AML-CFT: An Indicative List of Red Flags for Trust & Corporate Service Providers

Trust and corporate service providers (TCSP) are categorised as designated non-financial businesses and professions (DNFBPS) as per the UAE’s Cabinet Decision No. (10) of 2019 on Anti-Money Laundering and Combating the Financing of Terrorism (AML – CFT). TCSPs are At a higher risk of money laundering and financing of terrorism and hence are required to abide by AML-CFT obligations. An AML compliance officer needs to be aware of the potential money-laundering red flags associated with the TCSPs to counter money laundering risks.

TCSPs act as an agent in the creation or establishment of legal persons and are often exposed to risks of use of complex legal structures and high-risk customers. Identifying such risk may be tougher for an AML compliance officer as the techniques used by criminals keep on evolving. However, the compliance officers can use an indicative list of AML red flags (warnings) which can be used to identify suspicious transactions and high-risk customers. Read ahead.

Physical Person Customer Reluctant to Share Information  

It’s a red flag if a customer refuses to provide personal information or the TCSP has strong reasons to believe that the provided information is incorrect or insufficient. Such a customer may refuse to provide information about their business activities and corporate history, the identity of the real beneficiary owner, source of wealth, explanation for carrying out activities in a specific manner, the people with whom they transact, and the nature of their business dealings with third parties located outside the UAE.

Suspicious Nature of Physical Person Customer 

And AML compliance officer should be on alert if the customer exhibits some suspicious behaviour. Such a customer can be an individual who is under investigation or has a connection with criminals. Due diligence must be exercised on customers who has a history of criminal indictment or convictions. And AML compliance officer should also lookout for the following:

  • The customer insists on the use of an intermediary for all interactions without proper justification
  • The customer avoids personal contact without sufficient justification
  • Avoids communication after the initial incorporation of a legal entity in the UAE when such follow-ups are expected by the TCSP
  • The customer is a foreign national with no significant dealings in the UAE
  • Refuses to provide data, information and documents when it is required for transactions
  • Shows unusual concern about or asks detailed questions about compliance matters such as customer due diligence or transaction reporting requirements

Risky Profile of Physical Person Customer 

Apart from the suspicious nature, a compliance officer can identify money laundering risks by scrutinising the profile of the individual customer in question. The following pointers can be useful in reporting such customers:

Check if the customer is a Politically Exposed Person (PEP) or has familial connections with PEPs

Be on alert if the customer’s transaction appears contradictory to his educational or socio-economic background

Has previously been prohibited from holding a directorship role in a company or operating a Trust and company service provider (TCSP)

The Customer Makes Unusual Requests 

Sometimes, the Individual customers may make requests which the TCSP may find unusual. An AML Compliance Officer should keep an eye on such unusual requests and transactions such as:

Customer wants to form companies in tax havens or low-tax jurisdictions without justifiable business reasons

Customer requests to use legal persons, legal arrangements, or foreign private foundations that operate in jurisdictions with secrecy laws

Seeks to open multiple trusts or accounts with the same beneficiary

Seeks to open multiple trust accounts, each with a different business declared as the source of funds

Seeks to open trust accounts with high amounts, which are inconsistent with customer’s profile

Takes an unusual interest in assisting or helping to facilitate the business arrangements of another party to the transaction

Requests the use of shelf companies, or pre-constituted shell companies, in jurisdictions that allow their use but do not require updating of ownership information

Red flags for a Legal Person Customer 

An AML Compliance Officer should enhance the due diligence process of the customer is a legal person and shows the following red alerts:

  • The jurisdiction of incorporation is known for money laundering risk
  • Unable to demonstrate the real activity with evidence
  • Can’t find on the internet or professional platforms such as LinkedIn
  • Uses email address on non-professional domains such as Yahoo, Hotmail or Gmail
  • Directors/shareholders can’t be located
  • Family or close associates acting as nominee shareholders or directors without any legitimate tax, business, economic reason
  • The jurisdiction of incorporation doesn’t mandate disclosure of Ultimate Beneficial Owner
  • The legal structure is unnecessarily complex
  • Management acts as per instructions from unknown persons
  • Inexplicable changes in ownership without notifying the TCSP
  • The legal person changes corporate structure constantly

Red flags Related to Choice of Trust & corporate service providers  

If the choice of TCSP seems unreasonable given the size, location or specialisation of the TCSP, the AML Compliance Officer should consider it as a red flag. The client’s profile becomes suspicious if it changes or engages multiple TCSPs within a short period without reasonable explanation.

Sometimes, a customer chooses a particular TCSP after another TCSP refuses to provide the requested service or their association was terminated under suspicious circumstances. This is a risky situation that demands due diligence exercise on the customer. Furthermore, it’s a red flag if the TCSP was chosen to solely provide services such as keeping documents or other goods, holding large deposits of money or otherwise using the client account without the provision of legal services.

How Can Jitendra Chartered Accountants Help Reduce Risks to AML Compliance?

TCSPs engaged in the establishment and/or administration of legal entities and legal arrangements are vulnerable to misuse by criminal networks engaged in money laundering and the financing of terrorism. TCSP’s services are required to establish or register companies or legal arrangements and play a key role in obtaining access to financial institutions and the financial services sector in general. These factors make TCSPs vulnerable to money laundering risks. To reduce the risks, the TCSPs can consult with the best AML consultants in the UAE such as Jitendra Chartered Accountants (JCA). JCA can help TCSPs by:

  • Designing and preparing a profile of Money Laundering Reporting Officer (MLRO)
  • Establishing Customer Due Diligence Profile
  • Establishing ongoing monitoring for customer transactions
  • Establishing Suspicious Transaction Reports and reporting
  • Recommending the best AML-CFT software