Identifying Red Flags in AML and Countering Financing of Terrorism (CFT)

Why Identifying Red Flags in AML and Countering Financing of Terrorism (CFT)

Money Laundering (ML) and Financing of Terrorism (TF) are the threats around the globe that impact the financial systems, increase criminal activities, and create a destabilization in the economy of the countries. In response, countries like the UAE have implemented the AML/CFT Laws to mitigate these risks. The AML/CFT framework in the UAE is more robust, which matches with the international standards for combating the said threats. To avoid penalties and legal complications, businesses operating in the UAE must be aware of red flags in their business and vigilant on the red flags to report to the authority in case of any client or transaction seems related to Money Laundering or Finance of Terrorism. In this article, let us dive into the key red flags associated with AML/CFT and provide actionable strategies for businesses to mitigate the risk of exposing their business to ML/FT.

Understanding AML and CFT in the UAE

Being the global financial hub, by foreseeing the potential chances of using the country for Money Laundering and finance of terrorism, UAE introduced Federal Decree Law No.20 of 2018 on Anti-Money Laundering and Combating the Finance of Terrorism, along with its Executive Regulations. The Law outline the duties and responsibilities of businesses operating in the UAE, financial institutions, and DNFBPs (Designated Non-Financial Businesses and Professions) to identify, report to the authority and prevent suspicious activities 

Key obligations under UAE AML/CFT laws include:

• Registration with the Financial Intelligence Unit (FIU)
• Appointment of Compliance Officer 
• Preparation and implementation of AML/CFT policy for preventing the use of the entity for Money Laundering and Terrorist Financing 
• Conducting Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)
• Reporting Suspicious Transactions and activities to the Financial Intelligence Unit (FIU).
• Maintained proper customer files.

What Are Red Flags in AML/CFT?

Red flags are the indications or warning signs that highlight the potential activities of money laundering and terrorist financing. The red flags can arise based on various factors like the behavior of customers, patterns the customer follows in the transactions, geographical location of the customer (high-risk countries) or certain industry-specific vulnerabilities. It is very crucial for the businesses to identity these red flags at the early stage in order to take appropriate action such as conducting Enhanced Due Diligence (EDD) or reporting to the authority. 

1. Common Red Flags in Money Laundering

a) Suspicious Transaction Patterns

• Unusual Transaction Size: Certain transactions do not match the profile of the customer. These transactions can be higher or smaller in amounts. 

Example: A small retail shop deposits AED 1 million in cash within a week without a clear explanation.

• Frequent Small Transactions: Structuring large amounts into smaller transactions to avoid detection thresholds (e.g., multiple AED 9,000 deposits instead of one AED 90,000 deposit).
• Rapid Movement of Funds: Transferring of funds between accounts quickly without any economic reasons or justifications. 

b) Customers Refusing to Provide Information

• Customers who are not willing to provide the KYC documents or providing incomplete documents or providing the documents which are tampered. 
• Placing intermediaries in the transactions to avoid direct contact with the entity

c) Use of Shell Companies

• The entities are set up with no significant business activities or assets but are used to move funds from country to country. 
• The entities which do not have clarity on the Ultimate Beneficial Ownership (UBO).

d) High-Risk Payment Methods

• Use of a large number or volume of cash transactions without legitimate reasons. 
• Transactions are conducted through unregulated exchanges via virtual assets like cryptocurrencies without proper documentation.

2. Red Flags in Terrorist Financing (TF)

Terrorist Financing is a dangerous matter which compromises national security despite of the number or volume of transactions. Key red flags include;

a) Charities and Non-Profit Organizations

• Charitable organizations collect funds in which the purpose is vague or transferring huge amounts to high-risk jurisdictions. 

A charity organization raises funds for "natural calamity relief" and transfers the funds to conflict zones without proper documentation.

b) False Legal Disputes

Creating fabricated legal disputes to justify fund transfers between entities or individuals linked to terrorist organizations. 

c) Use of Third Parties

Transactions which are routed through multiple intermediaries and the intermediaries are located in high-risk countries or in countries with weak AML/CFT controls.

d) Frequent Cross-Border Transactions

Doing transactions to the countries known for terrorist financing activities and such transactions have no commercial or economic reasons. 

