Recognising the Red Flags of Money Laundering
From 2001: Peter Lilley examined the dirty money problem and highlighted some of the most common red flags which should denote suspicion – and when found, will almost certainly require further investigation.
In a recent address to securities industry executives, Lori A. Richards, Director of the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations, outlined the SEC’s plans for a new examination initiative designed to focus attention on money laundering compliance by broker-dealers.
This is one of many recent signs that the enormity of the world’s money laundering problem is causing increased concern among a growing number of US and foreign regulatory bodies. But while bureaucrats may be stepping up efforts to force financial institutions to comply with anti-money laundering laws, it is in the interest of those institutions to take their own actions to prevent money laundering. Failing to do so greatly increases the risk of costly compliance problems as well as the chance of substantial financial loss.
Triggers for Suspicion
As money laundering has been around for literally centuries, law enforcement and international regulatory agencies have had plenty of time to study the patterns and techniques of the practitioners of this illegal activity. Over the years, a list of red flags of possible money laundering activity has emerged. Here are some of the most common triggers of suspicions, which I hope will at the very least raise alarm, and then encourage subsequent action, which could encompass further investigations or the reporting of such illegal activities to the relevant authorities:
Red Flag Scenario 1: A customer fails to provide phone or fax numbers or the numbers provided are maintained by third-party office services.
Red Flag Scenario 2: A prospective customer presents a diplomatic passport from an obscure country – particularly one in Africa, where such passports are easily obtained for modest amounts of money. The passport may be genuine…but the holder may be a criminal.
Red Flag Scenario 3: A customer presents a photocopy of his or her passport when opening a new account. Tip: Train employees to refuse to accept photocopies of passports or other identification documents which are presented to open new accounts. Today’s photocopying technology makes it all too easy to apply a new photo to an original document so that it appears genuine when copied.
Red Flag Scenario 4: Relying on third-party due diligence. If a client is referred to you by a third-party organisation, be sure that the due diligence documentation provided by the other organisation relates directly to the prospective client that you are looking to do business with. Solely relying on another organisations’ due diligence will prove to be plain foolish if you rely on it to proceed with a deal which ultimately unravels.
Important: Thorough due diligence is becoming an essential part of establishing new business relationships in more and more industries. Experience has proved that without performing detailed research to verify documentation and identification, a company is taking a significant risk.
Red Flag Scenario 5: Being asked to do business with shell companies. A prospective new client may present you with the legal documents of a seemingly legitimate company, along with identification for nominee directors. If you suspect – or know for sure – that these individuals are “fronts” for the actual account beneficiary, walk away
Red Flag Scenario 6: Be suspicious of prospective clients that maintain a financial performance which is noticeably inconsistent with that of other businesses of comparable size in the same industry
Red Flag Scenario 7: A group of foreign nationals visits your organisation to open multiple accounts. It may mean that they are doing the same at other financial institutions in your city – thereby setting up the banking framework for a laundering operation. You should also beware of instances where multiple accounts are being set up using variations of the same name.
Red Flag Scenario 8: Frequent inconsistencies in an account’s activities. If a business that claims to operate only on a regional or national level has a large number of international cash transfers, you may need to investigate. Similar incongruities should be scrutinized as well.
Red Flag Scenario 9: New account applications from customers from suspect jurisdictions. Countries such as Vanuatu, Antigua, Nauru and the Philippines are major centres for money laundering activity, due to lax banking regulations, the presence of organised crime, drug trafficking, etc. Prospective customers from these jurisdictions should be scrutinized with extra care. Tip: For a full list of suspect jurisdictions, visit the website of the Financial Action Task Force (FATF) at www.oecd.org/fatf. The FATF is a 29-country organisation based in Paris that monitors and promotes policies to control money laundering.
Red Flag Scenario 10: Numerous cash transactions for amounts just under the legal threshold for reporting. For example, in the US, any bank transactions of $10,000 or more must be reported by the financial institution. Other countries have similar reporting requirements. Making transactions for amounts just under the threshold limit is one of the most widely known laundering tactics, but it continues to be extensively used by money launderers worldwide. In addition, large numbers of cash transfers to and/or from offshore banks or companies should be subject to scrutiny, as should frequent or unusually large cash receipts or payments which have been made by a customer whose business is normally conducted primarily with cheques or other non-cash instruments.
Fine Tuning the Process
As a cautionary advisor, please do not rely exclusively on the above list of red flags. While they are common in many cases, each business has its own unique operating procedures. One or more of your company’s particular procedures may make you vulnerable to money laundering via means that can’t be detected by simply using the above list.
Ideally, you should retain an experienced money laundering expert to assess your organisation’s unique vulnerabilities and tailor the list of red flags to your specific operation.
If Your Suspicions do Prove Warranted…
There should be a trained senior person in your organisation with full responsibility for money laundering reporting and control. This individual should have the authority to take action on cases where money laundering activity is suspected.
You must then have a policy in place for involving the proper law enforcement and/or regulatory officials at the correct time.
Author: Peter Lilley
Original publication date: August 2001
This extract is from an article published in the August 2001 edition of “White-Collar Crime Fighter.” It has been provided for information purposes and should be read in the context of its original publication date.