Unconventional Business Deals Raise Red Flags for Financial Regulators

Financial regulators are on high alert for clients who conduct business in unusual or unconventional circumstances. In an effort to combat money laundering and terrorist financing, they are identifying several red flags that may indicate fraudulent activity.

Unusual Ownership Structures

One such red flag is when the structure of the entity makes it difficult to identify the beneficial owner. This can include:

• Complex ownership structures
• Multiple layers of intermediaries

Suspicious Management Practices

Another concern is when management appears to be acting on instructions from unknown or inappropriate individuals, such as:

• Situations where a company’s operations are controlled by an individual with no apparent connection to the business

Cash-Heavy Businesses and Transactions

Cash-intensive businesses, non-profit organizations, and transactions that take place outside of a client’s typical profile can also raise suspicions. Specifically:

• Cash payments or large international transactions without a clear business rationale
• Changes in ownership or legal structure without explanation

Unusual Payment Methods

Regulators are also watching for unusual payment methods, such as:

• Over- or under-invoicing of goods and services
• Use of virtual assets
• Delays in making payments

Services That May Conceal Beneficial Ownership

According to the Financial Action Task Force (FATF), some services offered by trust company service providers (TCSPs) may be used to conceal beneficial ownership or facilitate illegal activities. These services include:

• Pooled client accounts
• Safe custody of client money or assets
• Advice on setting up legal persons or arrangements

Geographical Locations of Concern

The geographical location of a business can also play a role in the level of risk. Certain regions or countries may be more prone to money laundering and terrorist financing activities, making it important for financial institutions to take extra precautions when dealing with clients from these areas.

Conclusion

Unconventional business deals can pose significant risks to financial stability and security. Regulators are working closely with financial institutions to identify and mitigate these risks, and TCSPs must be proactive in monitoring their clients’ transactions and reporting any suspicious activity. By being vigilant and taking necessary precautions, we can prevent money laundering and terrorist financing activities from undermining our financial systems.