Anti Money Laundering Warning Signs

How to Assess and Manage Risk

This post has already been read 9106 times!

Anti Money Laundering Warning Signs

In this post we will break down the Signs of Money Laundering and the importance of the first AML officer’s actions in a chain that obfuscates the more layers the money goes through.

AML Officer Importance – The First Link.

Anti Money Laundering Warning Signs
Anti Money Laundering Warning Signs

Imagine for a second dripping a drop of blue ink into a container of clear water. At first the ink can be clearly seen as it enters the water. But as it disperses it becomes less and less visible. Eventually mixing so much that it becomes virtually undetectable.

That analogy fits perfectly to identify the importance of the first identification of a transaction(s) into the real financial system. It exemplifies how frauds such as the Danske bank scandal in Estonia become so difficult to trace. Criminals infiltrating a financial institution to facilitate that first layer can be critical.

Once they have placed the money in the first transaction any further layer becomes less and less suspicious with less and less chance the transactions will be identified; and even if they are those subsequent layers only usually trace one layer up. If those ‘higher’ layers come from reputable financial institutes they are less likely to flag as suspicious by the subsequent AML officer. Especially when the transactions are international and inter-organizational.

Criminal Insiders?

Anti Money Laundering Warning Signs includes Employee vetting
Anti Money Laundering Warning Signs includes Employee vetting

Occasionally an AML officer uncovers ML further down the chain. Howard Wilkinson, who blew the whistle on perhaps the largest money-laundering scheme in history, the movement of €200bn of suspect funds through the Estonian branch of Denmark’s biggest bank between 2007 and 2015, most of it earned in the dodgier corners of the former Soviet Union, some ‘perhaps’ belonging to Vladimir Putin himself.

“No one really knows where this money went,” Wilkinson, a former Danske Bank employee, told Denmark’s parliament last year. Once the money had got into the global financial system, “it was clean, it was free.”

Britain’s most famous money launderer is HSBC, thanks to its systematic cleansing of the earnings of the Latin American drug cartels over the second half of the last decade, for which it was fined $1.9bn by the US government in 2012. But that was a tiny operation compared to the Danske Bank scandal.

If gathered together, the suspect funds moved through the bank’s Estonian outpost could buy HSBC, with more than enough left over to buy Danske Bank too.

The scandal has been big news in Denmark and Estonia, but barely grazed public consciousness in the UK. This is strange, because Britain played a key role. All of the owners of the bank accounts that first aroused Wilkinson’s suspicions had their identity hidden behind corporate businesses registered in the UK – including Lantana Trade LLP.

Anti Money Laundering Warnings.

Global AML warning Signs
Global AML warning Signs

That means this is not just a Russian, Estonian or Danish scandal, but something far closer to the UK. In November, Wilkinson told a European parliament committee that the countries hosting these companies are just as culpable. “Worst of all is the United Kingdom,” he said. “The United Kingdom is an absolute disgrace.”

Signs of Money Laundering

The Cayman Islands is a jurisdiction that has a reputation for being less than prudent with its regulatory framework (that is British understatement by the way). There are many suspicions of the jurisidiction facilitating money laundering.

Yet the regulations, while piece-meal in the Cayman Islands, are getting tougher and are actually tougher than the UK. Registering a business is expensive and ‘relatively’ complex here. Go to the UK and you can add a business to ‘Companies House’ (National register for businesses) for about $33. Doing it all from a bedroom PC with no checks on identity or legitimacy.

The sheer volume of businesses being added can’t be monitored effectively. It is relatively simple then to allow the business to become dormant with the business banking in Estonia (for example) allowing the transactions to flow into the legitimate system.

It is the air of respectability that the UK is perceived to supply that the criminals desire. The mistake the criminals made in the Danske scandal was to allow those businesses to become dormant and register 16 such businesses all from the same mailing address. It was this that Wilkinson uncovered to raise the alarm.

First Line of Defence

AML First Line of Defence
AML First Line of Defence

This, in the AML world usually means the frontline staff and the term usually applies to banks. Yet it means so much more. More than just banks. Consider mirror trading.

The process whereby an ‘investor’ buys stocks/shares through one account while selling the same through another. Meaning financially his investment is net neutral. But he has created two transactions creating layers to obfuscate his laundering.

If you are an AML officer charged within an investment broker, have you ever checked the shareholder register within the company being purchased? Checking for your client’s movement of investments for the same trade in the opposite direction? And would you have enough detail to uncover the client despite a layer of corporate identity?

That, for me is the first line of defence within a brokers, so this does not fit the traditional FATF view of first line of defence.

It is a clear Anti Money Laundering Warning Sign.

