Money Laundering Red Flags to Watch Out for in Business

People often think that money laundering is a victimless crime. Indeed, some believe it only affects financial institutions and has no real impact on the daily lives of ordinary people.

However, this is a dangerous misconception as money laundering (and other financial crimes) do take a heavy toll on society. Through money laundering criminals such as arms traffickers, drug traffickers, organized criminals, sex traffickers, and terrorists can ensure their illegal activities are well funded, continue to operate, and they keep benefiting from it.

As such, financial institutions have a responsibility to uphold—they must make sure they protect themselves from malicious actors looking to funnel their dirty money through legitimate financial systems. It’s also in their best interests to do so. If financial institutions are found to have facilitated financial crimes, they can face serious legal consequences, including fines, sanctions, and reputational damage.

Getting smarter about anti-money laundering measures is, thus, crucial to ensuring financial institutions and businesses can effectively ward off criminals who are getting smarter by the day.

Common Warning Signs of Money Laundering to Investigate

Here are four red flags and warning signs of money laundering to keep an eye out for and mitigate:

Red Flag #1: Highly Secretive Customers

Businesses and financial institutions can stop money laundering in its tracks even before beginning a business transaction or relationship with a customer.

During the onboarding or account opening process, you’ll want to be extremely thorough in obtaining all of the necessary information to establish and verify a customer’s identity. You’ll also want to do the same when it comes to checking the identity and nature of their business.

Customers who are cagey about their personal information or are reluctant to provide more details about their business should set off an immediate red flag.

Other factors that should instantly alarm you include documents that cannot be verified and the presence of multiple tax ID numbers. You should also be wary of any potential customer that refuses to disclose their source of income and hides the identities of their beneficial partners or owners.

Red Flag #2: Unusual Transaction Patterns

The process of transferring money itself is not a problem on its own. However, there are certain situations in which money transfers can be considered suspicious.

After some time, you should be able to identify a customer’s usual transaction patterns. Sudden deviations from the norm should be considered red flags.

For example, a long-dormant account that suddenly experiences a high level of activity should raise an eyebrow. If the activities include sending money to sanctioned areas or unregistered jurisdictions, your financial institution may want to consider giving the account a closer look.

The same goes for inconsistent money transfers that do not seem to have a logical explanation. Your customers should always be able to justify every transaction they make through their business account. If not, your financial institution should probably investigate.

Red Flag #3: An Account Holder from a High-Risk Country

Sometimes, your business will receive requests to open an account from customers from high-risk countries. The Financial Crimes Enforcement Network (FinCEN) makes use of the Financial Action Task Force (FATF) blacklist to determine which countries are considered high-risk. As of February 2024, countries on this blacklist include Iran and the Democratic People’s Republic of Korea.

Your financial institution or business does not have to refuse these requests outright. However, you should make every effort to ensure these applicants are thoroughly vetted before starting a business relationship with them. You’ll want to perform all of the necessary background checks, such as verifying whether they belong on any sanctions lists or Politically Exposed Persons lists.

It’s also a good idea to keep an especially close eye on applicants from the countries under the most current FATF increased monitoring (greylist). As of June 2024, these countries are Bulgaria, Burkina Faso, Cameroon, Croatia, Democratic Republic of Congo, Haiti, Kenya, Mali, Monaco, Mozambique, Namibia, Nigeria, Philippines, Senegal, South Africa, South Sudan, Syria, Tanzania, Venezuela, Vietnam, and Yemen. These lists are updated regularly, so keep monitoring them.

Red Flag #4: Conversions to Virtual Assets or Vice Versa

The FATF defines virtual assets as “any digital representation of value that can be digitally traded, transferred, or used for payment.”

Cryptocurrency and crypto assets are examples of virtual assets, and fraudsters often use them to launder money. That’s because it’s easy to convert one virtual asset into another, which can effectively erase all links to the crime. After that, criminals can simply send the ‘clean’ virtual asset to a service provider or financial institution that can convert it into fiat money and withdraw it.

Transactions of this nature should be closely monitored. If your financial institution spots frequent conversions, there may be reason to believe that something not quite aboveboard is going on.

In Conclusion

Knowing how to identify warning signs of money laundering can keep your business or financial institution from becoming an unwitting accomplice to financial crime. An easy way to efficiently catch these red flags is by making use of an AML solution from a provider that you trust. Investing in one sooner rather than later should be a top priority for your company.