Money laundering is a heinous crime. It hurts organizations in many ways. Acts of money laundering and tax evasion smear the company’s finances and reputation. Criminals launder millions of ‘dirty’ money every year. Money launderers are constantly devising new methods to circumvent the law. You will be shocked to learn that money laundering activities cost the world 2% to 5% of its GDP.
They use unethical means to hide/divert the flow of money while concealing their identities and that of other co-conspirators. It is essential to be aware of the red flag indicators that point out illegal activities to protect your business from financial crimes and penalties from Anti-Money Laundering Regulators.
Many European and Asian countries have implemented anti-money laundering legislation and related rules to align with global standards. The UAE, being a world-renowned business hub, is not complacent in this regard as well. In fact, it has some of the strictest AML laws and regulations in place.
In most cases, these funds are obtained through illegal means and used for funding dangerous activities like terrorism and creating political unrest. Such activities harm the UAE economy and consume a considerable chunk of its income.
Other adverse effects of money laundering include:
- When individuals/companies use the entity as a cover to commit money laundering activities, it creates enormous hurdles for asset management.
- Results in violations of anti-money laundering and tax evasion laws.
- Violations of the anti-money laundering laws may result in heavy penalties and lawsuits.
The authorities have implemented strong anti-money laundering laws to curb such activities. However, companies must also extend their cooperation to make these efforts successful. Companies must keep an eye out for AML/CFT red flags or hire resources to identify them. Constant monitoring is necessary to identify these red flags and minimize potential damage.
This blog will shed light on the red flags for AML/CFT. Without further ado, let us get to the point.
What do Red Flags for AML & CFT Mean?
AML/CFT red flags are an indication of potential financial perils. These red flags highlight fraudulent acts in a financial transaction. Sometimes, corrupt individuals or employees may carefully conduct frauds without leaving much evidence. Their money laundering methods constantly evolve to circumvent the legal risk.
Upon observing these red flags, relevant departments/managers must detect fraudulent activities and report them. After that, Money Laundering Reporting Officers (MLRO) will analyze these activities and divide them into various categories, depending on the intensity or the type of crime. Post this exercise, they will file a Suspicious Activity Report (SAR). They may report these fraudulent activities to the Financial Crimes Enforcement Network (FinCEN) if they see fit.
How do the investigating bodies know if the funds come from a legitimate source? Who are the potential beneficiaries of the fraud? Companies need these answers to find the underlying cause of the fraud. The red flag indicators help financial institutions implement a risk-based approach to meet customer due diligence requirements.
According to the FATF, there are a few obvious signs that indicate fraudulent activity:
- Converting virtual assets into fiat at notable losses.
- Utilization of dubious funds to conduct illegal activities.
- Engage virtual asset service providers located in jurisdictions with mediocre AML/CFT regulations.
- Conduct multiple high-volume transactions within a short duration.
Through the list of red flag indicators, investigators will get a fair idea of whether the funds come from legitimate sources. The indicators will also tell them if they are being used for dangerous activities like terrorism.
Since every financial crime is unique, all the red flags might not point in one direction. The investigating agencies may have to dig deeper to find the individuals or companies responsible for the fraud. However, the red flag indicators will help the investigators observe the behavior of potential fraudsters and gather evidence against them.
Customer – Red Flags
Red Flag 1
The customer is very hesitant to share information or tries to conceal information regarding the aspects below:
- What is the ultimate motive or the primary plan?
- Is there something more than what meets the eye?
- What are the sources of the funds?
- Who is the beneficiary?
- What is the reason for the suspicious transactions?
Red Flag 2
Customers indulge in such activities:
- Customers intentionally avoid personal or direct contact with investigators.
- Using an unidentified email address (unavailable on the web & the database).
- Refusal or delay in providing information essential for investigation (for example, data, account information, books of accounts, ex-employees).
- Providing fake, doctored, or invalid documents.
- Employees, ex-employees, associated partners or unknown persons involved in unlawful activities like terror funding and money laundering.
Red Flag 3
Red flags for parties arise in the following situations:
- When the concerned parties or their representatives operate from high-risk jurisdictions.
- The parties involved in a particular transaction are interconnected for inexplicable reasons.
- It may raise suspicions about their legitimacy, be it blood relations, employment, or institutional links between the parties.
- The person heading the operation is not a part of the transaction’s official parties, nor is he one of the representatives.
- A natural person serving as a director or representative is unprofessional in many ways, including unacceptable behavior.
