The Risk Based Approach and Red Flags

 

The following red flag indicators should assist you in applying a risk based approach to the organisation’s CDD requirements. If you notice a number of red flag indicators, it is more likely that you should have a suspicion that money laundering or terrorist financing is occurring. (Note: This lesson does not set out all of the red flag indicators.)

Remember, however, that the methods and techniques used by criminals to launder money may also be used by clients with legitimate means for legitimate purposes. Because of this, red flag indicators should always be considered in context. (The mere presence of a red flag indicator is not necessarily a basis for a suspicion of money laundering or terrorist financing, as a client may be able to provide a legitimate explanation.)

Red flag indicators

It is not possible to provide an exhaustive list of circumstances or situations that might give rise to a suspicion, but the FATF report provides four categories of red flag indicators:

  • client
  •  source of funds
  • choice of lawyer
  • nature of the retainer

 

Red flags about the client

Various factors can mean that additional enquiries need to be made of clients. Be wary of:

  • an individual who appears to maintain a lifestyle which does not fit with what we know of their legitimate business activities (i.e. they appear to have a lifestyle beyond their means)
  • a client who does not find time to meet the fee earner in person or will only meet at public venues
  • a client who appears defensive when enquiries into identity or financial affairs are made
  • a client who is native to or situated in a country where the production of drugs, drug trafficking, terrorist activities or money laundering activities are prevalent, or which does not have effective legislation or regulations equivalent to EU Money Laundering Directives.

 

Red flags in the source of funds

Client money is a particularly important area for support staff

For example, you may be the one to spot:

  • money coming in from a source other than the expected one (i.e. a cheque received in a name other than that of the client)
  • a client pays the firm and we are asked to return the excess to a different party  a client uses money from several different jurisdictions to complete a transaction
  • a client sends in money sooner than would otherwise have been expected. (Note: You must be particularly cautious if this occurs when dealing with property matters.)

 

It will also be a red flag if:

  • we receive instructions at a distance from the client or transaction without legitimate reason or without experience in the particular speciality
  • the client is prepared to pay substantially higher fees than usual, without legitimate reason

 

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