Top money laundering red flags, and how to detect & respond effectively

azakaw
3 days ago
8 min read

Money laundering is a hidden threat that enables organised crime, terrorism financing, corruption, and tax evasion to thrive.

In 2023, penalties for Anti‑Money Laundering (AML), Know Your Customer (KYC), sanctions, and customer due diligence breaches totalled approximately $6.6 billion globally. Many of these fines were directly associated with institutions failing to act on obvious AML red flags.

Failing to detect and respond to suspicious activity for regulated businesses can result in steep fines and severe reputational damage.

This article breaks down the most common red flags of money laundering, offering practical insights into how to identify and prevent money laundering across industries, from banking to real estate and crypto.

Whether you're a compliance officer, business owner, or just curious about AML, keep reading to stay alert and informed.

What is money laundering, and why is it important to be alert?

Money laundering means disguising the origins of illegally obtained money to make it appear legitimate. It's a global issue with wide-reaching implications as it enables criminal enterprises to thrive and infiltrate the legal economy.

To tackle money laundering, it's crucial to understand its mechanics and recognise the red flags.

The three stages of money laundering

Money laundering typically occurs in three phases:

Placement: This is the first stage, where illicit funds are introduced into the financial system. For example, a criminal might deposit small amounts of cash into a bank account to avoid detection.
Layering: The second stage involves complex transactions designed to obscure the origin of the funds. This could include transferring money through multiple accounts in different countries or converting it into cryptocurrencies.
Integration: In the final stage, the laundered money is reintroduced into the legitimate economy. For instance, it might be used to purchase assets like real estate or luxury goods, making it appear as lawful income.

The impact on businesses and society

Money laundering undermines financial integrity, facilitates criminal activity, distorts market competition, and can expose businesses to regulatory penalties, reputational harm, and operational risks.

What are the red flags of money laundering?

The red flags of money laundering are behavioural or transactional indicators that suggest a higher risk of this illegal activity.

While they don't confirm criminal activity, they serve as early warnings that call for further scrutiny by compliance teams.

Definition and regulatory background

AML red flags are behavioural patterns, transaction anomalies, or structural irregularities that may indicate a customer is attempting to launder money.

Regulatory bodies such as the Financial Action Task Force (FATF), the European Banking Authority, and national financial intelligence units expect organisations to be able to recognise and respond to these signs.

The importance of identifying red flags

Spotting these indicators early enables businesses to investigate further, escalate concerns, and report suspicious activity, ultimately supporting efforts to prevent financial crime and protect the broader financial system.

Top signs of money laundering

Red flags can appear in many forms. This section outlines the most common signs of money laundering seen across sectors such as banking, real estate, insurance, and virtual assets. These red flags often relate to customer behaviour, transaction activity, or inconsistencies in account information.

Unusual transaction patterns

Transactions that deviate from a customer's known financial activity, such as frequent large deposits, sudden surges in account movement, or inconsistent spending habits, should raise concern.

Use of multiple accounts

Criminals often spread funds across several accounts to avoid detection, and then they consolidate them later. This tactic creates a complicated trail that can hide the source of the funds.

Transactions of large amounts of cash

Significant cash deposits or withdrawals, especially when they’re inconsistent with a customer’s business operations, may indicate illicit activity.

For example, an online consultancy with little reason for cash use, making large deposits is a red flag. Other sectors, like car dealerships or art dealing, don't usually involve large amounts of cash either.

Complex ownership structures and shell companies

Entities with unclear or deliberately opaque ownership, such as those using trusts or offshore entities, may be used to hide beneficial owners and the true source of funds.

Reluctance to provide information or evasive behaviour

Customers who resist providing KYC documentation, offer incomplete or false data, or seem overly secretive about their financial dealings should trigger further scrutiny.

Frequent or unjustified international transfers

Regular cross-border transfers, particularly to high-risk jurisdictions or countries with weak AML regulations, can indicate an attempt to layer and disguise the origins of funds.

Inconsistent customer profile

When the scale of a customer's financial activity is inconsistent with their known profession, lifestyle, or business model, it may be a sign of money laundering (for instance, a student with frequent six-figure transactions).

Rapid activity in virtual assets

Cryptocurrencies and other virtual assets, like NFTs (Non-Fungible Tokens), are increasingly used to launder money.

Common red flags include rapid conversions between assets, use of privacy coins, engagement with DeFi protocols (Decentralised Finance protocols), and transactions via unregulated or non-compliant exchanges.

Small increments and structured transactions

Also known as smurfing, this involves breaking large sums into smaller transactions to avoid detection and mandatory reporting thresholds.

Use of unusual or high-risk payment methods

Use of prepaid cards, third-party transfers, or other alternative payment channels can signal attempts to anonymise transactions and avoid AML controls.

Examples of suspicious activities that may indicate money laundering

To move from theory to practice, it’s important to look at what aml red flags look like in real-world settings, as recognising typical examples of suspicious activity can strengthen internal controls and improve the effectiveness of AML programmes.

These examples illustrate how seemingly routine transactions can hide suspicious activity.

Structuring/smurfing

A customer deposits sums just below the reportable threshold across multiple branches (e.g., 8,999€ multiple times instead of a single €25,000 transaction) over a short period. This is often done to avoid triggering AML checks.

Rapid movement of funds without a clear economic purpose

Funds are received into an account and then transferred out almost immediately, with no business justification or explanation.

This pattern is particularly suspicious when repeated across multiple accounts.

Use of shell companies or complex ownership structures

An entity registered in a tax haven, with no physical presence, staff, or real operations, receives large payments and routes them offshore.

