Money laundering and terrorist financing risks can arise in any area of legal practice. Criminals may seek to exploit legal professionals because of the legitimacy, expertise and services they provide. Firms should therefore adopt a risk-based approach and remain alert to suspicious activity throughout the life of a matter, not just when onboarding a client.
AML awareness should not be treated as a standalone compliance exercise. Many of the methods used by criminals can appear similar to legitimate transactions, making it important to understand the context of a matter and to identify indicators that may suggest heightened risk.
What Are Red Flag Indicators?
A behaviour, circumstance or transaction feature that may indicate potential money laundering, terrorist financing or other financial crime is often referred to as a red flag indicator.
Examples of red flag indicators have been identified by the Financial Action Task Force (FATF), the Legal Sector Affinity Group (LSAG), law enforcement agencies and UK regulators. Firms should consider these indicators when carrying out customer due diligence, ongoing monitoring and risk assessments.
Access our full list of Red Flag Indicators.
These indicators should assist you in:
- Identifying your client and any beneficial owners.
- Understanding the nature and purpose of the business relationship.
- Establishing the source of funds and source of wealth where appropriate.
- Assessing whether enhanced due diligence may be required.
- Identifying circumstances which may warrant further enquiries or escalation.
Common Red Flags
The presence of a red flag does not automatically mean that money laundering or terrorist financing is taking place. However, where multiple indicators are present, or satisfactory explanations cannot be obtained, firms should consider whether further investigation, enhanced due diligence, internal reporting or a Suspicious Activity Report (SAR) may be required.
Examples of common red flags include:
Client Risks
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- Clients who are reluctant or unwilling to provide identification documents.
- Difficulty identifying the ultimate beneficial owner.
- Clients who are evasive, secretive or provide inconsistent information.
- Clients acting through multiple intermediaries without a clear explanation.
- Politically Exposed Persons (PEPs) or clients linked to high-risk jurisdictions.
Transaction Risks
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- Transactions that appear unnecessarily complex.
- Large sums of money with no apparent commercial rationale.
- Requests to move funds through client account facilities without an underlying legal service.
- Transactions involving unexplained third-party payments.
- Sudden changes to payment arrangements or transaction structures.
- Matter Risks
- Property transactions involving unusual funding arrangements.
- Trust and company structures that obscure ownership or control.
- Transactions involving overseas entities or complex corporate structures.
- Matters that appear inconsistent with the client’s known business activities.
- Requests to proceed with unusual urgency without a reasonable explanation.
Financial Crime and Sanctions Risks
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- Concerns relating to sanctions exposure or sanctions evasion.
- Links to designated persons or jurisdictions subject to sanctions restrictions.
- Use of cryptoassets where the source of funds cannot be adequately evidenced.
- Attempts to conceal ownership, control or the origin of funds.
Risk Assessment is an ongoing process
Risk assessments should not end once a client has been onboarded. New information may emerge during the course of a matter which changes the risk profile of the client, transaction or business relationship.
Firms should regularly review customer due diligence information, revisit matter risk assessments where circumstances change, and remain alert to new or emerging threats identified through the UK’s National Risk Assessment, LSAG guidance and CRL’s Sectoral Risk Assessment.
What should you do if you identify a risk?
Where a red flag is identified, firms should:
- Make appropriate enquiries to understand the concern.
- Consider whether enhanced due diligence is required.
- Document the rationale for any decisions made.
- Follow internal escalation procedures.
- Report concerns to the firm’s Money Laundering Reporting Officer (MLRO) where appropriate.
- Consider whether a Suspicious Activity Report (SAR) should be submitted to the National Crime Agency (NCA).
Remember, a single red flag may have a legitimate explanation. However, where concerns remain or multiple risk indicators are present, firms should take appropriate steps to manage the risk and comply with their obligations under the Money Laundering Regulations 2017.