Fund Sources – Red Flags
Red Flag 1
The financial transactions and derived income do not match the individual’s socio-economic profile.
Red Flag 2
Further investigation points out that the funds’ sources are illegitimate.
Red Flag 3
If the customer has funds in multiple foreign/local bank accounts or uses multiple bank accounts to conduct transactions.
Red Flag 4
The customer switches the payment mode or postpones the payment as the notarization date draws nearer for no apparent reason.
Red Flag 5
Short payback periods for absolutely no reason.
Red Flag 6
Customer pays off huge mortgage loans quickly, months/days before the due date.
Red Flag 7
The customer purchases expensive assets in cash and uses them as collateral against loans.
Red Flag 8
The customer forwards a request to alter the previously agreed agreement terms without providing a proper explanation.
Red Flag 9
The lender releases funds without following the protocol. Also, the lender does not belong to the listed credit institution.
Red Flag 10
The party acting as collateral (along with the funds) is based in a high-risk jurisdiction.
Red Flag 11
Massive financial contributions or successive deposits to the same account without any reason or evidence to justify its legitimacy.
Red Flag 12
If the company receives bank deposits from suspicious local or foreign companies.
Red Flag 13
If the business receives a ridiculously high amount of funds or capital from unverified sources.
Red Flag 14
If the price for the transfer of securities is too high or extremely low.
Red Flag 15
Recently incorporated entities that conduct large financial transactions involving vast sums of money without logical explanations or reasons.
Behavior – Red Flags
- The customer makes dodgy requests to conceal or not disclose the transaction details.
- When the customer insists on using an arbitrary in all transactions without proper explanation or reasoning while avoiding personal contact/interactions.
- The customer expresses unnecessary fears about the company’s AML policies and compliance with UAE authorities.
- When the customer involves the entities below in the transactions without justification/reason, especially those transactions that do not align with business goals.
- Cultural or leisure associations
- Non-profit organizations
- When the customer cancels the transaction abruptly upon being asked for evidence (identification, documentation, or other details).
Why Should you Choose NR Doshi and Partners?
Methods of money laundering have changed, and so should your business approach to dealing with them. It is crucial to stay informed about ongoing and upcoming AML regulations. With 36 years of experience in the industry, NR Doshi and Partners knows the ins and outs of AML and ways to keep your business transactions in check.
Even though the UAE has recently introduced AML regulations and laws, we have always ensured that our clients and employees conduct business while following fair and ethical principles. Criminals will always find loopholes in the system and use them to carry out unlawful activities like money laundering and tax evasion. Individuals can use these illegally acquired funds to support terrorism or other illegal activities.
If you are a business that wants to implement AML-related procedures in your organization while complying with the UAE government’s guidelines, we are here to help. Understand that not complying with the AML guidelines can result in heavy fines and legal problems. Furthermore, your employees and entities working on behalf of your organization can be held criminally liable.
With our AML services, you can close the loopholes and strengthen the framework & requirements while enabling effective communication between government bodies and regulatory agencies. We monitor the AML red flags below in transactions:
- Sanctioned fund sources
- Owners from high-risk jurisdictions
- Suspicious bank transactions
- Inaccuracies in the ID verification process
- Sudden withdrawals of excessive amounts of money
There are many other red flags, but it depends on case to case. On many occasions, there can be more than one red flag in a transaction. Our AML experts have a keen eye for detail, identifying problems and implementing solutions before it is too late.
What do NR Doshi & Partners do after Identifying the Red Flags?
Experts at NR Doshi and Partners take the following actions after identifying the red flags:
- Obtain and assess internal reports from departmental heads or managers regarding suspicious or unlawful transactions.
- Examine and analyze the reports in detail to determine whether the businesses are using the entity as a cover to aid terror funding or money laundering.
- Suppose we feel that a particular transaction threatens national security or may result in dangerous consequences. In that case, we will file a Suspicious Transaction Report with the Financial Intelligence Unit.
- Establish systematic reporting channels and ensure effective coordination for compliance-related issues.
- Set up powerful reporting channels to ensure your organization complies with the UAE’s AML/CFT regulations.
- Establish the in-house AML training programs for the staff members concerned.
We provide end-to-end AML services ranging from AML consulting to setting up an in-house AML department. Visit our AML services in UAE to understand our offerings in depth.
For more information on AML compliance and other services, contact NR Doshi & Partners at +971 4 352 8001 or email us at email@example.com.