What Every Compliance Professional Should Know

Why Financial Statement Analysis Matters

Financial statements tell a story - one that sometimes reveals suspicious activity when one knows what to look for. As regulatory scrutiny intensifies globally, understanding these warning signs isn't just good practice - it's essential for protecting your organisation from reputational damage and regulatory penalties. 

Key areas to monitor:

1. Revenue Patterns

Revenue anomalies often serve as the first indicator of potential money laundering activities: 

• Unexplained Fluctuations: Sudden spikes or dips in revenue without corresponding business activities warrant further investigation.
• Cash vs. Credit Ratio: Businesses reporting significantly higher cash sales percentages than industry norms (e.g., a business reporting 90% cash sales when industry standard is 40%)
• Customer Demographics: Sales patterns inconsistent with the company's geographic focus or target market

2. Inventory and Purchases

Money launderers often exploit inventory accounting to justify suspicious cash flows:

• Valuation Inconsistencies: Fluctuating inventory values without clear business justification
• Gross Margin Anomalies: Significant deviations from industry benchmarks
• Suspicious Supplier Relationships: Transactions with unverifiable or high-risk suppliers

3. Employee and Salary Red Flags

Payroll presents numerous opportunities for financial crime:

• Disproportionate Workforce: Small companies with unusually large employee counts
• Salary Discrepancies: Compensation significantly above or below industry standards
• One-Time Payments: Unexplained bonuses or payments to individuals without clear roles

4. Professional Services Expenses

These discretionary expenses often hide illicit payments:

• Consulting Fees: Large, unexplained payments to vaguely described service providers
• Marketing / Advertising: Excessive spending relative to business size and market presence
• Jurisdictional Concerns: Payments to service providers in high-risk jurisdictions

5. Balance Sheet Warning Signs

A. Unusual Financing Arrangements

• • Shareholder Loans: Funding from unknown sources or with unusual interest terms
  • Related Party Transactions: Frequent transactions without clear economic justification

B. Asset Anomalies

• • Intangible Assets: Inflated valuations without supporting documentation
  • Non-Current Assets: Overvalued or undervalued assets with questionable acquisition sources
  • Cash Balances: Significant cash positions inconsistent with operational needs

C. Corporate Structure Red Flags

• • Business Activities: Operations outside stated business purpose
  • Expertise Gaps: Ownership / management lacking relevant industry experience
  • Rapid Growth: New companies with unusually high transaction volume
  • Ownership Changes: Frequent or complex shareholder restructuring

Moving Beyond Checklist Compliance

Remember that individual red flags don't automatically indicate illicit activity. The FIAU emphasises the importance of context and pattern recognition:

• Evaluate red flags collectively rather than in isolation
• Consider industry norms and business models when assessing concerns
• Document your reasoning when deciding whether to escalate findings

Strengthen Your Compliance Programme

Forward-thinking organisations are implementing systematic approaches to financial statement analysis as part of their AML programmes:

1. Train Staff on financial statement red flags specific to your industry
2. Implement technology that flags unusual financial patterns
3. Document review processes to demonstrate regulatory diligence
4. Cultivate collaboration between finance and compliance teams

The Bottom Line

In an era of increasing regulatory expectations, successful compliance programmes must move beyond transaction monitoring to incorporate sophisticated financial analysis. By understanding and identifying these red flags, compliance professionals can better protect their organisations while contributing to the global fight against financial crime.

This article is based on guidance document SA25-01 from the Financial Intelligence Analysis Unit (FIAU). For more comprehensive information, please consult the full document and applicable regulations which can be found on this link: Intel Guidance Document - May 2025