Are you being duped? 10 signs of money-laundering

Are you sufficiently aware of the signs of money laundering?

Senior police officers say accountants are not doing enough to identify suspicious activity and report potential crimes.

Would you spot the signs of suspicious activity? Here are ten tell-tale indicators that could have you going online to file a Suspicious Activity Report.

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1. Unexplained third-party investment

Business funding that comes from apparently unconnected sources could be a red flag. According to Jeremy Clarke, Assistant Director of Practice at ICAS, specific signals to look out for include a “disproportionate amount of private funding or cash which is inconsistent with the socio-economic profile of the individuals involved”, and also where there is no logical explanation or economic justification for the finance being provided.

2. Difficulty identifying everyone in the business

Look out for individuals trying to hide their identity or the identities of beneficial owners or partners in the business. This could be by withholding or falsifying identification documents, for example, or where the money is paid out by the business to numbered bank accounts. The onus is on you as an accounting professional to know who your clients are. One red flag highlighted by the Financial Action Task Force is when a client avoids personal contact without good reason. Documents issued by public authorities such as passports and driving licences are the most reliable forms of identification because they are difficult to forge and have a photograph of the holder, so another suspicious sign is if one of these official proofs of identification is not forthcoming.

3. The business operates in high-risk countries

Look at whether any business assets, such as properties, are located in high-risk countries – including countries that are tax havens. The business could also have directors or owners (or other people involved with the company) that are residents in high-risk countries.

The European Commission identifies “high-risk third countries” and its latest list contains 16 countries: Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Syria, Uganda, Vanuatu, Yemen, Ethiopia, Sri Lanka, Trinidad and Tobago, Tunisia, Pakistan, Iran, and Democratic People’s Republic of Korea.

You are required to apply enhanced due diligence measures to mitigate the risks arising in any business relationship or transaction with a person established in one of these countries.

4. High volumes of cash transactions through the business

Certain business sectors are more susceptible to money laundering. For example, the “archetypal” money laundering business is a pizza restaurant or a nail salon or similar, where there are high volumes of cash transactions, and “dirty” money can be added in by inflating the turnover. This should arouse particular suspicion when there are no records such as till receipts to back up the cash volume.

Other warning signs include large cash deposits being made using night safe facilities and cash deposit machines, thereby avoiding direct contact with the bank; and a large aggregate amount of cash being deposited with the bank in numerous small amounts, or at different branches, to avoid scrutiny.

5. Finance from poorly-regulated sources

Ron Warmington, previously head of global investigations at Citibank, says that around 20 years ago, the organisation was tipped-off about its branch at Puerto Banus, Marbella. “We’d have expected the biggest loan in a retail bank in Marbella to be maybe $800,000, this bank had $40m loans on its books.”

Many of the loans were guaranteed by a Finnish bank and were in turn underwritten by a Russian bank. In Europe, countries like Cyprus, Malta, Latvia and Estonia have built their economies around attracting foreign money, without effectively policing its origin.

Money from non-banking sources, such as Bitcoin finance, is often completely unregulated.

6. Unusual behaviour or actions that are out-of-character

If someone asks you to complete a transaction quickly without giving a reason why or to short-cut normal processes, then alarm bells should ring. Individual transactions that are disproportionate or don’t fit the usual pattern of the business are also a cause for concern. And if you have an established client whose lifestyle is familiar, and you suddenly find out they are buying a Ferrari, or playing the casinos in Monte Carlo, that might also be a reason to suspect something untoward is going on.

7. Transactions that don’t appear to make sense

If a business sells an asset for less than its market value, this can often be an indicator of money laundering.  Property is a particular case in point, where the price can be manipulated to hide proceeds of criminal activity. For example, you could buy a property using illicit funds and then sell at a loss to make the proceeds “legal”.

It can also work in the other direction: you could understate the value of the property and pay the realtor the balance behind the scenes using illicit cash – then sell again at the market value and appear to have made a profit.

8. An overly-complicated ownership structure

A company could have several complex, illogical layers of corporate officers, shareholders and people with significant control, which could make it difficult to see who the beneficial owners are.

Ownership structure becomes even more difficult to determine when companies based overseas are appointed as shareholders (often from tax havens or offshore locations). “Unnecessarily complex group structures and investments in areas with no obvious geographical connection can both be indications of money laundering,” says the Consultative Committee of Accountancy Bodies (CCAB).

9. A frequent change in accountants

A business that frequently changes its accountants or other professional advisers is a classic red flag. The rationale behind this is that no adviser is ever allowed to get too close to the business and to spot changes in financial or behavioural patterns.

A business that chooses advisers who are geographically remote without any obvious explanation should also ring alarms.

10. Politically-exposed persons involved with the business

Evidence shows that a politically exposed person is likely to abuse their position for the purpose of committing money laundering and terrorist financing offences. A politically-exposed person could be a current or former senior official in the executive, legislative, administrative, military, or judicial branch of a government (elected or not), or a senior official of a major political party.

For further information about money laundering and how to spot it, visit flagitup.campaign.gov.uk.

Read more on AML as part of our #AATPowerUp Anti Money Laundering campaign for November:

David Nunn is Content Manager at AAT.

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