Suspicious transactions are financial transactions that may indicate money laundering or other financial crimes. Financial institutions are required by law to monitor transactions for red flags that may indicate the funds are being used for illegal purposes. There are several examples of red flags for suspicious transactions that banks and other financial companies watch out for.
Transactions Inconsistent with Customer’s Business
One major red flag is when a transaction seems inconsistent with the customer’s known business or income. For example, if a small business with a history of only small deposits suddenly starts making very large cash deposits, that would be considered suspicious. Or if an individual customer with a modest salary begins making large transfers internationally, the bank would investigate that further to determine if it makes sense or if it is a sign of criminal activity.
Frequent Large Cash Transactions
Frequent large cash transactions, especially deposits and withdrawals just under $10,000, can be a red flag for structuring. Structuring is when someone splits up deposits or withdrawals into smaller amounts to avoid triggering reporting requirements for transactions over $10,000. Even if the deposits are spread across multiple accounts, patterns of transactions just under $10,000 could indicate efforts to avoid detection.
Transactions Inconsistent with Customer Profile
Financial institutions develop customer risk profiles to identify what types of transactions would be considered normal for each individual or business customer. Any transactions that fall outside of the expected parameters could be red flags for potential criminal activity. For example, if a customer with no international ties suddenly starts receiving wire transfers from overseas, that would warrant further investigation.
Use of Shell Companies
The use of shell companies, or legal entities that have no real operations or assets, can be a red flag in some transactions. Criminals may create shell companies to disguise the true source of funds or make it harder to connect the money to illicit activity. Large transactions involving shell companies as the sender or recipient for no clear purpose are suspicious.
Transactions with High-Risk Geographic Locations
Financial transfers involving countries or geographic locations identified as high-risk may indicate potential money laundering schemes or terrorist financing. Jurisdictions with weak anti-money laundering laws, high levels of corruption, or known terrorist presence pose higher risks. A customer transferring money to or from those locations more frequently than usual or without an explanation is a red flag.
Multiple Personal and Business Accounts Used in Transactions
The use of both personal and business accounts in a transaction without a clear reason is suspicious. This technique may be used to obscure the true source or destination of funds. For example, a large deposit from an individual’s personal account transfers to their business account and then wired internationally could look like an attempt to layer the transaction and hide criminal activity.
Third-Party Transactions
Be wary of transactions involving third-parties with no apparent connection to the customer. For instance, depositing a check written by an unknown third party into a personal account could signal fraudulent activity. Or wiring money to an unrelated third-party overseas might disguise the actual recipient. Scrutinize third-party transactions to ensure legitimate reasons for the funds flows.
Early Account Closure
Customers who open accounts and then close them within a short period can be suspicious. Criminals may open accounts solely to transfer or receipt illicit funds, planning to quickly close them afterwards. While there are valid reasons to close accounts, early closure combined with other red flags should trigger enhanced monitoring.
Out-of-Pattern Transactions
Sudden transactions that are well outside the norms and patterns established in a customer profile warrant scrutiny as possible red flags. Even if not large dollar amounts, things like a first-ever international wire, new third-party recipients, or transfers to high-risk locations with no business explanation should raise suspicions.
Conclusion
In summary, red flags for financial transactions include inconsistencies with the customer’s profile and business, unusual third-party transactions, suspicious geographic connections, potential structuring to avoid reporting requirements, early account closure, and other activity patterns that vary from the customer’s baseline behavior. While any single red flag does not necessarily indicate illicit activity, identifying multiple suspicious transaction indicators should prompt financial institutions to conduct further monitoring and due diligence.
Questions and Answers
What is a suspicious transaction?
A suspicious transaction is a financial transaction that may indicate money laundering, terrorist financing, or another illegal activity based on certain red flags. Common red flags are transactions inconsistent with the customer’s business or profile, suspicious third-party payments, transfers to or from high-risk locations, structuring to avoid reporting requirements, and unusual changes compared to normal account activity.
What are some examples of red flags for suspicious transactions?
Red flags for suspicious transactions include:
- Frequent large cash deposits or withdrawals just under $10,000
- Transactions with no clear connection to the customer’s business or income source
- Unexplained wire transfers to or from high-risk jurisdictions
- Use of shell companies as sender or recipient
- Transactions involving both personal and business accounts
- Early closure of recently opened accounts
Why do banks monitor transactions for red flags?
Banks and financial institutions are required by anti-money laundering (AML) laws and regulations to monitor account activity for suspicious transactions that may indicate money laundering, terrorist financing, or other financial crimes. Identifying red flags helps detect illegal use of the financial system.
What should you do if you notice a suspicious transaction?
If you work at a bank and notice a transaction with multiple red flags, you should escalate the suspicious activity as required by the bank’s policies. This may involve informing your AML compliance officer, filing a suspicious activity report (SAR), or submitting the transaction for further monitoring and investigation.
How do banks investigate suspicious transactions?
Banks use a variety of methods to investigate transactions flagged for suspicious activity, including:
- Reviewing all account activity for patterns of unusual transactions
- Analyzing any connections to high-risk jurisdictions
- Contacting the customer to understand the purpose of the transaction
- Verifying identities and relationships of transaction parties
- Determining if activities match customer profile or expected behavior
What happens if a transaction is determined to be illegal?
If after investigation a suspicious transaction is determined to be unlawfully moving illicit funds, the bank will take appropriate action such as:
- Filing a Suspicious Activity Report with the Financial Crimes Enforcement Network
- Closing accounts involved in the illegal activity
- Placing additional restrictions on the customer account
- Terminating relationship with the customer
- Reporting activity to the relevant law enforcement agencies
Suspicious Transaction Monitoring Table
| Transaction Type | Example Red Flags |
|---|---|
| Cash transactions | – Frequent large deposits/withdrawals under $10,000 – Transaction size/frequency exceeds customer profile – Suspected structuring to avoid reporting |
| Wire transfers | – Sender or recipient in high-risk jurisdiction – Transfers lack valid business purpose – Multiple inbound wires from unknown parties |
| ACH/Checks | – Checks deposited from unknown third-parties – Payee substantially different from account holder – Multiple third-party checks endorsed over |
| Account activity | – New customers rapidly opening/closing accounts – Unauthorized account logins or changes in activity – First-time international transfers |
| Customer behavior | – Unwillingness to provide information – False identities/fictitious businesses – Becomes defensive or threatening when questioned |
Conclusion
In conclusion, banks and financial institutions are on the front lines of monitoring transactions for suspicious activity that may indicate money laundering, terrorist financing, fraud, or other illegal activity. Being able to identify red flags like inconsistent account activity, suspicious third-parties, transfers through high-risk jurisdictions, potential structuring, and other unusual transactions enables compliance teams to detect and report unlawful use of the financial system. Robust anti-money laundering protocols, thorough know-your-customer due diligence, transaction monitoring, and investigations are key for banks to mitigate the risks of financial crimes occurring through accounts at their institutions. Recognizing red flags and taking appropriate action by filing SARs and closing accounts when necessary are some of the most important weapons banks have for fighting money laundering and related financial crimes.
