Red Flags And Atypical Customer Behavior: Anti Money Laundering Awareness

Identifying red flags and atypical customer behavior accompanies the entire customer life cycle and virtually every touchpoint.  All of this is quite specific for a given organization and the products and services it offers. 

However, there are some general red flags and atypical customer behavior to look out for, which might show indicia for financial crimes, including money laundering and terrorist financing.

Atypical Customer Behavior

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 is 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 one who is closer.  The customer may also ask for short-cuts that are unexplained or at an unusual speed.  This 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.  If the customer attempts to disguise the real owner of the business or the parties to the business dealing, this is almost always something to be sensitive about and an 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 known to be home to big drug cartels, you want to keep in mind things like the black market peso exchange.  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 that is inconsistent with the individuals involved’ socio-economic profile.

Additionally, it would be best if you always considered the way a business is structured.  Watch out if the ownership structure is overly complicated when there is no legitimate or economic reason.  This 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 make the connection to offshore shell companies and fictitious invoices, bogus loans, and the like.

Identifying Transaction Red Flags

Let’s look again at transaction monitoring a little bit closer concerning potential red flags and atypical customer behavior.  We determined that you must make sure your monitoring system alerts you to unusual, large, or complex transactions or patterns of transactions.  This 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 account balances or account activity for a customer 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.
  • This goes right into the next one, namely 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.

There are many other customer transactions, activities, and types of behavior that 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.

Final Thoughts

It is critical to recognize and act on red flag and atypical customer behavior indicators that a transaction may be suspicious. One of the following scenarios may warrant further investigation of your client. Several red flag indicators combined, 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 illegal activity is possible. Employees should investigate for suspicious activity if these changes are unusual due to the type of business or simply appear out of scope for the business type. Simply using an unusually large number of large denomination bills in cash transactions in a manner that deviates from normal practice may be significant.

Some of 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 SAR is not a legal action against a customer; it is simply atypical customer behavior that assists the financial institution in remaining in compliance.

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