3. Geographic Risks

Certain regions are considered high-risk due to weak regulatory frameworks, political instability, or known links to criminal activities:

• Grey List and Black listed countries by Financial Action Task Force
• Jurisdictions subject to international sanctions or embargoes.

4. Industry-Specific Red Flags

Different industries face unique risks when it comes to AML/CFT compliance:

a) Real Estate

Real estate transactions are often targeted by money launderers due to their high-value nature and potential for anonymity.

• Property flipping by way of rapid purchases and quick sales with inflated prices.
• Property transactions are done with heavy cash or virtual assets where the sources are not legitimate.

b) Financial Institutions

Banks and financial institutions must monitor:

• Accounts with frequent deposits followed by immediate withdrawals (layering).
• Dormant accounts suddenly showing significant activity.

c) Virtual Assets Service Providers (VASPs)

Crypto currency exchanges and wallet providers face risks such as:

• Conversion of large amounts of cryptocurrency into fiat currency at significant losses without clear reasons. 
• Use of unauthorized exchanges for crypto currencies to fiat currencies. 

5. How Businesses Can Mitigate Risks

To address these red flags effectively, businesses must implement comprehensive AML/CFT measures:

a) Customer Due Diligence (CDD)

CDD involves verifying customer identities, understanding their business activities, and assessing their risk levels:

• Conduct Enhanced Due Diligence (EDD) for high-risk customers such as Politically Exposed Persons (PEPs).
• Use government databases or third-party screening tools to verify identities and check against sanctions lists.

b) Transaction Monitoring Systems

Automated transaction monitoring systems can flag unusual patterns based on predefined rules:

• AI-driven solutions can detect anomalies such as sudden spikes in account activity or unusual geographic fund flows.

c) Reporting Suspicious Transactions

Under UAE law, businesses must file STRs with the FIU within 48 hours of identifying suspicious activity:

• Document all details related to the transaction and customer behavior.
• Submit the report through the FTA portal (goAML).

Failure to report suspicious transactions can result in severe penalties, including fines up to AED 50 million under Article 15 of Federal Decree-Law No. 20 of 2018.

d) Employee Training Programs

Regular training ensures employees can identify red flags effectively:

• Conduct workshops on recognizing suspicious behavior, such as structuring or layering.
• Train staff on using transaction monitoring tools and filing STRs.

e) Record-keeping obligations

Businesses must maintain records of all transactions, customer profiles, and STRs for at least seven years as per UAE regulations.

6. Case Study: Real-Life Example from the UAE

A Dubai-based real estate company noticed a shell company attempting to purchase multiple properties worth AED 50 million using untraceable crypto currency funds. Upon further investigation:

1. The company froze the transaction under Article 16 of UAE AML Law.
2. Filed an STR with the FIU detailing the suspicious activity.
3. Enhanced due diligence revealed links between the shell company's beneficial owner and a sanctioned individual involved in terrorist financing.

This proactive approach not only prevented regulatory penalties but also protected the company's reputation.

7. Regulatory Frameworks Supporting AML/CFT Compliance in the UAE

The UAE has introduced several measures to strengthen its AML/CFT framework:

1. Federal Decree-Law No. 20 of 2018: The cornerstone legislation for combating ML/TF.
2. Cabinet Decision No. 10 of 2019: Outlines implementing regulations for AML/CFT compliance.
3. FATF Recommendations: The UAE aligns its policies with FATF's international standards.

Conclusion

Identifying red flags in AML/CFT is essential for businesses operating in today's complex regulatory environment, especially in global financial hubs like the UAE. By recognizing patterns such as unusual transactions, high-risk customers, geographic risks, and industry-specific vulnerabilities, businesses can protect themselves from legal repercussions while contributing to global security efforts.
For tailored solutions on implementing robust AML/CFT measures, consult experts like Flying Colour Tax Consultants. Our team specializes in helping businesses navigate compliance challenges while safeguarding their operations against financial crimes.

To learn more about Identifying Red Flags in AML and Countering Financing of Terrorism (CFT), book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.