Spotting the Red-Flags in ML activities

What is AML?

Anti-Money Laundering refers to set of laws, regulations and procedures, that are designed to prevent people from disguising illegally obtained funds as legitimate income.

There are two parts to this definition
Part 1: illegal funds angle and
Part 2: Disguising them as white money and brining it back to the system.
Part 3: Legislations that establishes rules and organizations that monitors money flows.

How do they do it?

Money laundering is executed through three steps, which the AML systems are designed to track. The steps are

1. Placement: introducing the illegal money into the legitimate financial system
2. Layering: Making the source of fund difficult to track, by conducting complex, multi-layered transactions. (We call it Idiyappam Sikkal in Tamil)
3. Return: Lastly, returning the funds back to the launderer through legitimate economy.

Okay, what do you mean by illegal funds?

Illegal funds refer to funds that comes from activities that break the law. That’s why it’s called dirty money. Examples of illegal funds are as follows:

1. Placement: introducing the illegal money into the legitimate financial system
2. Layering: Making the source of fund difficult to track, by conducting complex, multi-layered transactions. (We call it Idiyappam Sikkal in Tamil)
3. Return: Lastly, returning the funds back to the launderer through legitimate economy.

Common AML Red Flags

Transaction patterns:

Certain transaction patterns can signal potential money laundering or suspicious activity. Those transactions include:

1. Breaking large sums into multiple small transactions and depositing into the account, within short period of time, to avoid detection.
2. When there are Large or frequent wire transfers (international) from high-risk countries.
3. Rapid movement of funds. meaning, money coming in and leaving quickly without clearly established business purpose.
4. Excessive reliance on cash deposits or withdrawals than it is usual for that type of business operations
5. The customer acts nervous or sounds very uncomfortable answering basic questions about the source of funds or purpose of the transaction

Customer behaviour:

Sometimes, it’s not just the transactions that raise suspicion. The way a customer behaves can also signal potential money laundering risks. Red flags that can be observed from Customer behavior are:

1. Customer’s reluctance to provide ID or documents, inspite of repeated KYC reminders or inconsistent personal information.
2. A criminal may threaten long-term client (who otherwise doesn’t refer) to vouch for a new, illegitimate client who would otherwise KYC checks.
3. Referrer (customer or any other person) might bring in multiple, separate, small-value clients ( as ‘dummies/benamis’ ) to stay under reporting thresholds.
4. An existing client frequently refers new customers, yet they have no clear, legitimate business reason to be doing so (e.g., they are not a professional broker)

Complex structures:

The organizational setup of a business, including who controls it and how ownership is arranged can hint warning signs of money laundering. Some of them are:

1. Hidden ownership through shell companies.
2. Frequent changes in company directors or beneficiaries
3. Transaction’s source is from entities that are registered in tax heaven countries like tongs, Seychelles etc
4. Appointing unqualified or under qualified individuals who lack expertise to positions of control, as tactic to disguise the true owner.