections to the darknet and other illicit online marketplaces. Interactions with accounts known for online gaming or gambling, or those operating within other high-risk sectors, also warrant heightened scrutiny.

2. Unusual Transactions and Patterns

Large cash deposits and withdrawals or frequent transactions across multiple bank accounts, particularly in different jurisdictions, are significant red flags for money laundering. Financial institutions should flag these activities for further scrutiny as they might indicate attempts to obscure the origin of funds.

3. Incomplete or Incorrect Information 

If a client withholds complete Know Your Customer (KYC) information or provides false data, this can signal an attempt to conceal their identity or the origins of their funds. 

Financial institutions need to carry out effective KYC verification and AML checks during onboarding and periodic KYC post-onboarding to ensure such customers do not slip through the cracks. Clients who fail to comply with these processes should face account restrictions.

4. Immediate Cash Withdrawals 

Rapid cash withdrawals following account deposits can indicate money laundering, often as part of the layering phase to disguise the origin of funds according to FATF. It is usually followed by further layering or integration as part of the money laundering cycle. Criminals usually withdraw such money and use it to acquire assets in cash.

All financial institutions should pay attention to such occurrences especially when it's frequent according to FATF. For example, a customer may receive large sums every five days and immediately withdraw it in cash. 

5. Frequent Purchase of Virtual Assets

Financial trail and ownership information of virtual assets are difficult to track. This makes it very suitable for money launderers who mostly use these assets (e.g. cryptocurrencies), to hold value. Financial institutions should look out for customers who immediately convert huge sums to virtual assets as soon as it's deposited in their account similar to immediate cash withdrawals. 

6. Transactions with High-Risk Individuals or Geolocation

Engaging significantly with individuals on PEP or sanctions lists, or from high-risk locations, should trigger further investigation according to FATF should be investigated for money laundering. If no reasonable explanation can be given, then the financial institution should restrict such accounts and launch an investigation or report to regulatory authorities. 

7. High-Risk Industry Transactions

Transactions in industries like online gambling, arms, art, and adult entertainment, known for their opaque transactional nature, should be carefully monitored. These industries are often used as “washing” mechanisms for money laundering due to the opaque nature of the transactions that they conduct. Financial institutions should implement ongoing monitoring for customers or accounts that operate or transact with these industries. 

8. Criminal Financial History

This is beyond doubt, a clear red flag for financial institutions to keep an eye out for. Customers with a past criminal record related to financial crimes or money laundering should be closely watched, as their history indicates a higher risk of reoffending. In addition to monitoring them, close relatives and business partners of customers with such history should be treated as potential red flags because they are often used as conduits for money laundering. 

9. Adverse Media Mentions 

Customers who have been negatively highlighted in the media pose a higher risk for money laundering. AML checks should be frequently conducted and processes put in place to ensure the customer is not involved in money laundering or the institution is alerted in light of any suspicious move.

10. Appearance on Relevant Sanctions and Watchlists

Being listed on relevant sanctions and watchlists is a clear indicator of high money laundering risk. Financial institutions should have robust mechanisms to identify such individuals and either avoid onboarding them or apply stringent monitoring and restrictions if they are customers.

Spotting Money Laundering Red Flags with Smile ID Superior Solution

Smile ID offers a comprehensive KYC and AML solution that empowers financial institutions to verify customer identity and run AML checks for effective risk assessment. This helps them spot potential red flags in customer profiles that put them at high risk of money laundering and other financial crimes. 

Learn how compliance and AML professionals are using Smile ID solutions to automate customer risk assessment at scale, spot money laundering red flags and satisfy compliance requirements without compromising the onboarding experience. Request a demo today.