The evolution of technology has been always helpful in economic growth and development, but it is also one of the major roots of the rise of financial and other crimes. However, one of the most common financial crimes going on nowadays is money laundering. 

With convenient access to digital banking networks through applications instead of traditional banking, these criminals can easily commit such financial frauds. Yet, there are some signs and warnings that can indicate that some money laundering activity is being held and you can easily detect these criminal activities.

In this guide, you will get to know about seven red flags for money laundering and what AML solutions can be implemented to prevent such financial crimes.

What is Money Laundering?

Money laundering is the activity of obtaining money in illicit ways such as through corruption, drug trafficking, gambling, or embezzlement, and showing it to a legitimate source. In other words, money laundering is the process of showing dirty or black money as clean or white money. And, it is usually done by transferring it through a number of transactions to hide the original source of money.

The purpose of money laundering is to legalise the earnings and make them seem as if they were acquired through legal means. Moreover, the objective of money laundering is to prevent verification and detection by law enforcement authorities.

7 Red Flags for Money Laundering You Should Be Aware of

Here are seven signs and warnings for money laundering through which you can analyse criminal activities and execute some processes to prevent these fraudulent practices.

1. Unusual Sources of Money

If a large amount of money is transacted through a bank account, it may be a sign of warning for money laundering. It should be considered a red flag because of how a customer is able to have a significant amount of private funding suddenly, especially if it’s happened unusually. 

Thus, you can verify several documents for that evidence such as the client’s bank statement, his business bank account, and various documents such as the sale of property or shares that recognize the sources of money.

However, identifying these sources of wealth may become complex where cash is involved. For instance, if a client’s bank statement shows a significant amount of withdrawal, it might not refer to the cash you’re trying to verify. Likewise, if a bank statement demonstrates a large amount of cash deposit, it may not show the sources of funds.

2. Funds from Suspicious Accounts

If your bank observed a transaction from any suspicious account, it could be one of the red flags for money laundering. According to FATF, any bank account that may receive funds from an anonymous or suspicious account can be involved in money laundering. For instance, if any client has received money from a sanctioned bank or region that has been blacklisted by other banks could be engaged in illicit financial activities.

3. Transactions by PEPs

Politically exposed persons and their family members and other connections are more susceptible to getting involved in corruption. Thus, they’re at a higher risk of committing money laundering. PEPs usually include senior politicians, military judicial officers, heads of the state, government officials, senior executives of government organisations, and other political parties. Therefore, if banks determine these individuals are being involved in money laundering, further enhanced due diligence is processed to verify them.

4. Converting Funds into Virtual Assets

Virtual assets are pretty uncommon for regular transactions, making them a prime target for fraudsters seeking to launder money. These criminals often immediately convert received funds into VAs and make repeated small conversions to avoid detection by banks. However, virtual assets can also be converted back to fiat currency, and your organisation may receive small amounts of VAs in local currency. That is why it is important to closely monitor these transactions, as frequent conversions may indicate a red flag for money laundering.

5. Issues in Customer Due Diligence

While conducting a customer due diligence process for customer verification, if you face some issues during the procedure such as a customer might have provided incomplete documents or encountering spoof attacks during the facial verification, it is crucial to closely observe them. Financial organisations are obliged to execute further verification such as enhanced due diligence if such issues arise. In case the client doesn't fulfil the CDD requirements, it is not recommended to onboard the customer.

6. Frequent Transfers to Multiple Accounts

Transactions are not considered an issue, yet frequent transactions to multiple and different bank accounts are considered suspicious activity. If a bank or any financial institution observes such activity, it is important to keep track of these transfers and clients closely to identify any irregular transaction patterns. 

For instance, if a client, who has been inactive for a while, suddenly begins making multiple transfers to accounts. It may raise a red flag for money laundering.

7. Highly Confidential Customers

While opening a bank account or any financial organisation, customers are required to provide specific pieces of information. It includes the client’s personal and financial details. However, identifying a suspicious client for several financial institutions might become a challenging task since some clients may feel hesitant to share their personal information.

For instance, they may hide if they have connections with some PEPs or sanctioned individuals. Such information is crucially required to onboard a customer. If they do not fulfil these standards, financial firms have complete rights to reject their account opening applications. Doing this prevents future financial crimes.

Final Words

To fight against financial fraud and other related crimes, it is essential for financial companies to implement powerful AML compliance regulations. Before that identifying several red flags for money laundering can also be helpful in detecting such suspicious activities and identifying criminals. These red flags not only include anonymous transactions, but issues in onboarding procedures, funds conversion into virtual assets, and suspicious sources of wealth. Hence, keeping a vigilant eye for these red flags help financial organisations to prevent money laundering.