10 Red Flags to Watch Out for in Transaction Screening

Businesses in the financial sector are subject to anti-money laundering regulations. An effective transaction screening process is one of the best ways to combat money laundering.

The Financial Action Task Force (FATF) has a list of recommendations to help governments enforce the necessary measures to prevent illicit activities. This includes implementing transaction screening and monitoring, which can help in early detection.

Learn the similarities and differences between transaction screening and transaction monitoring, what red flags to look for when screening, and why transaction screening should be a part of your anti-money laundering (AML) program.

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What is transaction screening?

Transaction screening is a process financial institutions and other regulated entities use to assess customer transactions for potential risks before approving the request. This can filter out suspicious individuals and entities with signs of possible involvement in financial crimes such as money laundering, terrorist financing, or sanctions violations.

This initiative contributes largely to keeping a risk-based approach in a business's AML program, ensuring transactions don't involve prohibited parties, activities, or jurisdictions that could expose the institution to legal, financial, or reputational risks.

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Transaction screening vs transaction monitoring

Transaction screening and transaction monitoring critical processes in the financial industry's efforts to combat financial crime. They each serve different functions and occur at different stages of the transaction lifecycle.

Here’s a breakdown of the differences in these processes.

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Transaction screening

Transaction screening reviews transactions, ensuring they do not involve prohibited or high-risk parties before approval. It also reviews every payment's compliance with all relevant regulations, particularly sanctions and AML/CTF laws.

Checking transaction details, such as the sender, recipient, and amount, is vital before processing any transaction. This is where reviewing customer data comes in. Like sanctions checks, transaction screening identifies whether individuals and entities are on global watchlists, politically exposed persons (PEP) lists, or are flagged as high-risk customers.

The process is conducted in real time or before payment is processed. Conducting transaction screening at this time allows for immediate blocking or holding of suspicious payments, ultimately preventing illicit activities from occurring.

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Vespia allows you to automate transaction screening in real-time.

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Key activities throughout the process

• Screening payment instructions (e.g., SWIFT messages), customer names, and transaction parties against sanctions lists.
• Screening for PEP involvement or connections to known criminals or terrorists.
• Ensuring compliance with regulations related to AML, CTF, and sanctions.

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Transaction monitoring

Transaction monitoring is broader and focuses on detecting unusual or suspicious transactions by continuously monitoring them over time. This process looks at patterns and trends in customer activity, both in real-time and retrospectively, that can potentially stretch over days, weeks, or months to identify potential financial crimes such as money laundering, fraud, or terrorist financing.

Most financial institutions use a transaction monitoring service to conduct real-time monitoring. This service can proactively detect anomalies or behaviors as they happen so that they can efficiently mitigate any risks.

For instance, Vespia's solution uses machine learning and artificial intelligence to aid in spotting patterns that do not match the expected patterns for a customer or account type.

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Key activities throughout the process

• Monitoring for unusual transaction volumes, frequency, or types.
• Detecting structuring, where large amounts are broken down into smaller transactions to avoid detection.
• Identifying transactions involving high-risk jurisdictions or industries.
• Generating alerts based on predefined rules or using machine learning models to detect anomalies.

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10 Red flags to check in transaction screening

Transaction screening is a critical process for financial institutions, as it can prevent illegal activities such as money laundering, terrorist financing, and sanctions violations.

Here are some key red flags to watch out for during transaction screening.

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1. Unusual transaction patterns

Many signs indicate unusual transaction patterns in a customer's account. These can take four forms. Data collected from transaction monitoring can be used to determine this when screening.

• Sudden spikes in transaction volumes
  The sudden spike in transaction volume is most often seen in relatively inactive accounts. These accounts can either be hacked for money laundering purposes or part of more significant financial crime operations.
• Frequent small transactions
  The most obvious sign of money laundering is conducting multiple small transactions to avoid detection thresholds and funnel money to one source. This is more commonly referred to as structuring or "smurfing."
• Transacting solely with round numbers
  Regularly occurring transactions in round amounts can suggest deliberate manipulation.
• Unjustified transfers
  Accounts that make unusually large transfers without a clear business rationale or connection between the parties are also significant causes for concern.

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2. Inconsistent customer behavior

Customer behavior can impact the way you detect anomalies in transaction screening. A customer's risk profile identified in the onboarding process and transaction history pulled from transaction monitoring can inform you of whether or not a payment is inconsistent with their determined behavior. They normally look like:

• Financial transactions that don’t align with their customer profile
  This can look different for every customer—for instance, a high volume of transactions for a customer with low financial activity may warrant further investigation.
• Changes in transaction patterns
  Changes in how a customer uses their account can be deemed unusual. One example is a customer who normally uses their account for local transactions and might suddenly start making international wire transfers with no clear rationale.

