What are some Red Flags Entities should be aware of?

  1. Section 56 of the AML Code refers to Schedule 3 of the said Code which provides guidance to enable an entity, business, or professional to establish the types of activities or transactions that may give rise to suspicion of money laundering or terrorist financing. The general indicators can also be considered to establish the types of activities or transactions that may give rise to suspicion of proliferation financing and other types of financial crimes. Naturally, only the indicators that apply to the specific circumstances of the business, entity or professional ought to be applied and considered.
  2. The following indicators (“red flags”) highlighted below are general types of suspicious transactions and suspicious activities:
    ‘Red flags’ related to customer profile/Behavioral indicators
    1. Inadequate information in the documents required to be presented or submitted by the customer or inconsistent information or reluctance to give information.
    2. An unreasonable proportion between job/profession, financial profile and transactions of the customers.
    3. Demonstrating different customer attitude other than general customer attitude models. For instance, behaving overly friendly or exhibiting threatening attitude in order to prevent suspicious transaction or suspicious activity reporting on them.
    4. Use of false identification.
    5. The parties to the transaction (owner, beneficiary, etc.) are from countries known to support terrorist activities and organisations.
    6. Reports from the media stating that the customer is linked to known terrorist organisations or engaged in terrorist activities.
    7. Very difficult to verify customer information and source of funds.
    8. Client’s documents such as identification, statement of income or employment details are provided by an intermediary who has no apparent reason to be involved (the intermediary may be the actual client).
    ‘Red flags’ related to financial transactions
    1. No usual and reasonable legal or economic ground or reason in conducted or requested transactions.
    2. Client using means of payment unusually such as by making too many cash payments with small denominations or making payments in a foreign exchange used infrequently.
    3. Client deposits a large and unusual amount of cash with you to make payments which are outside of the client’s profile.
    4. Frequent change of ownership of same asset in unusually short time periods with no apparent business, economic or other legitimate reason.
    5. Divergence from the type, volume or frequency of transactions expected in the course of the business relationship.
    6. Deposits were structured below the reporting requirements to avoid detection.
    7. Client requests the firm to act as his agent in obtaining high sum bankers’ drafts, cashiers’ cheques, other cash equivalent or near cash monetary instruments or in making wire transfers to and from other banks or financial institutions.
    ‘Red flags’ related to Real Estate sector
    1. Client does not want to put his/her name on any document that would connect him/her with the property or uses different names on Offers to Purchase, closing documents and deposit receipts.
    2. Client purchases property in someone else’s name such as an associate or a relative (other than a spouse).
    3. Client buys real estate for third parties without any reasonable ground such as business or family relation.
    4. Client wants to re-sell property shortly after purchase at a significantly different purchase price, without corresponding changes in market values in the same area.
    5. Client leases real estate by using large amounts of cash.
    6. Client negotiates a purchase but wants to record a lower value on documents, paying the difference “under the table”.
    ‘Red flags’ related to Dealers in precious metals and stones
    1. A client paying for high-priced jewelry or precious metal with cash only.
    2. Purchase appears to be beyond the means of the client based on his stated or known occupation or income.
    3. Transaction lacks business sense.
    4. Client indiscriminately purchases merchandise without regard for value, size or colour.
    5. Client orders item, pays for them in cash, cancels the order and then receives a large refund.
    6. Transactions that appear to be structured to avoid reporting requirements.
    7. Client is reluctant to provide adequate identification information when making a purchase.
    ‘Red flags’ related to Legal Practitioners
    1. Payments are made by the client for legal services in actual cash.
    2. Instructions by the client for the creation of complicated ownership structures where there is no legitimate or economic reason.
    3. An absence of documentation to support the client’s story, previous transactions or company activities.
    4. Client is from or in any country known to have inadequate measures to prevent money laundering, terrorist financing and proliferation financing.
    5. Client linked to negative news or crime (named in a news report on a crime committed or under Law Enforcement investigation/inquiry).
    6. Client is overly secretive or evasive (e.g. of who the beneficial owner is, or the source of funds) or provides fabricated records.
    7. Client or any of its associated person/entity was found to be a positive match while screening against UN Security Council Resolutions (“UNSCRs”).
    ‘Red flags’ related to Accountants
    1. Unauthorised or improperly recorded transactions; inadequate audit trails.
    2. Instructions to an accountant from the client to conduct transactions without legitimate or economic reason or when such transactions are conducted by the client itself.
    3. Client is making unusual payments in cash which are not commensurate with business activities.
    4. Transactions where there is lack of information or explanations, or where explanations are unsatisfactory.
    5. Client/Company records consistently reflect sales at less than cost, thus putting the company into a loss position, but the company continues without reasonable explanation of the continued loss.
    6. Client/Company has a long period of inactivity following incorporation, followed by a sudden and unexplained increase in financial activities.
    7. h.Client or any of its associated person/entity was found to be a positive match while screening against UN Security Council Resolutions (“UNSCRs”).
    ‘Red flags’ related to NPOs
    1. Sudden increase is detected in the frequency and amounts of financial transactions on the account of an NPO from a particular donor.
    2. The donation does not match the donor’s known source of funds and wealth.
    3. The donation of funds or other properties derives from donors residing in high-risk countries.
  3. It is important to note that ‘red flags’ are not intended to cover every possible situation and should not be viewed in isolation. Additionally, the mere presence of a ‘red flag’ does not necessarily indicate reasonable grounds to suspect money laundering, terrorist financing or proliferation financing activity. On the contrary, if a number of ‘red flags’ are present during a transaction or a series of transactions, then a business, entity or organisation ought to apply closer scrutiny. Applying together, the presence of one or more ‘red flags’ with the knowledge of the client’s business or financial affairs may assist in identifying suspicious transactions or activities.
  4. Additionally, ‘red flags’ which point to a transaction being related to terrorist financing are in ways similar to those relating to money laundering. It is quite possible that a transaction could relate to both offences. For instance, funds to be utilised for terrorist activity could be the proceeds of criminal activity as well as from sources that are legitimate.
  5. The context in which the transaction or activity occurs or is attempted is an integral factor in assessing suspicion. This will vary from business to business, and from one client or customer to another. It is therefore advisable that an entity, business or organisation should evaluate transactions or activities in terms of what seems appropriate and within normal practices in each respective line of business and based on the knowledge of its clientele. The fact that transactions or activities do not appear to be consistent with normal industry practices may be a relevant factor for determining whether there are reasonable grounds to suspect that the transactions or activities are related to money laundering, terrorist financing or proliferation financing activity.
  6. Further, it is also important to keep in mind that the behavior is suspicious, not the individual.

FAQs on Suspicious Transaction Reports

FAQs Suspicious Transaction Reporting - Charities and NPOs
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FAQs Suspicious Transaction Reporting - Financial Institutions
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FAQs Suspicious Transaction Reporting - High Value Goods Businesses
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FAQs Suspicious Transaction Reporting - Lawyers, Accountants, Notaries
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FAQs Suspicious Transaction Reporting - Real Estate Agents
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Red Flags for Suspicious Transactions or Activities
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Suspicious Transaction (Potential Examples)
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Suspicious Transaction Reporting - Additional FAQs
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Suspicious Transaction Reporting Filing Process
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