The banks play a crucial role in deterring money laundering activities. Criminals try to launder illegally obtained money through regular banking transactions. Banks shall be on the lookout for possible signs of such illegal money movements. Bank employees who spot such red flags bring the incident to the attention of authorities through the filing of a suspicious activity report, which becomes the basis for the regulators’ probe of possibly unlawful transactions.
This article reviews nine common red flags that may cause a bank to file a Suspicious Activity Report as part of anti-money laundering in banking. These red flags could indicate that some transactions are designed to conceal the origin of money or do not make commercial sense.
Let’s go through each of the nine red flags that banks are trained to look for so they can report on it for further review.
Large or Complex Transactions
Large financial transactions of a customer, much above their standard limits in banking, are often viewed with suspicion as part of the Anti-Money Laundering process by the bank. These significant or complicated transactions are scrutinized to see whether they can be used to launder money earned illegally. Under the AML rules in banking, any transaction above a threshold limit—$10,000 in the US under the Bank Secrecy Act and varying limits elsewhere—will call for unique verification and documentation to prove that it has emanated from a lawful source only.
Structuring Transactions to Avoid Reporting
Some customers try to dodge AML checks at the bank by breaking down a significant transaction into many smaller transactions under the set limits. This process is known as structuring and goes against the law. According to the 2023 report by the FATF, banks are increasingly using advanced analytics to identify patterns of transactions that may not be typical for a customer. Any structuring pattern is taken very seriously as part of AML in banking.
Bonus: Through proper anti-money laundering policies and sound internal controls, financial institutions can best monitor transactions and protect their institutions from being used as a vehicle for money laundering practices involving criminal activity.
Geographical Red Flags
Banks also monitor transactions that originate or are received from specific countries and regions more closely in adherence to their AML procedures. This is because some countries and regions have legal or terrorism risk factors. Huge funds moving to and from such “red flag” places would require due solid diligence before processing to ensure that the money has a clear source and use per the bank’s anti-money laundering processes in place.
Unexplained changes in transactional behaviour
In AML processes in banking, sudden changes in transaction patterns by a customer without proper reason may raise an alarm. An example may be deposits by far much more than usual or tendering money for overseas payments, which has never been the case. Under AML Banking Compliance, banks ought to investigate these unexplained changes to ascertain whether the funds come from suspicious sources such as money laundering.
Transactions with Countries that have Strategic Deficiencies in their AML Systems
To prevent Money Laundering in Banking, banks need higher monitoring of transactions linked to countries known for weak anti-money laundering laws and implementation. If a customer sends or receives money frequently from such countries that international watchdogs flag, it may indicate an attempt at obscuring illegal proceeds. According to guidelines, additional KYC documentation and transaction rationale are required to move funds to jurisdictions with weak AML systems and monitoring.
Transactions That Apparently Serve No Business Purpose
They are also watching for transactions that seem unrelated to any legitimate need of the customer for its business, service, or investment. The customers must be able to show credible evidence and documentation regarding the legitimate purpose to verify that their money does not involve the business source or intended use associated with probable money laundering. The European Banking Authority said measures of suspicious transaction alerts have increased 15% year over year in 2023, reflecting tighter regulatory measures.
Personal or Business Name Differences
Following the Anti-Money Laundering provisions, banks must identify and ensure that the declared identity of a client in his personal and commercial bank accounts is liable to match. Any mismatches in name details among personal and commercial accounts can become a red flag indicator under the Money Laundering check in Banking Compliance. Banks must have strict AML Compliance and check for such name discrepancies to be validated with proper documentation; otherwise, this could indicate attempts to conceal illegal sources and flows of funds.
Avoiding Thresholds
Under AML regulation, banks are required to report cash or other transactions above a specific value to financial watchdogs. Sometimes, customers try to break their transactions into transactions that are less than the reporting limits to avoid additional scrutiny. As a result of anti-money laundering, banks monitor for such intentional splitting patterns of transactions to bypass reporting rules.
The unconfirmed identity of the customer
Proper verification of customer identities is a crucial foundation of AML Compliance. However, where there are gaps or inconsistencies in identity proofs that a client has submitted, this needs to be a red flag for alert banks. Inadequately establishing who is behind an account can make it easy for criminals to use the banking system for dirty money flows secretly.