The beneficial owner is kept hidden by using fake directors or by setting up several connected companies to make it hard to know who is really in control.

Unusual use of cash or virtual assets

A company or an individual uses large sums of cash to purchase high-value items, like real estate, without taking out a mortgage. Alternatively, funds are rapidly converted from fiat to virtual currencies without a clear investment rationale.

Frequent international wire transfers to high-risk jurisdictions

Funds are sent to or received from countries with weak AML regulations or known corruption issues. These transfers often lack documentation or a clear business relationship.

Industry-specific risk factors

Each industry faces unique laundering risks. Here's what to watch out for:

In banking, unusual offshore transfers or layered account ownership.
In real estate, quick resales or undervalued purchases.
In crypto, mixing services or high-volume transactions via DEXs (Decentralised Exchanges).
In insurance, policy loans or early redemptions.

Why recognising these red flags is critical

Spotting and reacting to signs of money laundering is not just about compliance. It enables institutions to protect themselves from being exploited by criminal networks.

Failing to act on suspicious behaviour can lead to hefty fines, reputational damage, and regulatory intervention.

By identifying signs of money laundering early, businesses can:

Enhance compliance with AML regulations,
Prevent fines and sanctions,
Build trust with regulators and customers,
Help combat broader financial crime.

How to detect and respond to red flags

Detecting red flags is only the first step. Knowing how to react is equally important. This section explains what tools and procedures businesses need to investigate and respond to suspicious activity effectively.

Having robust internal controls and response procedures is just as important as spotting red flags. Businesses must have systems in place to detect, investigate, and escalate suspicious activity effectively.

The role of transaction monitoring systems

Automated transaction monitoring tools help identify unusual activity patterns across accounts. These systems apply risk scoring models and alert compliance teams to investigate.

Escalation and internal reporting procedures

Staff should be trained to escalate red flags to the compliance officer or AML team. A well-documented escalation process ensures that no suspicious activity is ignored.

When to file a suspicious activity report (SAR or STR)

If suspicions remain after an internal review is performed, a Suspicious Activity Report (SAR in the UK or STR in the EU) should be filed with the relevant financial intelligence unit. These reports are confidential and a legal requirement.

Training staff

Regular AML training ensures that employees understand how to spot red flags, follow KYC protocols, and apply proper reporting procedures.

Leveraging KYC & KYB protocols

Robust identity verification (KYC for individuals, KYB for businesses) helps ensure you know who you’re doing business with.

AML screening and sanctions list checks

Screening customers against sanctions lists, PEPs (Politically Exposed Persons), and criminal watchlists is a foundational control.

FAQs

What are the red flags for banks?

Inconsistent account activity, unexplained large transactions, and refusal to provide ID documents are key red flags for banks.

What are the money laundering flags in capital markets?

Frequent trades with no economic rationale, use of multiple intermediaries, and wash trades may indicate laundering.

What are the warning signs of money laundering in insurance?

Early policy cancellations, large lump-sum premiums, and inconsistent beneficiary information are all warning signs of money laundering in insurance.

What are the warning signs of money laundering in real estate?

Cash purchases, property bought via shell companies, and purchases far above market value are all warning signs of money laundering in real estate.

What are the warning signs of money laundering in crypto?

High-frequency trades, movement between multiple wallets, use of privacy coins, and mixing services are all warning signs of money laundering in crypto.

What constitutes suspicion of money laundering?

Any behaviour or transaction that lacks a clear legal or economic purpose or contradicts a client’s profile constitutes suspicion of money laundering.

What do money laundering checks involve?

AML checks include identity verification, transaction monitoring, sanctions screening, and ongoing due diligence.

How do regulators define a red flag?

A red flag is any activity, behaviour, or transaction that appears inconsistent with a customer’s known profile or lacks a legitimate explanation.

Regulators expect businesses to investigate red flags and take appropriate action, even if no crime is confirmed.

Do all red flags mean a crime has occurred?

No. Red flags are indicators of potential risk, not proof of wrongdoing. They are signals that warrant closer review. If suspicions remain after review, a Suspicious Activity Report (SAR/STR) should be filed.

How quickly should I act on a red flag?

Red flags should be reviewed as soon as possible. Delays in detection or escalation can lead to compliance breaches and increase the risk of facilitating illicit activity.

What industries are most vulnerable to money laundering?

Financial services, real estate, crypto, casinos, luxury goods, and insurance are common targets in money laundering due to the high-value transactions and potential for anonymity or complex ownership structures.

Can automated systems catch all red flags?

No system is perfect. Automated transaction monitoring tools help identify patterns, but human oversight is essential for context, judgment, and escalation.

What happens if I fail to report a suspicious activity?

Failing to report a suspicious activity can result in regulatory fines, reputational damage, and, in some jurisdictions, criminal liability for individuals or institutions involved.

Key takeaways: the importance of vigilance

Money laundering poses a serious threat to the integrity of financial systems, affecting everything from consumer trust to national security.

Businesses can take key actions to protect themselves, such as implementing strong KYC processes, maintaining robust transaction monitoring, training staff regularly, and escalating suspicious activity promptly.

These steps not only reduce risk but also demonstrate a strong culture of compliance, as staying alert to red flags can make a significant difference.

By implementing proper AML controls, businesses can detect AML red flags and prevent illicit financial activities.

Ultimately, education and awareness are key. Everyone in a regulated business has a role to play in spotting suspicious activity and protecting the system from abuse. Staying proactive helps ensure a safer and more transparent financial environment for all.

Related articles