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Red Flag Overview

This document contains a collection of red flag indicators from a FATF report to help legal professionals identify potential money laundering or terrorist financing activities. Some red flags include clients being overly secretive about details of transactions or parties, using unusual payment methods like large cash amounts, multiple bank accounts with no clear purpose, or rapidly repaying loans. The source of funds, prices of securities transferred, and choice of using a distant or inexperienced lawyer can also raise red flags. Where multiple indicators are present, further scrutiny of potential illegal activities is warranted. However, clients may still provide legitimate explanations for behaviors.

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84 views

Red Flag Overview

This document contains a collection of red flag indicators from a FATF report to help legal professionals identify potential money laundering or terrorist financing activities. Some red flags include clients being overly secretive about details of transactions or parties, using unusual payment methods like large cash amounts, multiple bank accounts with no clear purpose, or rapidly repaying loans. The source of funds, prices of securities transferred, and choice of using a distant or inexperienced lawyer can also raise red flags. Where multiple indicators are present, further scrutiny of potential illegal activities is warranted. However, clients may still provide legitimate explanations for behaviors.

Uploaded by

9840665940
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Red Flag Indicators

The methods and techniques used by criminals to launder money may also be used
by clients with legitimate means for legitimate purposes.

This paper contains a collection of red flag indicators published in the FATF report
Money Laundering and Terrorist Financing - Vulnerabilities of Legal Professionals in
June 2013.

These red flag indicators should assist you in applying a risk-based approach to your
requirements of knowing who your client and the beneficial owners are,
understanding the nature and the purpose of the business relationship, and
understanding the source of funds being used in a retainer.

Where there are a number of red flag indicators, it is more likely that you should
have a suspicion that Money Laundering (ML) or Terrorist Financing (TF) is
occurring.

However, the mere presence of a red flag indicator is not necessarily a basis for a
suspicion of ML or TF, as a client may be able to provide a legitimate explanation.

RED FLAGS ABOUT THE CLIENT

Red flag 1: The client is overly secret or evasive about:

• who the client is;


• who the beneficial owner is;
• where the money is coming from;
• why they are doing this transaction this way;
• what the big picture is.

Red flag 2: The client:

• is using an agent or intermediary without good reason;


• is actively avoiding personal contact without good reason;
• is reluctant to provide or refuses to provide information, data and
documents usually required in order to enable the transaction’s execution;
• holds or has previously held a public position (political or high-level
professional appointment) or has professional or family ties to such an
individual and is engaged in unusual private business given the frequency
or characteristics involved;
• provides false or counterfeited documentation;

• is a business entity which cannot be found on the internet and/or uses an


email address with an unusual domain part such as Hotmail, Gmail, Yahoo
etc., especially if the client is otherwise secretive or avoids direct contact;
• is known to have convictions for acquisitive crime, known to be currently
under investigation for acquisitive crime or have known connections with
criminals;
• is or is related to or is a known associate of a person listed as being
involved or suspected of involvement with terrorist or terrorist financing
related activities;
• shows an unusual familiarity with respect to the ordinary standards
provided for by the law in the matter of satisfactory customer identification,
data entries and suspicious transaction reports – that is – asks repeated
questions on the procedures for applying the ordinary standards.

Red flag 3: The parties

• The parties or their representatives (and, where applicable, the real


owners or intermediary companies in the chain of ownership of legal
entities), are native to, resident in or incorporated in a high-risk country.
• The parties to the transaction are connected without an apparent business
reason.
• The ties between the parties of a family, employment, corporate or any
other nature generate doubts as to the real nature or reason for the
transaction.
• There are multiple appearances of the same parties in transactions over a
short period of time.
• The age of the executing parties is unusual for the transaction, especially if
they are under legal age, or the executing parties are incapacitated, and
there is no logical explanation for their involvement.
• There are attempts to disguise the real owner or parties to the transaction.
• The person actually directing the operation is not one of the formal parties
to the transaction or their representative.
• The natural person acting as a director or representative does not appear
a suitable representative.
RED FLAGS IN THE SOURCE OF FUNDS

Red flag 4: The transaction involves a disproportional amount of private funding,


bearer cheques or cash, especially if it is inconsistent with the socio-economic profile
of the individual or the company’s economic profile.

Red flag 5: The client or third party is contributing a significant sum in cash as
collateral provided by the borrower/debtor rather than simply using those funds
directly, without logical explanation.

Red flag 6: The source of funds is unusual

• Third party funding either for the transaction or for fees/taxes involved with
no apparent connection or legitimate explanation.
• Funds received from or sent to a foreign country when there is no
apparent connection between the country and the client.
• Funds received from or sent to high-risk countries.

Red flag 7: The client is using multiple bank accounts or foreign accounts without
good reason.

Red flag 8: Private expenditure is funded by a company, business or government.

Red flag 9: Selecting the method of payment has been deferred to a date very close
to the time of notarisation, in a jurisdiction where the method of payment is usually
included in the contract, particularly if no guarantee securing the payment is
established, without a logical explanation.

Red flag 10: An unusually short repayment period has been set without logical
explanation.

Red flag 11: Mortgages are repeatedly repaid significantly prior to the initially agreed
maturity date, with no logical explanation.

Red flag 12: The asset is purchased with cash and then rapidly used as collateral
for a loan.

Red flag 13: There is a request to change the payment procedures previously
agreed upon without logical explanation, especially when payment instruments are
suggested which are not appropriate for the common practice used for the ordered
transaction.
Red flag 14: Finance is provided by a lender, either a natural or legal person, other
than a credit institution, with no logical explanation or economic justification.

Red flag 15: The collateral being provided for the transaction is currently located in a
high-risk country.

Red flag 16: There has been a significant increase in capital for a recently
incorporated company or successive contributions over a short period of time to the
same company, with no logical explanation.

Red flag 17: There has been an increase in capital from a foreign country, which
either has no relationship to the company or is high risk.

Red flag 18: The company receives an injection of capital or assets in kind which is
notably high in comparison with the business, size or market value of the company
performing, with no logical explanation.

Red flag 19: There is an excessively high or low price attached to the securities
transferred, with regard to any circumstance indicating such an excess (e.g. volume
of revenue, trade or business, premises, size, knowledge of declaration of
systematic losses or gains) or with regard to the sum declared in another operation.

Red flag 20: Large financial transactions, especially if requested by recently created
companies, where these transactions are not justified by the corporate purpose, the
activity of the client or the possible group of companies to which it belongs or other
justifiable reasons.

RED FLAGS IN THE CHOICE OF LAWYER

Red flag 21: Instruction of a legal professional at a distance from the client or
transaction without legitimate or economic reason.

Red flag 22: Instruction of a legal professional without experience in a particular


specialty or without experience in providing services in complicated or especially
large transactions.

Red flag 23: The client is prepared to pay substantially higher fees than usual,
without legitimate reason.

Red flag 24: The client has changed advisor a number of times in a short space of
time or engaged multiple legal advisors without legitimate reason.

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