AML Red Flags: Spotting the Signs of Money Laundering

Money laundering is the process of hiding the origin of illegally gained money by passing it through legitimate financial transactions, making the proceeds look legitimate. It allows criminals to wash dirty profits into the formal economy, often through sophisticated sequences of transactions designed to conceal. To balance this, financial institutions and businesses must positively identify red flags—significant indicators of possibly suspicious activity linked to money laundering. These warning signs include unusually frequent or sizeable transactions, complex corporate arrangements that mask ownership, large amounts of cash transactions without an apparent business rationale, and the rapid movement of funds from several accounts or jurisdictions. Identification and correction of these red flags are necessary to validating compliance with Malta's Anti-Money Laundering (AML) legislation and safeguarding its financial system integrity.

Malta is a core and dynamic EU member country with a significant role in international business, finance, and trade. The country diversified and developed industry over the years in real estate, banking, and crypto. While these sectors offer great opportunity, they also offer potential areas for people to conceal illicit activities. In turn, Malta has stepped up the efforts to combat money laundering and financial crime. It is essential to identify primary red flags in determining possible money laundering activity.

One of the common warning signs in anti-money laundering (AML) operations is the use of complex ownership structures. Companies will alter their business structures, including multiple layers of ownership, perhaps involving offshore or shell companies, to hide the true owner. Malta's UBO transparency law minimizes the risk of this kind of abuse by making it more difficult for parties to hide behind complex structures.

Another red flag potential is the presence of individuals that have no compelling reason to open a company in Malta. Where a client is opening a company for no evident economic reason, it may signal an attempt at concealing criminal activity. The service providers in Malta must perform thorough due diligence, like a transparent source of funds.

Unexplained large or repeated transactions are also significant red flags. Such transactions may represent money laundering if they lack a good legitimate business explanation and are out of line with the company's principal businesses. Similarly, transactions from jurisdictions where AML enforcement is weak can suspect illegal funding.

Some of the other warning signs include the rapid movement of funds, whereby a customer transfers funds from one account to another, maybe between two jurisdictions that have weaker AML regulations, for no clear purpose. Heavy use of cash transactions is also an indication because cash cannot be tracked, and illegal activities are more difficult to detect. Inconsistent or incomplete client information can also be indicative of money laundering where the client will not describe the use of specific transactions or business activities.

Unusual or complicated transactions, large or repeated cash transactions, and refusal to provide information or documentation—particularly regarding the source of wealth (SOW) or source of funds (SOF), are red flags of serious concern that require heightened scrutiny. Transactions that do not align with a client's usual financial behaviour, involve complicated ownership structures, or are not economically transparent can evidence attempts to hide criminal activity. Similarly, excessive use of cash, especially in big transactions, is suspicious of money laundering as cash is difficult to trace and often used to avoid regulatory oversight.

Besides, when firms or parties shy away or are slow to present significant information about their financial background—like the origin of funds or legitimacy of their wealth—it suggests a concealment of criminal proceeds. In Malta, where AML compliance is vital in maintaining financial openness, firms are required to conduct enhanced due diligence (EDD) during such cases to mitigate risks and maintain regulatory standards.

With the view to dampen these early warning signs, businesses and institutions located in Malta are required to implement measures such as Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) wherever appropriate. While CDD aims at establishing the purpose of an undertaking by a company, EDD allows providers of services to carry out more in-depth risk analysis and obtain additional information relating to the origin of funds. It is necessary that businesses report any suspect transactions to the Financial Intelligence Analysis Unit (FIAU).

Though ongoing challenges with money laundering continue, Malta's proactive approach, such as the identification of warning signs and the implementation of effective AML programs, allows businesses to reduce financial risk, avoid regulatory penalties, and foster a cleaner financial system. As global pressure mounts and authorities increasingly target non-compliant jurisdictions, preventing money laundering is not merely a regulatory issue, it is essential to maintaining Malta's reputation as a secure and trusted business hub.

For further information or assistance, please contact Quazar at quazaroffice@quazar.mt.

Get in Touch:

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Christina Meli

cmeli@quazar.mt / +356 2388 4600