What a red flag means
An AML red flag is information that gives a reason to examine a customer’s activity or behaviour. Indicator is another name for this warning sign.
Its value depends on the circumstances. Activity that is unusual for one customer may have a clear business purpose for another.
Sources: AUSTRAC: How to monitor your customers; AUSTRAC: Determining if a transaction or behaviour is unusual.
Examine the pattern and its purpose
Useful questions concern changes in transaction size, frequency, parties or purpose. Compare the activity with reliable customer information and previous activity.
An unexplained change can warrant further review. A plausible story also needs support where the surrounding facts remain inconsistent.
An indicator list cannot cover every situation. A transaction can need examination even if software did not produce an alert.
Sources: AUSTRAC: How to monitor your customers; AUSTRAC: Step 1; Step 2.
A new payment arrangement
A fictional supplier receives an instruction to pay a third party after months of payments to one account. The employee records the change.
The customer says the third party is a new distributor. The reviewer compares that statement with the contract and payment instructions.
The documents may support the change or leave a conflict. The next action depends on that evidence and the applicable legal conditions.
Source: AUSTRAC: Step 1; Step 2; Step 3.
- Change observed
A fictional supplier receives new instructions to pay a third party.
- Explanation examined
Compare the customer’s explanation with the contract and instructions.
- Response recorded
Use the evidence and applicable conditions to decide the next action.
Connect a warning sign to evidence
Fictional example. A red flag starts an examination. It does not itself prove crime or decide whether an SMR is required.
Follow the process from top to bottom.
Keep the response tied to evidence
The business must respond appropriately to unusual transactions and behaviour. Possible actions include further review, a risk update or enhanced customer due diligence.
A suspicious matter report has its own legal test. The SMR article describes reasonable grounds, deadlines and exceptions.
A red flag can also concern another control, such as sanctions. Follow the relevant legal restriction. A monitoring review does not permit a prohibited transaction.
Sources: AUSTRAC: Responding to unusual transactions and behaviour; Federal Register of Legislation: Sections 30, 32 and 41; AUSTRAC: Persons designated for targeted financial sanctions.