In the world of finance and accounting, anti-money laundering (AML) procedures are critical to ensuring the legitimacy of clients and their transactions. Money laundering schemes can damage financial institutions' reputations, lead to legal consequences, and even destabilise economies. To mitigate these risks, professionals involved in accounting, bookkeeping, and financial services must be vigilant, identifying red flag indicators and suspicious behaviours that may signal illegal activities.

In AML - Red Flag Indicators and Suspicious Transaction Reporting, Elaine Jackson discusses the common red flags in AML, their significance, and the role professionals play in ensuring that potentially problematic clients are identified and reported early.

Red Flag Indicators to Watch for in AML

The process of identifying potential money laundering activities often begins with spotting irregularities, inconsistencies, and behaviours that don't add up. These red flags are important markers that something may be amiss, whether it’s an attempt to obscure financial details, hide sources of funds, or avoid scrutiny. Some of the key red flags outlined in the attached discussion include:

1. Reluctance to Provide Information

A common red flag is when clients are reluctant or delayed in providing necessary information, including identification (ID) or documentation related to beneficial ownership. If a client is hesitant to disclose such details, it could indicate that they are hiding something, or perhaps even fabricating the information they eventually do provide. This reluctance, whether intentional or due to disorganisation, puts the professional on alert for further investigation​.

2. Secrecy and Evasion

Secrecy around ownership structures or evasion when asked about the broader business picture is another strong indicator. Clients who deliberately avoid giving clear answers about their business goals, operations, or stakeholders might be involved in illicit activities like money laundering. For accountants and bookkeepers, understanding the full context of the company is crucial, and ambiguity could signal an intent to conceal illegal transactions.

3. Poor Record Keeping

Clients with disorganised or incomplete records present both practical and AML risks. Poor record keeping can indicate either negligence or a more calculated attempt to obscure the audit trail of transactions. While some clients may simply be disorganised, consistent issues with documentation and financial records can suggest a potential attempt to hide illicit activities​.

4. Unusual Transactions

Transactions that deviate from a client's normal business activities should be thoroughly examined. These may include unusually large sums, frequent use of suspense accounts, and transactions that lack clear business rationale. Suspense accounts in particular, which are temporary accounts used when a transaction cannot immediately be classified, are often used to hide the origins or purposes of funds​.

5. Frequent Changes in Advisors

Clients who frequently change accountants, bookkeepers, or other advisors may be attempting to evade scrutiny. This behaviour raises questions about why the client keeps switching, and whether previous advisors have resigned due to discovering suspicious activities. Additionally, a high turnover of advisors can suggest a history of poor compliance with regulations​.

6. Excessive Use of Cash

In today’s digital age, the use of cash has significantly decreased, especially in developed economies. Thus, businesses that operate primarily in cash, especially those that should logically use electronic payments, raise serious red flags. High volumes of cash transactions can be used to conceal money laundering activities, making it harder to trace the origins of funds​.

Suspicious Behaviours That Require Attention

In addition to these red flag indicators, there are specific behaviours that suggest a higher risk of money laundering. Professionals need to be particularly wary of these actions, as they often precede illegal activity or reflect attempts to cover it up.

1. Anger or Silence When Asked for Information

Clients who react with anger, defensiveness, or extended silence when asked for routine financial information should be carefully monitored. This resistance could indicate an attempt to hide something, whether it’s a financial irregularity or involvement in illegal transactions​.

2. Unwillingness to Follow Recommendations

If a client continually refuses to implement suggestions or recommendations to improve transparency and efficiency in their record keeping, it might be because they are trying to keep certain activities hidden. It raises suspicion when clients avoid actions that would make their business practices more transparent​.

3. Frequent Travel to High-Risk Jurisdictions

Regular travel to or business dealings in countries known for weak AML regulations or high levels of corruption could be a sign that the client is involved in money laundering. High-risk jurisdictions provide fertile ground for illicit financial activities, making it critical to assess any cross-border dealings carefully​.

4. Avoidance of Face-to-Face Meetings

Clients who consistently avoid meeting face-to-face or insist on conducting all business through digital channels may be trying to avoid deeper scrutiny of their identity and activities. In many cases, in-person interactions are an important opportunity to verify the legitimacy of a client and ensure that the information provided matches their actual operations​.

Practical Considerations in Managing AML Risks

While identifying red flags is crucial in AML, professionals should also consider the broader context of these warning signs. It’s important to remember that not all red flags indicate illegal activity—some may be the result of disorganisation or poor management. However, the accumulation of multiple red flags should raise concerns and prompt further investigation.

1. Judgment and Professional Skepticism

When reviewing a client’s financials or business operations, bookkeepers and accountants must exercise professional skepticism. This means taking the time to question irregularities and inconsistencies and not simply taking things at face value. Even if an initial explanation seems plausible, professionals must dig deeper when red flags continue to appear​.

2. Onboarding and Client Selection

The onboarding process is critical for identifying high-risk clients. It allows professionals to assess whether they want to take on a client based on the complexity of their records, their willingness to provide information, and their past relationships with other advisors. Importantly, it’s also a chance to spot red flags before any significant work has been done, saving time and reducing risks​.

3. AML as a Practice Management Tool

Many accountants and bookkeepers may view AML requirements as a burden. However, AML procedures can also be used to improve practice management. By identifying high-risk clients early, professionals can decide whether to adjust their fees to reflect the increased risk or avoid taking on these clients altogether. Additionally, robust AML practices can help firms operate more efficiently by streamlining documentation and compliance procedures​.

Red flag indicators and suspicious behaviours in AML are essential tools in the fight against money laundering. By staying vigilant and employing professional skepticism, bookkeepers, accountants, and other financial professionals can play a crucial role in preventing illicit financial activities. Not only does this help maintain the integrity of financial systems, but it also protects firms from potential legal and reputational damage.

Being proactive about identifying and addressing red flags ensures that professionals remain compliant with AML regulations while safeguarding their own business interests.

For the full session, please click here. In this course Elaine Jackson covers the following topics;

• Red Flag Indicators
• The Role of the MLRO
• Suspicious Activity/Transaction Reporting

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. The information at the time of publishing was accurate and could be subject to final changes.