AML Red Flags for law firms to be aware of

What are the most common AML Red Flags?

One of the key ways to avoid being found in breach of the Money Laundering Regulations is to ensure clients and their matters are subject to appropriate risk assessments, however, this must not take the form ‘ticking boxes’, it must be detailed and include the identification and management of any red flags.

So, what are some of the common red flags that firms and their staff need to look out for?

• Is the client being overly secretive?
• Is the client refusing to provide requested information?
• Has the client used a number of advisors in a short space of time?
• Does the client want to take short-cuts?
• Does the matter involve a disproportionate amount of private funds?
• Is the source of funds unusual?

Our red flag poster provides an insight into the risks that firms need to consider when dealing with clients and their transactions; it may be worth adding this to your firm wide risk assessment so you can show it to the SRA should it ask to see it.

There can be other red flags that may not be immediately apparent as they don’t directly involve the clients themselves, for example, estate agents and other regulated third parties putting law firms under pressure to rely on the due diligence they carry out on their clients before referring them; it cannot be taken for granted that this type of pressure is just to speed up the conveyancing process! 

Is cryptocurrency use an AML red flag?

In addition to the ‘standard’ red flags, firms that deal with crypto-currencies as part of matter should also consider the Virtual Assets Red Flag Indicators report published by the Financial Action Task Force, which states that, ‘The ability to transact across borders rapidly not only allows criminals to acquire, move, and store assets digitally often outside the regulated financial system, but also to obfuscate the origin or destination of the funds and make it harder for reporting entities to identify suspicious activity in a timely manner’.

The crypto-currency market has taken a real battering recently due to the failure of platforms like FTX, but such currencies are still likely to be used in legal transactions by those holding them, so appropriate due diligence needs to be undertaken.

The misuse of crypto-currencies often relates to criminal activities such as illicit trafficking in drugs, fraud, theft and extortion, including cyber-enabled crimes. The following are examples of common red flags related to source of funds/wealth linked to such activities:

• Transacting with crypto-currency addresses or bank cards that are connected to known fraud, extortion, or ransomware schemes, sanctioned addresses, darknet marketplaces, or other illicit websites
  
  
• Crypto-currency transactions originating from or destined for online gambling services
  
  
• The use of one or multiple credit and/or debit cards that are linked to a crypto-currency wallet to withdraw large amounts of crypto to plastic currency (fiat currency), or funds for purchasing crypto-currency are sourced from cash deposits into credit cards
  
  
• The bulk of a client’s source of wealth is derived from investments in crypto-currency
  
  
• A client’s source of wealth is disproportionately drawn from crypto-currencies originating from other crypto-currency providers that lack AML controls

  ---