What are your processes for managing cash based businesses and what would you do if one was depositing more than is usual? Another warning sign of cash based money laundering. What if they were managing a private ATM? Would you consider layering and integration through your association with them?

If you work within a bank AML department and you see the same business transacting in the millions daily, what efforts do you take to audit those transactions? Do you go as far as Mr Wilkinson?

His check was a simple review of the Companies House website, you can actually still see Lantana Trade LLP here. The business was set up creating two Corporate LLP members, both in the Marshall Islands, banking in Estonia, with Russian money syphoning through the accounts.

To be honest, the check Mr Wilkinson did was very, very easy. A simple check of the register, it takes literally two minutes to do. When he checked another 15 businesses and they were all dormant and registered to the same address alarm bells rang.

Yet it still took Danske bank nearly two years to deal with it.

That is a scandal in itself because of the volume of criminal money that flowed in the interim. (Addendum 7/7/19: In the news today is an allegation Danske Bank tried to discredit rather than support Mr Wilkinson, one reason CYW are building an end to end encrypted application to allow anonymous CAMS operators to report fraud and ML).

Layers Make Money Laundering Warning Signs More Difficult To Spot

Layers fog AML Risk
Layers fog AML Risk

The point I am making here is while AML is difficult because of volume, the easiest time to find it is upon the first time the money enters the system. Once it disperses it becomes more and more ‘legitimate’ through each step.

More and more difficult to trace backwards because of the layers of legitimate institutes who have apparently given the money a green light. The counter argument is, it is sometimes the ‘layers’ of connected transactions that raise the alarm.

What the AML industry needs to consider on a macro level is not just the ‘red flags’ but the combination of those and a greater awareness of risk and what to do about it.

Hindsight is a wonderful thing. I am sure a plethora of recommendations will come out of the Danske scandal in time. Yet I can confidently suggest the Anti Money Laundering warning signs were there upon the first opening of the accounts.

  • Why is a British Company owned by two corporate entities in the Marshall Islands – Risk 1.
  • Why is it banking in Estonia in Russian money – Risk 2/3
  • Why wasn’t anyone checking non-resident customers from Russia within Danske in Estonia -Risk 4
  • Why was the business registered in the UK – Risk 5
  • What volume/value checks were in place to focus on large scale ML – Risk 6 and 7
  • What level of ongoing Due diligence was under way in Danske – Risk 8
  • What level of corporate compliance was going on – Risk 9
  • What does the local AML manual require, have they even got one – Risk 10
  • What does the AML policy/procedures require – Risk 11
  • Should I go on????
Retail Banking

How to Investigate Money Laundering

By Andy / 17 November 2019 / 0 Comments
AML suspicious activity

Money Laundering Red Flags

By Andy / 27 May 2019 / 0 Comments
Cyber enabled Money Laundering

Cyber Money Laundering 101

By Andy / 10 June 2019 / 0 Comments
Money Laundering Definition

What are the best Money Laundering Schemes?

By Andy / 19 November 2019 / 0 Comments


By Andy / 29 September 2019 / 0 Comments

What is a Politically Exposed Person?

By Andy / 13 November 2019 / 0 Comments
Money Laundering Compliance

Preventing Money Laundering 101

By Andy / 22 June 2019 / 0 Comments
How to Assess and Manage Risk

Anti Money Laundering Warning Signs

By Andy / 6 July 2019 / 0 Comments

Red Flag Warnings for AML pt2

By Andy / 8 November 2019 / 0 Comments

Yet with all of these easily evident risks a simple check of the company register in the UK wasn’t completed until several years into the scandal. The repeated missing of this makes me question the competence of the Danske Compliance function or indeed if it was criminally complicit. I’ll leave you to decide so I don’t leave myself open to litigation.

Key takeaways

Key AML warning sign takeaways
Key AML warning sign takeaways
  • AML officers should be guided by a manual that also encompasses frontline and senior staff.
  • Basic checks should be mandatory and automated by a web crawler/software (to access Companies House and check for example).
  • Audits should be mandatory and aligned to volume/value.
  • First line AML officers should understand the importance of their decisions.
  • A process to review more risky business should be mandatory, flagged by the first ‘human’ checks.
  • Checks aligned to risk should be conducted repeatedly on an ongoing basis.
  • Officers should be provided with external reporting mechanisms (that are legally enforceable and individually culpable) to side step any potential criminal elements within the institute to speed up internal actions.
  • Red flags in combination should be identifiable by software and experience.
  • Employee vetting is fundamentally critical in risk roles like AML.
  • FATF – the financial action task force – provide clear guidance on what are warning signs or red flags for AML. Your should review them regularly.

Register for our newsletter today


Register for our newsletter today