The money laundering red flags and how to prevent it in 2024

Supporting criminal activity and risking substantial fines from regulators that also damage their reputation are not things any financial institution aspires to. Yet many are exposing themselves to such risks because they are not doing enough to prevent money laundering.

With digitalisation creating new opportunities for money laundering to take place identifying and stopping it is proving a challenge for those in financial services who are usually on the front line in trying to prevent it.

In fact, the United Nations Office on Drugs and Crime (UNODC) estimates that money laundering accounts for between two to five per cent of the world’s GDP. It’s a significant issue.

While there is a plethora of global and regional laws and regulations around anti-money laundering (AML) that requires those in financial services to identify prospective customers and activities by existing customers that could be linked to money laundering, this isn’t proving enough to reduce it.

Eight red flags to identify money launderers and processes to prevent such activity from occurring:

1. Unwillingness of prospective customers to provide personal information: Verifying the identity of an individual before they open an account is one of the most important steps financial institutions must take. This necessitates the prospective customer sharing certain personal information and, where appropriate, providing documentary proof of their identity, such as their address. Most people don’t have an issue with sharing such information about themselves. However, if a prospective customer does seek to evade the provision of or provide false information it should ring alarm bells. Prospective customers should never be onboarded without completing the required know your customer (KYC) verification process.
2. Geographic location of prospective and existing customers: While money laundering is not restricted to a particular geographic area, the risk is greater in some countries that are more exposed to corruption and organised crime due to weak regulations and poor governmental insight. According to the Basel AML 2022 report, countries including Haiti, Myanmar, Mozambique, Madagascar and The Democratic Republic of Congo have a high money laundering risk associated with them. Therefore, it’s important to prioritise due diligence for those with an address from any of these countries.
3. Lack of clean and up to date data on customers: If your data is not clean and up to date then you can’t be confident that you don’t have any money launderers as customers. It’s why a good first step to help prevent money laundering is to have processes in place that deliver ongoing data hygiene. When it comes to the data cleansing process one of the most useful tools is an address autocomplete or lookup service which gathers accurate address data in real-time at the onboarding stage. These tools also deliver address validation - supporting ID verification. Since ID checks will pick up basic issues with data, such as an incorrectly formatted address, it’s better value and best practice to ensure you have accurate user contact data in the first place.
4. Deliver effective know your business (KYB) checks: Shell companies or organisational structures that just don’t exist in reality are frequently the source of money laundering and fraud. And where there is such complexity these can be fronts for financial crime, even terror financing, particularly because it’s often difficult to source who the owners of these entities are. To fully understand the risks posed by new and existing business customers and suppliers it’s important to carry out KYB checks – something most regulators around the world require financial institutions to undertake. For an effective and cost-effective approach to KYB screening it’s advisable to cross-check a company name, address, business registration number and operational status against recognised sources of business data, such as from a business registry or regulator, like Companies House.
5. Embrace SaaS electronic identity verification (eIDV): One of the best ways to prevent money laundering and fraud is by using a software-as-a-service (SaaS) electronic identity verification (eIDV) tool. These platforms can, in real-time, cross-check the names, addresses, email addresses and the phone numbers provided by prospective customers. For best results it’s recommended to source a SaaS eIDV platform with access to billions of consumer records from reputable sources from around the world, such as from government, utility and credit agencies. When compared to manual checks, using such a tool is considerably quicker, more accurate and cost-effective way to undertake ID verification. Some eIDV services even offer wider KYC checks such as KYB, sanctions screening, etc.
6. Obtain up-to-date sanctions lists: While it’s a regulatory requirement to screen for those who have been sanctioned, it’s surprising how many financial institutions aren’t set up to effectively do this. It’s important to have an up-to-date sanctions list that can undertake automated sanctions screening globally, in real-time.
7. Implement PEP and RCA checks: It’s crucial to understand that having an up-to-date list of those who have been sanctioned is not enough. It’s vital to screen against politically exposed persons (PEPs) and relatives and close associates (RCAs) of PEPs from around the world, because there’s a tendency for these groups to be involved in or drawn into crime. In the UK, financial organisations are legally obliged to undertake enhanced checks of both domestic and foreign PEPs.
8. Undertake adverse media screening: As part of best practice customer due diligence (CDD) and AML processes, adverse media checks are critical. Sourcing adverse media screening technology with a global reach enables financial institutions to keep abreast of the latest news and alerts, in real-time, on any arrests or court cases, for example, against their customers who may be PEPs and RCAs, and others who could have a potential negative regulatory, financial, or reputational consequences to their organisation.

In summary

Being attentive to money laundering red flags and taking steps to deliver AML compliance by obtaining clean customer data and using a platform like eIDV, which can offer a full ID verification service, including the likes of KYB checks and sanctions data, are vital in 2024. This approach will help to prevent money laundering and fraud, significantly reduce the likelihood of being fined by regulators and the reputational damage this can cause.