The trading sector is mired in various fraud schemes from identity theft and cybersecurity threats to financial crimes. Interactive Brokers and Morgan Stanley underwent scrutiny by US regulatory authorities as they were managing the accounts of a Venezuelan businessman, involved in moving more than $2 billion in illicit funds across their financial systems. Concealing proceeds of crimes, escaping AML compliance and bypassing due diligence are more of the threats the trading industry is facing.
The trading sector comes under direct monitoring of Anti Money Laundering (AML) watchdogs. This is because it facilitates the global money exchange and involves international actors. Therefore, brokers should adhere to regulatory standards while opening doors to worldwide deals. This blog covers money laundering red flags and how AML security solutions help identify them.
Identifying Money Laundering Red Flags for Trading Companies
The flow of illicit funds harms brokers in various ways increasing legal scrutiny, hefty penalties, and loss of millions. Therefore, firms should be well aware of the red flag indicator to counter their attempts. Otherwise, brokers will experience a spike in financial crimes along with driving penalties from anti-money laundering regulators.
AML verification solutions enable trading companies to identify red flag indicators more efficiently. This way they can better detect suspicious transactions. The Financial Industry Regulatory Authority (FINRA), Financial Action Task Force (FATF), and Financial Crimes Enforcement Network (FinCEN) have outlined several red flags for money laundering. Details regarding the most crucial of them are in the next section:
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Criminals conceal their illicit funds by choosing industries that provide them with many loopholes. Due to complexities, inadequate AML compliance programs, and insufficient identity checks, trading companies are facilitating fraudsters in huge numbers. Despite the threshold being set, criminals employ cunning strategies such as performing multiple within-the-limit transactions or transferring funds once altogether. Anti money laundering watchdogs further provide a broad range of red flags for this category including:
- Transferring funds into accounts that are not related to customers or specific trade
- Receiving or depositing non-exchange or low-priced securities
- Requesting money deposits right after applying for their withdrawal
Trading companies are employing automated AML screening to detect these patterns with on-time identification of suspicious transactions.
Unusual Customers and Insufficient Identity Details
In order to escape AML compliance, criminals their identities by either camouflaging or creating a completely new one. This helps them escape customer verification and launder high sums of money. Red flags indicators for Customer Due Diligence (CDD) involve:
- Customers not providing sufficient information or refusing to reveal certain details such as the source of funds for anti-money laundering checks
- The information provided is not accurate
- Trader belongs to a high-risk country with sanctions, bank secrecy havens, or tax shelters
- Customers do not have a trading record and apparently have no justified reason to indulge in global exchange
- Individuals trying to register as broker or dealer has undergone account termination or rejection from other financial institutions
- Customer has failed AML compliance and been under sanctions or a part of other watchlists
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In order to escape AML monitoring and suspiciousness detection, criminals use various ways to move their money across trading companies. For this, they elude validating their funds and conceal high-value transactions. Anti-money laundering authorities highlight the following red flags for this category:
- Avoid creating suspicion by performing a single transaction
- Transferring funds after intervals of time
- Breaking down high-value transactions into smaller withdrawals to stay within the threshold
- Using wire transfers to move money into risky geographical regions
Abnormal Trading of Securities
Unusual financial behavior of customers is another red flag. With lax AML compliance programs, trading companies fail to identify changes in transactional patterns. However, anti-money laundering solutions are capable of detecting these changes instantly and help brokers restrict the respective customers. AML monitoring watchdogs have put forth the following indicators for this category:
- Placing multiple orders and canceling them to spike stock prices
- Non-competitive trading of securities
- Purchase of securities in large amounts
AML Systems – Sure Ways to Counter Financial Crimes
Implementing AML compliance controls has become a liability for trading companies to provide a secure exchange environment. Criminals are exploiting brokers to hide their dirty money. Therefore, the trading industry needs to bring in efficient AML systems to excel in the fight against money laundering. AI-powered IDV solutions provide access to global databases for accurate and real-time customer verification. Ultimately, anti-money laundering solutions aid in performing CDD, restricting fraudulent transactions, and safeguarding overall trading operations
Trading companies are on the verge of becoming a safe haven for money launderers due to their inefficient AML compliance programs. In order to counter financial crimes and skyrocketing movement of illicit funds through these firms, regulatory bodies have come up with a list of red flags. By integrating AML solutions, trading companies can identify these indicators, verify customers, validate sources of funds, and much more.
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