Identifying red flags and atypical customer behavior accompanies the entire customer life cycle and virtually every touchpoint. It s specific to a given organization and its products and services.
However, there are some general red flags and atypical customer behavior to look out for, which might indicate financial crimes, including money laundering and terrorist financing.
Identifying Atypical Customer Behavior
Let’s look at your customer’s human behavior first.
From the first point of contact throughout the ongoing customer relationship, your customer will employ a certain human customer behavior. What might give you reasons to be suspicious is if the customer frequently changes your customer-facing representative, sometimes in a short space of time without a legitimate reason. He could do this to find the weakest part of the chain or a customer representative pressured or influenced.
What is also atypical customer behavior if the client chooses an adviser geographically distant from himself or the transaction location, and there is no legitimate reason for choosing that adviser over someone closer. The customer may also ask for short-cuts that are unexplained or at an unusual speed. It goes especially for determining and verifying his identity or background information. The customer might pressure the customer representative not to look too closely at the ID card. Suppose the customer attempts to disguise the real owner of the business or the parties to the business dealing. In that case, this is almost always something to be sensitive about and atypical customer behavior.
The next thing you want to consider is the source of funds. Sometimes the source of finance doesn’t make sense and should raise questions in your mind about the basis of the transaction. Also, if you are an exporter of goods and have a client from a country that is home to big drug cartels, ou want to keep things like the black market peso exchange in mind. Generally speaking, you want to look out for large amounts of cash or a significant amount of private funding from an individual running a cash-intensive business. Additionally, it is advisable to be sensitive to a disproportionate amount of private funding or cash inconsistent with the individuals involved’ socio-economic profile.
Additionally, it would always be best to consider how a business is structured. Watch out if the ownership structure is overly complicated when there is no legitimate or economic reason. It also applies to business transactions involving countries with a high risk of money laundering or if false or suspicious documents are used to back up dealings. In this regard, your mind should connect to offshore shell companies, fictitious invoices, bogus loans, and the like.
Identifying Transaction Red Flags
Let’s look at transaction monitoring a little bit closer concerning potential red flags and atypical customer behavior. We determined that you must ensure your monitoring system alerts you to unusual, large, or complex transactions or patterns of transactions. It can be by your employees being aware and vigilant, or you can use automated systems.
However, what makes a transaction large or unusual will depend on your business or organization’s size and the services you offer. It will also depend on the types of customers and transaction activities you normally deal with.
As a general rule of thumb, transaction monitoring should alert you in the following five cases, which can be considered red flags for potential money laundering:
- The first red flag is if a customer makes transactions that are much larger or more frequent than usual.
- The second red flag is if a customer’s account balances or account activity are much higher or more frequent than usual.
- The third red flags are if transactions are sent to or come from a high-risk country or region.
- The fourth red flag is if payments are sent to or come from a person or organization on a sanctions list.
- And lastly, your system should alert if other unexpected account activity from a customer may indicate money laundering or terrorism financing.
Many other customer transactions, activities, and types of behavior raise a red flag about the possibility your business or organization is being exploited for money laundering purposes. You should always be aware of this general possibility and apply common sense to what is going on in your organization.
Recognizing and acting on red flags and atypical customer behavior indicators that a transaction may be suspicious is critical. One of the following scenarios may warrant further investigation of your client. Combined red flag indicators, without reasonable explanation, are more likely to raise suspicions.
Unexpected changes in a customer’s transaction pattern may warrant a closer look to determine whether an illegal activity is possible. Employees should investigate for suspicious activity if these changes are unusual due to the type of business or appear out of scope for the business type. Simply using an unusually large number of large denomination bills in cash transactions that deviates from normal practice may be significant.
These red flags and atypical customer behavior are easier for employees to spot during a customer’s due diligence research. Others, such as cash transaction patterns, may be built into digital controls that can be configured to notify employees.
In either case, employees and managers must be trained to identify potential risks and examine them with a magnifying glass. Submitting a Suspicious Activity Report or SAR is not a legal action against a customer; it is simply atypical customer behavior that assists the financial institution in remaining in compliance.