Some Red Flags

Most compliance practitioners have heard the term “Red Flags.”  Red Flags are generally defined as circumstances which could place a reasonable person on notice that illegal or improper conduct has or may occur. A Red Flags does not mean that an action or transaction should immediately be terminated. It does mean that you should engage in an appropriate level of additional due diligence and investigation before moving forward.

In his blog posting yesterday entitled “On Anti-Money Laundering“, our colleague Howard Sklar, discussed a new anti-money laundering initiative from the Asset Forfeiture and Money Laundering Section of the Department of Justice. Howard has previously spoken of “compliance convergence” or the merging of control programs such as anti-bribery and anti-corruption with anti-money laundering. Inspired by Howard’s post and his use of “compliance convergence” this post will list some possible Red Flags that you should consider in three control areas: anti-bribery and and anti-corruption; anti-money laundering and with a nod towards the ever changing economic sanctions being levied against Libya, Red Flags regarding international economic sanctions.

I. Anti-Bribery and Anti-Money Laundering

• Doing business in a high risk county
• Allegations that the party has made facilitation payments to government officials.
• Refusal to warrant compliance with the FCPA or other recognized anti-bribery or anti-corruption law.
• Reluctance to participate in due diligence.
• Allegations of illegal or unethical conduct.
• Convictions for illegal conduct.
• Any suggestion that laws or regulations or company compliance policies need not be followed.
• Any suggestion that unethical conduct is custom or the norm in  country.
• Refusal to follow your code of conduct.
• Use of shell companies.
• Ownership by or close relationship to a governmental official
• Refusal to identify a principal of beneficial owner.
• Recommendation of use by a governmental official
• Refusal to sign a contract.
• Lack of experience in the field.
• Requirement of an usually high commission.
• Insistence on payment in cash.
• Insistence on payment in third party country or to an unrelated third party.
• Request for advances.
• Sharing of compensation with undisclosed parties.
• Refusal to provide adequate invoices.
• Offering to provide false invoices.

II.       Anti-Money Laundering

• Named as a Designated Party, SDN or on any similar list.
• Connections to countries identified as non-cooperative with international efforts against money laundering.
• Providing false or misleading information.
• Refusal to disclose the nature and source of assets.
• Refusal to identify a beneficial owner.
• Acting as the agent for an undisclosed principal.
• Company address is not a physical site but a PO box.
• Use of a shell company.
• Lack of concern regarding risks or transaction costs.
• Structuring transactions to avoid reporting requirements.
• Offering to engage in transaction with no or little business justification.
• A request that funds be transferred to an undisclosed third party or in another jurisdiction.
• Any transaction designed to evade taxes.

III.    International Economic Sanction

• Connections to US or UN sanctions or embargoes, including SDN, Denied Persons, Entity and Debarred Lists.
• Requests that goods be exported to countries on an international boycott list.
• Inaccuracies in any shipping documentation and invoicing.
• Abnormal packing, marking or routing of goods.
• Inconsistencies between goods and services of that usually offered by the company.
• Declination of routine installation or training services.
• Promised delivery dates and locations are vague or out of the way location.
• A freight forwarding firm is listed as the final destination.
• Shipping route is out of the ordinary.

As no one list of Red Flags can be exhaustive or final, you may wish to add Red Flags more specific to the risks appropriate to your company, such as those based upon the industry in which you conduct business, the locations where your company does business or other risk factor. If there are any additional ones you feel our readers should be aware of please list them in the Comments Section.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011