The money laundering methods of criminals are constantly evolving, and in many cases, they are specific to the features of a given market or a given type of business activity. As a DNFBP, auditors need to understand whether a potential transaction is suspicious or not. The following is a list of red flags that indicates potentially suspicious transactions which are not exhaustive. The list can be used by Auditors’ compliance officers to appropriately determine whether a transaction is suspicious or not. Read ahead.
Personal Information Related to Client
Sometimes the client may refuse to divulge personal information, or the auditor has sufficient reason to believe that the provided information is inaccurate or insufficient. This raises the red alert on money wandering and AML compliance officers in the UAE should perform sufficient due diligence on such clients.
Refusal to Provide Company Information
It’s a red flag if the client is unable to provide or refuse to give the following information:
- Business activities and corporate history
- Beneficial owner’s identity
- Source of wealth or funds
- Why the activities are carried out in a certain manner
- Identity of persons they transact with
- Nature of business dealings with third parties, especially those located outside the UAE
Suspicious Nature / Activities of Clients
Due diligence is required if the client actively avoids personal contact without reasonable justification. Also, audit professionals should be on alert if the client is under investigation; has connected with criminals; has a history of a criminal indictment or has faced allegations of corruption or criminal activity in reliable publicly available information sources. Transactions with politically exposed persons (PEP) also warrant an extreme due diligence process.
Unusual Activities and Requests
Normally, the client is expected to communicate with the audit firm after the initial appointment. However, if the client avoids this without sufficient justification then the chances of money laundering are high. Furthermore, keep a watch on the following:
- Refuses to co-operate or provide information, data, and documents required for the audit
- Makes unusual requests to the audit firm or its employees
- Show an unusual interest in or ask too many questions about compliance-related matters, such as customer due diligence or transaction reporting requirements
- Tries to conceal beneficial ownership from authorities
Opaque Background of the Client
Not all clients that approach an audit firm need not have a clear and transparent background. If the background or history of a client appears to be murky, a detailed background check is necessary. The following points are some of the red flags in this category:
- Companies that can’t prove a history of real business activity
- Turns active after a long period of dormancy without any reliable legal explanation
- Can’t be traced on professional social media platforms such as LinkedIn
- Uses unprofessional email ids such as Hotmail, Gmail, Yahoo etc.
- Inexplicable changes in ownership
- Frequent changes in legal structures
Red flags Associated with Client’s Transactions
Suspicious transactions may take one or more forms from the following list:
- Large sums of cash are involved
- Parties with questionable connections are involved
- Involvement of family members who lack legitimate business rationale
- Involves loans from private third parties without adequate supporting agreements/documents/ collateral etc.
- Frequent high-value transactions between a small number of connected natural or legal persons
- Involvement of persons residing in tax havens or high-risk countries
Red Alerts for Means of Payment
Criminals may use money laundering techniques associated with the mode of payment. A smart AML compliance officer can easily recognise such attempts if it’s similar to the following:
- Involvement of cash or negotiable instruments without stating the true payer
- The payment is divided into smaller parts with a short interval between them
- The payment involves doubts as to the validity of the documents submitted in connection with the Transaction
- The payment Involves a loan granted, or an attempt to obtain a loan, using cash collateral, especially when this collateral is deposited abroad
- The payment involves third-party funding without any apparent connection or legitimate explanation
Choice of Auditor
- Is unreasonable and without a clear explanation, given the size, location, or specialization of the auditor.
- Has changed several times in a short space of time (i.e. the client has changed or engaged multiple auditors) without a legitimate reason.
- Is due to the fact that the business relationship was refused by another auditor or the relationship with another auditor was terminated without an adequate explanation.
Key Threats
Due to the nature of their work in terms of examining the accounts, books, records, transactions, and documents of their clients, audit professionals are in a unique position to detect potentially suspicious activity or transactions. For this reason, auditors need to be aware of the key ML/FT threats faced by their clients in the UAE. Among these are ML/FT threats related to the following predicate offences:
- Fraud
- Counterfeiting and Piracy of Product
- Professional third-party Money Laundering
- Insider Trading and Market Manipulation
- Tax crimes (related to direct taxes and indirect taxes)
Red Flags during the audit
- Transactions involve customs, excise or value-added tax or any other kind of tax fraud.
- Involve loans or other financings from private third parties without adequate supporting agreements, collateral, or regular interest payments, or principal repayments.
- Uses services of professional intermediaries that deliberately provide or depend upon more anonymity than is normal under the circumstances.
- Include contractual agreements with terms that are unusual or that do not make business sense for the parties involved.
- Involve funds received from a legal entity that subsequently goes into liquidation or receivership or is struck off the register (either voluntarily or compulsorily).
- Involve frequent intercompany loan transactions or their repayment, and/or multijurisdictional wire transfers, especially when there is no apparent legal or commercial purpose.
- Involve payments of “consultancy fees” to shell companies established in foreign jurisdictions or jurisdictions known to have a market in the formation of numerous shell companies.
Jitendra Chartered Accountants can Provide AML Compliance Services
Audit firms in UAE are categorised as Designated Non-Financial Businesses and Professions (DNFBP) and are regulated by the Ministry of Economy for AML / CFT compliance purposes. As a DNFBP, the auditors are required to abide by AML / CFT obligations such as registering in the goAML system. Failing to perform the mandatory AML / CFT obligations will result in hefty penalties up to AED 1 million, which necessitates the expert assistance of top AML consultants in Dubai such as Jitendra Chartered Accountants (JCA).
JCA has a highly qualified team that can help DNFBPs such as auditors, real estate agents, gold & precious metal traders, trusts, and corporate service providers to implement a robust AML system within their organization. JCA can provide services such as developing a compliance policy and procedures, reviewing current AML policy, implementing AML/ KYC/ CFT Plan and framework, AML audit and reporting, help with due diligence frameworks and providing AML training to the employees. Hire JCA’s AML compliance services in Dubai to fight money laundering with the best regulatory practices.