Common Red Flags in Money Laundering

QUESTION

I am the COO of a mid-sized lender in the Midwest. We have contacted your firm to do an Anti-Money Laundering Risk Assessment. One of the big issues we have is trying to identify the most common red flags. 

In streamlining our system AML reporting, we are using AI to determine common red flags. Unfortunately, AI is not able to provide real-world data. We need practical experience, which is why I would like you to let me know the kinds of common red flags you find in your audits. 

What are the common red flags for money laundering in mortgage banking? 

SOLUTIONS 

• AML TESTING
• AML TRAINING
• AML RISK ASSESSMENT 
• AML PROGRAM [Written Policy]

RESPONSE 

Since 2003, FinCEN has issued a number of analyses, reports, and advisories regarding emerging trends in mortgage fraud, money laundering, and terrorist financing activity involving residential mortgage loans. 

While FinCEN publishes a list of potential red flags, we often find that our list of activities that could trigger the filing of Suspicious Activity Reports continues to expand. At this point, we have hundreds of such findings. 

Thank you for retaining us to provide the AML Risk Assessment. 

Lenders Compliance Group was the first compliance firm in the country to provide AML audit tests to non-bank residential mortgage lenders and originators. Of course, we have also offered AML audits to banks involved in residential mortgage banking for many years. 

So, by this point, we have rock-solid indicia and identifiers that help us review for AML compliance. There are many common red flags. I am going to provide a half-dozen of them that keep turning up in our audits with the proviso that the list is not comprehensive. 

Activities considered red flags in mortgage banking include: 

(1) A loan secured by pledged assets held by a third party unrelated to the borrower. 

(2) A loan secured by deposits or other readily marketable assets, such as securities, when owned by apparently unrelated third parties. 

(3) A borrower default on a case-secured loan or any loan that is secured by assets that are readily convertible into currency. 

(4) A loan made for, or paid on behalf of, a third party with no reasonable explanation. 

(5) A customer, to secure a loan, purchases a certificate of deposit using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments. 

(6) A loan that lacks a legitimate business purpose, provides the depository institution with significant fees for assuming little or no risk, or tends to obscure the movement of funds (i.e., loans made to a borrower and immediately sold to an entity related to the borrower). 

It is important to ensure that your system solution requires the reporting of any activity that is suspected of violating a criminal statute. Additionally, the federal money laundering criminal statutes consider money laundering to be the handling of the proceeds of criminal activity, with mortgage fraud considered to be a predicate offense for the money laundering criminal statutes. Mortgage-related criminal activity is a specific predicate offense. 

Jonathan Foxx PhD., MBA
Chairman & Managing Director

Lenders Compliance Group

Cryptocurrency Dilemma

QUESTION 

Our compliance department notified us that the government has stopped criminal, regulatory, anti-money laundering enforcement of the crypto sector. We are a bank that accepts cryptocurrency transactions. For instance, we accept cryptoassets such as Bitcoin. 

One of my tasks is to monitor the cryptocurrency exchange platforms. I want to know the extent to which it is necessary to monitor these platforms if there is not going to be any enforcement. Are we wasting our time? I realize that government officials want to deregulate crypto, but it seems a stretch to allow the exchange platforms to bear no accountability. I hope you can shed some light on this subject. 

If there is not going to be enforcement of regulations involving cryptocurrency, to what extent is it necessary to monitor exchange platforms? 

SOLUTION 

- AML TESTING
- AML TRAINING
- AML RISK ASSESSMENT 
- AML PROGRAM [Written Policy]

RESPONSE 

On April 7, 2025, Todd Blanche, the Deputy Attorney General in the DOJ, issued a memorandum containing the following statement: 

''The Department of Justice is not a digital assets regulator.''[i] 

The memorandum was issued a couple of weeks after President Donald Trump pardoned several cryptocurrency executives and a company that had pleaded guilty to anti-money laundering compliance violations.[ii] 

The Justice Department has decided to stop pursuing those cases altogether. That means, in substance, that the DOJ will no longer pursue litigation or enforcement actions that effectively superimpose regulatory frameworks on the digital assets sector. 

In other words, there is a focus on deregulating the cryptocurrency industry. The Justice Department will no longer target virtual currency exchanges, "mixing and tumbling" services, and offline wallets for the acts of their end users and unwitting violations of regulations. 

Furthermore, the memorandum makes clear that prosecutors are directed not to charge regulatory violations in cases involving digital assets, including unlicensed money transmitting, violations of the Bank Secrecy Act, unregistered securities offering violations, and other registration requirements under the Commodity Exchange Act. When there are cases involving digital assets, prosecutors are now directed to pursue illicit financing by the culpable individuals and enterprises themselves – but not against the platforms they use to conduct the illegal activity. 

DISBANDED OVERSIGHT

Mr. Blanche also disbanded the Justice Department's National Cryptocurrency Enforcement Team, effective immediately, and directed the Market Integrity and Major Frauds Unit to cease cryptocurrency enforcement and instead focus on other priorities, such as immigration and procurement frauds. 

You mention that your task is to monitor the cryptocurrency exchange platforms. It appears the DOJ has changed its focus away from regulating the platforms themselves, seemingly interested in only the illicit transactions of bad actors who use the platforms. To me, this seems like going after bad drivers while doing nothing to put stop signs on the road itself to protect pedestrians. 

Cryptoasset exchange platforms are subject to certain regulatory oversight, but the level and nature of that oversight vary depending on the specific jurisdiction and the nature of the cryptoassets being traded. In the US, platforms that trade cryptoassets that are securities are subject to registration and regulation as national securities exchanges. Additionally, platforms may need to register as Money Services Businesses (MSBs) with the Financial Crimes Enforcement Network (FinCEN). The Commodity Futures Trading Commission (CFTC) also regulates crypto derivatives. A regulatory referral about an cryptocurrency exchange platform to the DOJ may now not be prosecuted with respect to illicit activity conducted by the platform itself.