Critical Signs of Money Laundering and How to Manage Them

When you run a financial institution or a regulated business, it's important to stay compliant with money laundering laws and regulations, as they help manage financial crime.

As technology progresses, it's become increasingly important for businesses to manage money laundering risks. Financial crime can also evolve and adapt to emerging tech like machine learning and AI. The United Nations, for instance, shared that to date, $2 trillion is laundered every year. Even with all the compliance laws in place, putting the effort into monitoring and detecting transactions for indications of money laundering can add a valuable layer of protection for financial institutions.

Discover what signs of illicit transactions to look for when protecting your business and how to mitigate these risks.

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What is money laundering?

Money laundering is the act of concealing illegally obtained funds. Criminals who launder money sneak "dirty money" into the financial system in many ways. Over the years, trillions have been lost annually. To mitigate this, financial institutions are subject to adhering to anti-money laundering (AML) laws and regulations set by regulators like the Financial Crimes Enforcement Network (FinCEN).

Staying compliant may, in fact, keep financial institutions safe against money laundering. The Financial Action Task Force (FATF) stated that financial systems with weaker regulatory frameworks are found to be ideal targets for illicit activities.

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8 Signs of money laundering

Criminals' methods of conducting money laundering schemes can vary widely. Therefore, it is important to monitor customers closely, checking for suspicious transactions that may suggest money laundering and illicit activities are at play.

Knowing what indicators to look for can streamline the process. Let's examine some of the most common telltale signs that financial institutions and businesses should watch out for to combat money laundering.

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1. Unusual financial activity

Every new customer is subject to the necessary compliance measures, such as customer due diligence (CDD) and, in some instances, enhanced due diligence (EDD). These procedures determine the baseline of what normal transactions look like for each customer. This data can be used for transaction monitoring processes, which can ultimately help you identify money laundering before it's too late.

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Some of the most common indicators of unusual financial activity that often need further investigation include:

• Large cash transactions, transfers, and withdrawals from customers who aren't known to make such transactions
• Transactions that seem structured to avoid reporting requirements, which normally appear as multiple small deposits
• Frequent transfers to and from multiple accounts in different geographic locations with no clear purpose
• Dormant accounts suddenly conducting more transactions
• Spikes in transacting with cash-based businesses

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2. Inconsistent business practices

Individual and business customers who have transactions that are listed as professional transactions but appear to have suspicious sources and intents could very well be "dirty money" hidden in plain sight. Some examples of transactions that should be flagged for further investigation include:

• A sudden increase in a customer's wealth that does not align with their declared income or standard business activities
• High-value transactions for products or services that don't seem relevant to the customer or business

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3. Third party involvement

Money launderers may attempt to use third parties to mask the true source of illicit activities. This sign is particularly relevant for ultimate beneficial owners (UBOs) and politically exposed persons (PEPs), making it important to understand the structuring of businesses. This can look like:

• Business transactions or funding from third parties who aren't legally connected to the company
• Manipulated invoices that under-declare or overstate the value of a purchase
• Using shell companies that are used as a front for obscuring the origin of funds

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4. Using digital assets

Owning and transacting with digital assets can be tricky due to the lack of processes for anti-money laundering procedures and other financial crime risks. Fortunately, a good KYB verification tool for Crypto should be able to spot any anomalies and red flags. Some factors to watch out for include the following:

• Immediately emptying funds from crypto wallets
• Frequent small digital conversions just below the AML reporting threshold
• Incrementally converting virtual assets into fiat deposits

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5. International transactions

Global AML laws consider transactions with entities and individuals from high-risk jurisdictions to be a red flag for money laundering. Without a clearly stated purpose, money laundering investigations can be launched. Some signs to watch out for include:

• Financial transactions with offshore accounts in high-risk countries where AML compliance may be weak
• Cross-border transfers in large amounts for no apparent business intention

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6. Refusing to provide clear information

The FATF considers the refusal to provide required information for document verification, AML screening, and other purposes suspicious. In effect, purposely not providing personal information and other supporting documents throughout the CDD and KYB process should be flagged as suspicious customer behavior, requiring further investigation.

Additionally, there are active ways that customers can get around providing legitimate information. This includes:

• Using complex business structures to hide the identity of UBOs
• Suspicious proof of identification that may be forged documents

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7. Payment cycle anomalies

Similar to unusual transactions, other suspicious activity that suggests the money laundering process is in place are anomalies that include:

• Customers making overpayments but suddenly requesting refunds through other platforms
• Purchasing high-value assets such as jewelry, real estate, and luxury cars with no clear source of funds
• Constantly moving funds across accounts with no clear business intent

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8. Opening multiple accounts

Customers opening multiple accounts, whether it's with all the same or different information, is another key indicator of money laundering. The necessary verification methods must be conducted before any more suspicious activities occur after moving forward with the business relationship.

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How to mitigate money laundering risks

While AML laws and regulations are updated frequently, having the right processes in place can help businesses mitigate money laundering risks. By implementing a robust framework of policies and procedures, detecting and reporting financial crime can be done successfully as compliance requirements evolve.

Some essential procedures include the following.

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Implement thorough KYB processes

Having the right Know Your Business (KYB) processes in place can help you identify UBOs and determine the right course of action for monitoring your business customers.

A thorough KYB approach should conduct the necessary risk assessments that determine high-risk customers by checking robust databases such as sanctions lists and global watchlists.

Financial institutions can implement a KYB tool that conducts all the necessary steps to ensure every business relationship follows due processes. Vespia's KYB solution, for instance, collects and verifies data, which is then used to inform automated risk scoring.

Transaction monitoring

Based on KYB verification findings and a customer's risk level, financial institutions need efficient transaction monitoring systems to prevent any money laundering risk posed by individuals and entities.

The best solution to mitigating these risks is to implement software that monitors and analyzes transactions for suspicious activities. When choosing a tool, finding one that operates with advanced analytics and AI can enhance accuracy and decrease the chance of false positives.

The right tool will automate AML checks and notify you of the most important business changes, indicators of money laundering or terrorist financing, and other signs of financial crime that need further investigation. It should also be able to support blockchain and cryptocurrency monitoring, considering the amount of money laundering risk in digital assets. Vespia's solution enables businesses to check and monitor customers' cryptocurrency transactions with support for all major blockchains.

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Reporting and record keeping

All financial institutions are subject to filing a Suspicious Activity Report (SAR) once significant money laundering signs are detected in the financial system.

Using efficient AML compliance software lets you track all your customer's transactions and compliance efforts. Vespia's solution covers full reports, which can be accessed as PDF files. This can prove valuable when preparing for periodical AML audits.

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Global standards and best practices

Keeping close watch of global standards for anti-money laundering and combating the financing of terrorism (CFT) is a must, as they can shape how you build your AML compliance strategies.

The FATF has recommendations that set the gold standard for responding to money laundering threats. When financial institutions cooperate to combat cross-border money laundering activities, they strengthen international efforts to prevent criminals from laundering funds.

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Managing money laundering schemes

Money laundering continues to pose a significant threat to financial institutions and businesses worldwide. Recognizing and staying vigilant of the most critical signs of money laundering can better safeguard your business against criminal activity, unwanted penalties, and other risks.

Vespia understands the need to stay compliant amidst all the money laundering indicators. That's why our AML Compliance Solution brings the best of detecting and managing money laundering risks. Book a demo today and discover how we can help your business.

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