The 10 Most Common AML Red Flags 2023—Complete Guide

The financial, marketplace, and e-commerce industries usually have to comply with Anti-Money Laundering (AML) regulations. This includes adopting a risk-based approach when working with customers, conducting Customer Due Diligence (CDD) checks and developing an ongoing transaction monitoring system. All of these procedures involve determining red flags that indicate suspicious customer activity. 

This article explains what these AML red flags are, with a focus on the top ten most common indicators.

What is an AML red flag?

AML red flags are warning signs, such as unusually large transactions, which indicate signs of money laundering activity. If a company detects one or more red flags in a customer’s activity, it should pay closer attention. In many cases, companies have to submit suspicious activity reports to authorities. However, the presence of a red flag does not necessarily mean that the customer is a criminal by default. 

Categories of red flags

The FATF indicates 42 red flags that companies should be aware of, dividing them  into the following four categories:

• Red flags about the client—for example, the client is overly secretive or evasive about their identity
• Red flags in the source of funds—for example, the client is using multiple bank accounts for no good reason
• Red flags in the choice of lawyer—for example, the client has changed advisors multiple times in a short timespan
• Red flags in the nature of the retainer—for example, the client is involved in transactions that do not correspond to their usual business activities

FATF warnings

The FATF warns that criminals use one or a combination of the following methods to launder money:

• Misuse of client accounts—use of corporate account for personal purposes, carding fraud, money mules
• Property purchases—investing the proceeds of crime in real estate
• Creation of companies and trusts—retaining control over criminally-derived assets while inhibiting law enforcement from tracing the origin and ownership of the assets
• Managing client affairs and making introductions—use of bogus representatives to make  companies and trusts look more legitimate and avoid additional checks
• Lending—when one company lends money to another in cash, which is paid back in non-cash

We’ve chosen the ten most common types of red flags in money laundering and also added the most common ones for marketplaces. The full version of the report “Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals” can be found here.

Red flags

• Red flag #1: Overly secretive clients

  If a customer doesn’t want to provide their personal information, that’s a red flag that should draw your attention. According to the FATF, some of the information that customers deliberately hide includes:

  • Who they are

  • Who their beneficial owner is

  • Where their money is coming from

  • Why they’re performing the transaction

  Therefore, companies have to implement Know Your Customer (KYC) checks and Customer Due Diligence (CDD) procedures. This way, all new customers are mandated to provide required information, which is verified using official documents.

• Red flag #2: Suspicious personal information

  New clients can have a questionable personal history. Therefore, companies should pay extra attention to customers with convictions for acquisitive crime or known connections with criminals. It’s also worth keeping a close eye on relatives of someone involved in illegal activities.

• Red flag #3: Questionable source of funds

  According to the FATF report, questionable sources of funds include:

  • “Third-party funding either for the transaction or for fees/taxes involved with no apparent connection or legitimate explanation

  • Funds received from a foreign country when there is no apparent connection between the country and the client

  • Funds received from high-risk countries.”

• Red flag #4: Atypical transactions

  If a customer conducts unusual transactions, a certain level of suspicion should arise. This includes:

  • Receiving and withdrawing large amounts of money on a regular basis without a clear economic purpose

  • Depositing unusually large amount of private funding, especially in cash

  • Using multiple bank accounts or foreign accounts without good reason

  • Repaying mortgages much earlier than the initially agreed maturity date or securing loans pledged by third parties unrelated to the borrower

  To detect such patterns, companies have to establish transaction monitoring policies and systems. At the moment, businesses increasingly rely on automated transaction monitoring solutions, which can be combined with KYC checks.

• Red flag #5: Irrational choice of legal representative

  People typically hire legal representatives that correspond to their needs. That’s why if a client chooses a lawyer that’s not familiar with their industry-specific regulations, or doesn’t reside in the same country, it can be considered a red flag.

• Red flag #6: Politically Exposed Person (PEP)

  Another red flag may come from Politically Exposed Persons (PEPs). A PEP is an individual who is currently (or has been) in a powerful public position, such as a high-level politician or judge. Since PEPs are exposed to sensitive information, there’s a higher possibility that they might abuse their position. Therefore, companies should have their policies intact when working with such customers. If you want to learn more about PEPs and how to work with them, read our guide here.

• Red flag #7: Usage of virtual assets

  The mere use of virtual assets (e.g., cryptocurrencies) doesn’t indicate a red flag. However, if it is detected that a customer exchanges fiat into crypto on a regular basis without an apparent reason, this should raise suspicion. To learn more about the FATF’s regulations on virtual assets, read our Travel Rule guide.

• Red flag #8: Presence on sanctions lists

  Companies need to ensure that their customers aren’t on any sanction lists. In many cases, customers may be added to a sanctions list after initial onboarding. Therefore, companies have to check sanctions lists on an ongoing basis.

• Red flag #9: Presence in adverse media

  Companies need to monitor whether their customers have any adverse media presence. This means any sort of compromising information discovered across various sources (including traditional media, databases of international organizations, blogs, etc.). A proper adverse media check can expose complicity in money laundering, terrorist financing, financial fraud, racketeering, organized crime and much more.

• Red flag #10: Geographic inconsistencies

  If a customer receives or sends money to unusual geographic locations that have nothing to do with their background or area of expertise, this can be considered a red flag. Further suspicion should arise if the location can’t be tracked or is a high-risk country.

Red Flags most commonly seen in marketplaces

Criminals constantly seek new ways to launder money. And since regulations in the fintech and crypto industries are getting tighter, these bad actors are starting to target other sectors. Therefore, over the past few years, we’ve seen an uptick in money laundering in marketplace and e-commerce businesses. Here are some red flags to look out for:

1: A sudden increase in the price of goods sold

If a seller sticks to selling low-priced goods for a while, and then suddenly switches to far more expensive goods, this could be a red flag. And it could be a reason to double-check and suspend the account.

2. Customer attempts to conceal identity or location

Honest users don’t usually hide their IP address with VPNs or usefake identities. So if you detect a VPN or the user’s ID seems suspicious, this can be a red flag for money laundering and fraud.

3. Selling intangible goods for a high price

Intangible assets or services are difficult to value. This is the reason why money launderers tend to use such assets. For instance, one can easily pretend to sell “consultancy services” for millions. 

4. Duplicated personal data or bank card information

If an account is registered with passport or bank card data that matches other registered account, this signals multi-accounting—which, in turn, may lead to fraud, bonus abuse, or money laundering.