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AML11 May 2024

Top 10 Key Signs of Money Laundering & How to Combat Them

Emmanuel Agwu

Despite several regulatory bodies being established and laws put in place to address the growing threat of money laundering and terrorist financing, the act still persists. In fact, up to $2 trillion is still laundered yearly according to the United Nations. It proves how difficult it is to address this threat, especially when businesses do not understand the signs of money laundering even though laws are already in place. 

 

From businesses not establishing sufficient control measures to some authorities not supervising their jurisdictions effectively, money laundering remains a global threat. One of the best ways businesses can remain compliant in the global fight against this crime is to understand the red flags and signs associated with it. 

What is Money Laundering?

Money laundering refers to the act of concealing the financial proceeds of a crime and converting it to assets that appear to have a legitimate origin. These assets can then be used freely without suspicion from the authorities or channelled to fund other criminal activities. Laundered money goes through three stages - placement, where it is strategically introduced to the financial system, layering, where it is run through a series of transactions to create a legitimate trail and integration, where it is converted into a legitimate asset.

 

Read more on the 3 Stages of Money Laundering.

What are the Top 10 Key Signs of Money Laundering?

Businesses need to investigate the data provided by customers to effectively combat money laundering. This includes verifying customer information and monitoring their transactions for suspicious activities. 

 

The top 10 key signs money laundering businesses should look out for include: 

1. Secrecy or Unwillingness to Provide Enough Information

This is easily one of the biggest red flags indicative of money laundering. Basically, customers who are unwilling or reluctant to provide information about themselves are considered suspicious by the Financial Action Task Force (FATF). This includes refusal to disclose their client information or beneficial owners, source of income, complete KYC information, and other related documents. 

2. Large Deposits

Organizations need to be wary of accounts that receive sudden large deposits over a short period of time. On the B2B relationship end, cash-based businesses like eateries and fast food restaurants experience a high volume of cash daily, making it easy for dirty money to be added to inflate the turnover amount. In such an instance, organizations can launch investigations when there are no receipts or records to back such a high inflow of cash.

3.  Unusual Transactions

Unusual transactions may easily be a sign of money laundering. Criminals usually engage in transactional patterns that are out of the norm. Examples are transactions that: 

  • Are unusual for an individual or business from their financial history
  • Does not fit the customer and their financial strength
  • Are sent to unusual geographic locations
  • Are sent to individuals in high-risk regions

 

Generally, any out-of-character customer behaviour should be treated with caution.

4. High-Risk Third Party Relationships and Complex Business Structures

Establishing vague third-party relationships is one of the prominent ways money launders operate especially in countries with unclear regulations around company structures. For example, money launders may use third parties like shell companies to create complex transaction trails of multiple accounts which may include a customer of an organization. This is to obscure the fund trail and make the money appear legitimate. 

 

Organizations should perform enhanced due diligence on customers with unclear third-party relationships and politically exposed persons who may be leveraging their position to launder money.

5. Transactions with Unregistered or High Risk Jurisdiction

Global AML laws designate transactions from and with individuals in high-risk jurisdictions as money laundering suspicious. The customer involved should be able to clearly explain the transactions, if not their account should be instantly frozen and investigated.

6. Multiple Account Opening

A client opening multiple accounts under the same or different details could indicate money laundering activities. Organizations need to verify and monitor these customer accounts to eliminate the possibility of them operating as money mules who launder money on behalf of criminals. 

 

Our solution, Smile Secure, empowers businesses to spot duplicate account opening attempts through identity verification and Biometric KYCBook a free demo today to learn more about how it works.

7. Customers in High Risk Countries

Some customers require extra caution and monitoring because they are from high-risk countries. Although the law does not prohibit onboarding such customers, it is recommended that proper risk mitigation strategies be put in place to prevent money laundering. Background and AML checks should also be conducted.

8. Immediate Withdrawal to Private (Crypto) Wallets

Accounts that constantly withdraw funds to a private wallet immediately after their account is credited may be a sign of money laundering. Businesses should closely monitor these accounts especially when multiple high-volume transactions occur within a short period of time. 

9. Use of Digital Assets

The digital asset world is still relatively new and lacks adequate processes to check money laundering and financial crime risks. As a result, it is slowly becoming a mainstay for criminals who quickly convert funds to virtual assets. Conversion is mostly done in small increments, below the AML reporting threshold to avoid attracting regulatory authorities. 

 

It could also be suspicious the other way around when criminals convert virtual assets into fiat deposits in small increments. 

10. Unusual Payment and Repayment Cycles or Transfers

Unusual repayment cycles or transfers from previously dormant accounts with little or no logical explanation should immediately spark an investigation. This holds especially when the customer is sending or receiving money from a high-risk country.

How to Mitigate Money Laundering Risks

Although AML guidelines are revised frequently and new laws are released yearly, the basic blocks of mitigating money laundering risks remain the same. By getting the foundations right, businesses can protect themselves from criminals and easily satisfy compliance requirements as they evolve. 

 

The basics generally involve: 

a. Implement Effective KYC Processes

Know Your Customer (KYC) processes help businesses verify the identity of customers and beneficial owners of a business for B2B relationships. KYC processes like ID verificationGovernment KYC checksenhanced due diligence, and other biometric verification processes are important for keeping money laundering activities at bay. The best way to achieve KYC compliance in this digital age is through the use of Automated solutions. Smile ID offers a suite of compliance solutions that make performing KYC much easier. Book a free demo to learn more today.

b. Ongoing Monitoring

An effective AML process should run frequent AML checks on customers and monitor their activities. Checks include politically exposed persons, watch and sanction lists screening to adequately assess the risk they posed at every point in time.  

c. Suspicious Activity Reporting (SAR)  

On discovering suspicious customer activities, organizations are mandated to report it to regulatory authorities within a stipulated time (usually a maximum of 3 days). Some of the information to be provided during reporting include:

 

  • Reason for suspicion
  • Customer identification information
  • Transaction details
  • SAR reference numbers, etc.

 

The specific information to be included in the report differs from one jurisdiction to another, therefore, it is important to understand the peculiar requirements for the country you operate in.

Bottom Line

Businesses need to understand the common signs of money laundering and take appropriate actions at the right time or risk penalties. It is also important that they report such suspicious activities to regulatory authorities within the stipulated time. 

 

Utilizing advanced AML compliance and screening solutions like Smile IDs’ helps simplify and automate the process for easy compliance.  Our APIs and SDKs are designed for easy integration with and interaction with your existing infrastructure. Book a free demo today to learn more.

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