Which of the following is an example of a red flag indicating potential money laundering?

The identification of red flags for potential money laundering is critical for compliance professionals in the financial sector. Unexplained large cash deposits or withdrawals typically raise significant concerns because they may indicate attempts to conceal the source of funds or to evade detection by authorities.

Large cash transactions that are not backed by a clear, legitimate source can suggest that an individual is trying to disguise illicit funds. This behavior often stands out in the context of typical financial practices, where transactions usually have specific, understandable purposes and correspond to a person's income or business activity. The sudden appearance of substantial amounts of cash without a credible explanation or documentation makes it a major indicator of potential money laundering activities.

In contrast, frequent small deposits might be part of a legitimate business practice or personal saving strategy. Payments made by check and regular payments for known services are often transparent and can generally be traced, making them less likely to indicate suspicious activity. Thus, the focus on unexplained large cash deposits or withdrawals as a red flag specifically highlights the unusual nature of these transactions in the context of preventive measures against money laundering.