Money Laundering Red Flags

On the 14^th of May 2025, the Malta Financial Intelligence Analysis Unit (‘FIAU’) issued a guidance document, bearing code SA25-01, aiding compliance professionals identify indicators which may point at money-laundering and terrorist financing (‘ML/TF’) risks within corporate, financial and non-financial records.

The SA25-01 document provides a detailed account of red-flags which are normally encountered by the FIAU in evaluating both financial and non-financial information.

Some red flags which may be evident in financial statements, as outlined in the guidance document, indicating potential ML/TF activities include the following:

• Anomalies in revenue reporting: Unjustified and sudden peaks and troughs in revenue, without demonstrating a clear and detailed business rationale;
• Abnormal cash sales to credit sales proportions: A higher proportion of cash sales when compared to typical industry figures, especially considering the role cash plays in many crimes;
• Irregularities in purchases and inventory: Warnings issued by the FIAU in this regard entail that inventory and purchasing accounts may potentially be manipulated in an attempt to justify cash flows appearing to be illegitimate. A thorough review of inventory value should be conducted, ensuring accounting policies are adhered to and applied on a consistent basis;
• There may also be inconsistencies in accounting practices, where the frequent changing of overly complex accounting policies may be an evident indicator of manipulation. There might be unjustified and inconsistent shifts in the valuation of revenue, which could indicate that illicit transactions are being obscured. The guidance document recommends that key accounting policies are checked regularly and applied consistently and reasonably;

It is important to note that none of these indicators should be viewed in isolation. A red flag is often only meaningful when seen alongside other factors and the overall context of the business. For instance, an unexpected revenue spike might be explainable by a new contract. However, if that spike is accompanied by certain anomalies, the combination should trigger suspicion.

The FIAU expects integration of these red flag indicators into their customer due diligence, ongoing monitoring, and internal risk assessments. When a subject person encounters one or more of these warning signs and deems them inexplicable by legitimate factors, this should escalate the level of scrutiny. If, after the activity is analysed, it is deemed suspicious, the subject person’s Money Laundering Reporting Officer (MLRO) should file a Suspicious Transaction Report (STR) to the FIAU. Whenever the STR is motivated by this guidance document, the guidance document should be cited in the report to help contextualise the suspicion. This practice ultimately improves communications between compliance practitioners and the FIAU.

For more information or assistance, please contact us at info@gtg.com.mt

Author: Dr Karl Cauchi