Financial institutions are under continuous pressure to prevent, detect, and report money laundering activities. A crucial phase in this process is client onboarding, where the identification of AML red flag indicators can prevent potential regulatory, financial, and reputational damage.
In Client On-Boarding and Red Flag Indicators, Elaine Jackson provides an overview of the key AML red flag indicators during the client onboarding stage and the appropriate actions professionals should take if these indicators arise.
Key AML Red Flag Indicators
Reluctance to Provide Information
One of the most significant red flags is a client's reluctance to provide basic information or Identification (ID) documents. If a client is evasive about disclosing essential details like beneficial ownership or the overall purpose of the company, it raises immediate concerns. Secrecy around beneficial owners and poor record-keeping habits are critical red flags, indicating the potential for illicit activities.
Frequent Changes in Advisors or Account Staff
Another red flag is the frequent change of advisors or account staff associated with the client. Such changes could suggest attempts to obscure activities or evade detection by leveraging different advisors' expertise. Similarly, a high turnover rate of key personnel such as financial controllers might indicate underlying issues that need further investigation.
Unusual Business Activities
Business operations that lack a clear commercial rationale or constantly sustain losses without a reasonable explanation should raise alarms. These may involve complex, high-volume transactions that do not align with the nature of the client’s business. For instance, start-ups usually experience losses initially, but persistent unprofitable operations coupled with suspicious transactions demand a deeper review.
High Levels of Cash Operations
A modern hallmark of suspicious activity is the engagement in high levels of cash operations. Given contemporary understanding of money laundering techniques, dealing extensively in cash is an outdated yet significant red flag. Large cash transactions without logical justification should be closely scrutinised.
Falsified Documentation
Submitting falsified documents is a clear indicator of deceitful intentions. Such actions undermine the transparency required for AML compliance and indicate the client's potential involvement in fraudulent activities. Additionally, the use of multiple bank accounts for transactions without valid reasons increases the complexity of financial activities, making them harder to track and analyse.
Link to High-Risk Countries
Clients with connections to high-risk third countries warrant enhanced due diligence. Such countries typically have lax AML regulations and higher incidences of corruption and financial crimes. Frequent travel to these regions or business associations therein call for a more rigorous vetting process.
Evasion of Face-to-Face Interaction
A client's unwillingness to meet face-to-face, preferring all interactions over email, can signal a desire to avoid scrutiny. When combined with using an intermediary without a legitimate reason, it may indicate efforts to obscure the true nature of the client's business and financial dealings.
Actions to Take When Red Flags are Present
Identifying red flag indicators is only the first step. The real challenge lies in how these indicators are managed. Here are the structured steps to take upon recognising red flags:
Perform Enhanced Due Diligence
When one or more red flags are identified, apply enhanced customer due diligence (CDD). This includes verifying the client's identity through multiple sources, understanding the nature and purpose of the business relationship, and continuously monitoring transactions. Enhanced due diligence becomes particularly crucial when dealing with clients linked to high-risk countries.
Conduct Thorough Reviews and Inquiries
At the onboarding stage, conduct a detailed review if a client shows reluctance in providing information or ID documents. Use professional judgment to determine whether the business activities align with the declared purpose. For instance, if a business with high cash operations exists, inquire about the nature of these operations to ensure they are justified and documented properly.
Internal Reporting and Suspicious Activity Reports
If there is knowledge or suspicion of money laundering, an internal suspicious activity report (SAR) should be made to the Money Laundering Reporting Officer (MLRO). The MLRO holds the responsibility of either seeking expert advice or escalating the matter to external authorities. The internal SAR will shield the firm from accusations and support the defense against money laundering applications.
Avoid "Tipping Off"
It is crucial not to "tip off" the client about the ongoing investigation. Tipping off can jeopardise the investigation and potentially alert the criminal elements involved, allowing them to cover their tracks. Maintain confidentiality and ensure that all inquiries are conducted discreetly.
Consult with Colleagues
Sometimes, individual bias or close familiarity with a client can impair judgment. In such cases, it is advisable to pass the case to another colleague for a fresh perspective. This collaborative approach can help identify issues that may have been overlooked due to personal biases or emotional attachments.
Make an Objective Decision
If the red flags are significant and cannot be resolved, make an objective decision about whether to accept the client. Remember, it is better to decline a potentially high-risk client than to face legal and reputational consequences later. If doubt prevails and the risk is too high, refuse the client and document the reasons for this decision to ensure a transparent record.
Client onboarding is a critical stage in the AML compliance process. Identifying and responding to red flag indicators early can mitigate significant risks. A vigilant approach, combined with structured actions such as enhanced due diligence, thorough inquiries, careful internal reporting, and objective decision-making, can safeguard financial institutions from becoming unwitting conduits for money laundering activities.
Maintaining professional scepticism and leveraging a robust AML framework ensures that financial institutions not only comply with regulations but also contribute to the global effort to combat financial crime. By acting decisively on red flags during client onboarding, institutions can protect their operations and uphold their integrity in the financial system.
For the full session, please click here. Tax Advisors, Solicitors, Auditors, Accountants, Art Dealers, High Value Goods Dealers are required to/have a legal obligation to complete Anti Money Laundering Training.
The training should be completed in specific core areas;
- The applicable Law
- Customer Due Diligence
- Internal and External SARs
- Red Flag Indicators
- How to deal with a MLTF situation
- How to avoid Tipping Off
- Relevant data protection requirements
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
