What are Red Flags?
Every year, hundreds of billions of “dirty” money are laundered through financial institutions or Virtual Asset Service Providers (VASPs). Virtual assets (VA) and related services encourage financial innovation, but their distinct features also create a plethora of opportunities for Money Launderers (ML), Terrorist Financiers (TF), and criminals to launder or finance their illegal activities. The ability to transact VAs across borders makes it even more challenging for national authorities to detect and investigate such elusive criminal activity.
Red flag indicators serve as a guide for VAs in reporting suspicious transactions and entities, using a risk-based approach according to the customer due diligence (CDD) requirements.These indicators can also help VAs analyse or investigate Suspicious Transaction Reports (STRs), as well as improve current detection methods for ML/TF activities.
Regulators also utilise red flag indicators to monitor the compliance of VAs and other entities against prevailing AML/CFT controls. For example, a reporting entity has access to customer information indicating the presence of multiple red flag indicators with no logical business explanation. In such a case, the failure to report such transactions may entail having regulators further investigate the reporting entity with consideration to it’s business profile.
Examples of Red Flag Indicators
Red flag indicators can help VASPs apply a risk-based approach to CDD requirements by allowing them to verify their client’s identity and understand the source of the funds. The FATF has identified through more than one hundred case studies since 2017, that the presence of multiple red flag indicators in a transaction with no logical business explanation raises suspicion of potential criminal activity.
The indicators highlighted by FATF are by no means exhaustive or applicable in every situation, and entities should adopt a-risk based approach with a two-way dialogue between private and public sectors to enhance the effectiveness of the report. The rapidly changing VA landscape means that the indicators identified are constantly evolving, and they are best used when applying other contextual information from domestic law enforcement and public sources.
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