Red Flags To Watch For When Transaction Monitoring

For any business but particularly financial institutions, transaction monitoring is not only an ethical requirement, it is a legal one as well. Whenever large or complex activities take place within your organisation, you have an obligation to assess them and if they look suspicious, you have an obligation to report them to the appropriate regulator.

The objective is to stop fraud, money laundering or the financing of terrorist activity. Large companies with complex financial systems are likely to have teams dedicated to transaction monitoring. Automated software processes help identify unusual behaviours that warrant further investigation. Smaller businesses might rely on the vigilance of staff to report irregular conduct. In both cases, the same red flags apply.

It goes without saying that it’s vitally important to act when red flags arise. If a transaction looks suspicious, it requires further investigation. If it remains suspicious, it should be reported. Any one of the following indicators should be followed up. But what kind of activity would constitute a red flag?

The Client

Flags should be raised if a client is evasive about who they are or where they’re from or are being secretive in any unreasonable nature. Likewise, if they’re unwilling to provide requested personal documentation, have criminal connections or demonstrate an unusual awareness about money laundering.

The Source

There are many ways that the source of funds in a transaction can be questionable and raise an alert. When a transfer that is inconsistent with the client’s economic profile, or when large amounts of cash are being used without a logical explanation, an organisation should ask questions. Similarly when multiple or atypical bank accounts are used without a satisfying explanation.

The Transactions

The size and scope of a transaction is frequently an indicator of improper conduct. Large or sudden injections of funds into an account, especially one that is approaching a termination date (a mortgage for instance) suggests problematic behaviour. If a transaction doesn’t fall within a client’s functional pattern, such as abandonment or irregular payments via third parties, red flags should be raised.

The Instructions

Unusual instructions are often an indicator of dubious activity. Indicators to consider should include directives that are outside the normal operations of your business, or directives issued by third parties who can not demonstrate expertise in the field. The offer of high wages to enact a function warrants further investigation.

The Geography

Location is everything. If a client’s bank is not involved with the transaction at a local level, or offshore accounts are involved, a credible explanation is required. If one is not forthcoming, it is reasonable to assume questionable affairs are taking place.

The above is by no means an exhaustive list, but it demonstrates the kinds of events that should be investigated. These indicators aim to provide some guidance about what to look for when transaction monitoring. They could indicate fraud, money laundering or the financing of terrorist activity and must be reported.