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3. High-risk jurisdictions

The FATF has a list of high-risk jurisdictions that can inform whether or not the transaction requires further investigation or heightened monitoring. This means international transactions involving countries with weak AML controls and transactions to or from offshore accounts should be flagged, especially where regulatory requirements may be more lax.

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4. Sanctioned

It's important to conduct the necessary sanctions screening to check for any attempts at evading sanctions. You'll want to look for two things:

• Matches with sanctions lists
  Any transaction involving individuals or entities on sanctions lists from the Office of Foreign Assets Control (OFAC), the UN, EU, and other sanctions lists should be flagged.
• Attempts to disguise sanctioned entities
  Criminals may try to slip through screening with slight name variations, intermediaries, or shell companies. It's essential to conduct thorough investigations with close matches.

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5. Shell companies or anonymous entities

Shell companies and anonymous entities are often exploited in money laundering schemes due to their ability to obscure the true ownership of assets and transactions, making it difficult for authorities to trace the origin of illicit funds. Here’s what to check:

• Purchases of assets through shell companies
  Once illicit funds have been layered and obscured through shell companies, they are often reintegrated into the legitimate economy by purchasing real estate, luxury goods, or businesses. These purchases further distance the funds from their illegal origin.
• Complex ownership structures
  These complex ownership structures are designed to obscure the ultimate beneficial owner (UBO). KYB verification plays a significant role in AML programs, as it can determine the legitimacy of companies and their UBOs and assess the risk the entity comes with, which you can weed out in transaction screening.

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6. Suspicious documentation

Documentation can be considered suspicious as it can create false narratives in many situations. For example, it can fake illicit funds' origin, ownership, or purpose. Some signs of documentation you should watch out for are:

• Incomplete or forged documents
  Document forgery can be used to conduct illegal activities. Documents missing essential information appear altered or inconsistent with other documentation.
• Unusual source of funds
  Documentation on any source of funds from unexpected or unverifiable sources can be a telltale sign of a fake document.

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7. Third-party involvement

Third-party involvement uses intermediary accounts to make it more difficult to trace back transactions to a single illegal source. Some signs include:

• Payments to innocent individuals
  Sometimes, third-party accounts belong to individuals or businesses unaware they are being used in a money laundering scheme. Launderers may ask friends, family members, or business associates to receive and transfer money, often under the guise of a legitimate purpose, such as a loan or payment for services.
• Inexplicable payments
  Multiple payments to different accounts with no clear business or familial relationship are often a telltale sign of suspicious or prohibited activity.

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8. Wire transfers

While wire transfers are the most common way to transact today, it's important to stay vigilant of the nature of payments to screen transactions effectively.

• Multiple wire transfers in large sums
  Transactions that come in successions of multiples are worth investigating, especially those involving high-risk jurisdictions or large sums without a clear business rationale.
• Transactions without a clear origin
  Large funds that arrive from unknown or unverified sources into an account with no proper documentation.

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9. TBML indicators

In trade-based money laundering (TBML), money launderers manipulate trade practices and transactions to integrate illicit funds into the legitimate financial system. Some ways to spot them include:

• Over or under-invoicing
  This can be found in intentionally inflated or understated values of goods or services in an invoice, which can be a flagged transaction. For example, a company that might export goods valued at $1 million might invoice them instead at $2 million, making the buyer purchase at an inflated price.
• Multiple payments for the same goods
  In multiple invoicing schemes, the same shipment of goods is invoiced numerous times to different financial institutions. Launderers can receive multiple payments for the same goods, allowing them to launder money by creating the appearance of legitimate transactions.

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10. High-risk customers

Money launderers exploit customer risk factors to enhance the effectiveness of their schemes or find vulnerabilities in financial institutions’ defenses. Some examples of high-risk customers that may need further investigation include:

• High-risk customer profiles
  PEPs, customers with criminal backgrounds, or entities involved in higher-risk industries should be monitored. Launderers may exploit PEPs to move illicit funds, especially if the PEP involves corruption or embezzlement.
• Customers with more cash transactions
  Individuals or businesses frequently dealing in cash are at higher risk for money laundering. Launderers can use such customers to deposit large sums of illicit cash without raising immediate suspicions, mainly if the business profile justifies high cash transactions, like casinos, nightclubs, or specific retail sectors.

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The benefits of the transaction screening process

Transaction screening is conducted primarily to protect financial institutions and the broader financial system from being used for illegal activities. Businesses can gain many benefits from implementing transaction screening into their AML program.