Are Third-Party Payments an AML Red Flag?

Introduction

Third-party payments are common in business. A company may pay a supplier through another entity, a parent company may settle an invoice for a subsidiary, or a family member may make a payment on behalf of another person.

However, third-party payments can also create Anti-Money Laundering (AML) risks when the reason for the payment is unclear or inconsistent with the customer's profile.

The presence of a third party does not automatically mean that a transaction is suspicious. Instead, businesses should consider why the third party is involved, who owns or controls the funds, whether the relationship was previously disclosed, and whether the transaction makes economic or commercial sense.

UAE Central Bank guidance identifies situations such as third-party funding with no apparent link to the customer and requests for third-party payments as potential suspicious activity indicators.

What Is a Third-Party Payment?

A third-party payment generally occurs when someone other than the customer involved in the underlying transaction provides or receives the funds.

For example:

Customer → Supplier

is a straightforward payment structure.

But:

Customer → Third Party → Supplier

involves an additional party in the payment flow.

The third party could be:

A related company
A parent or subsidiary
A business partner
A family member
An employee or representative
Another individual
A financial intermediary
An unrelated company

The important AML question is not simply “Is there a third party?”

The more relevant question is:

“Why is this third party involved, and can the business understand and verify the purpose of the payment?”

Are Third-Party Payments Automatically an AML Red Flag?

No.

A third-party payment can have a legitimate commercial or personal explanation.

For example, a parent company may legitimately pay an invoice on behalf of its subsidiary. Similarly, a person may authorize another individual to make a payment on their behalf.

However, a third-party payment can become a red flag requiring additional scrutiny when the payment is unexplained, inconsistent with the customer's profile, or appears designed to obscure the source or destination of funds.

CBUAE guidance states that a customer's account being funded by a third party with no apparent link to the customer can be a CDD/KYC red flag.

Therefore, businesses should assess third-party payments based on the context and overall risk, rather than automatically rejecting every payment involving another party.

Why Can Third-Party Payments Create AML Risks?

Third-party payment arrangements can make it more difficult to understand the true source, ownership, or purpose of funds.

For example, imagine a business customer purchasing goods worth AED 500,000.

Instead of receiving payment from the customer's business account, the payment comes from an unrelated company in another jurisdiction.

This may require further questions:

Why is another company paying?
What is the relationship between the two companies?
Who owns the funds?
What is the commercial reason for the arrangement?
Was the third party identified during onboarding?
Does the payment match the customer's expected activity?

CBUAE guidance notes that transactions may require attention when they involve third parties that were not previously disclosed or when transaction activity differs from the customer's expected profile.

Common Third-Party Payment Red Flags

A single indicator does not necessarily establish suspicious activity. However, several indicators occurring together may warrant additional review.

1. Unrelated Third Party

A customer receives or sends funds through an unrelated third party without a clear reason.

This can make it difficult to establish the economic purpose of the transaction.

2. Unexpected Payment Source

The payment comes from a person or company that was not previously identified as being connected to the customer.

CBUAE guidance specifically identifies third-party funding with no apparent link to the customer as a potential red flag.

3. Unusual Payment Routing

Funds move through several parties or jurisdictions before reaching the final recipient without an apparent commercial explanation.

Complex payment arrangements can make it more difficult to determine the true source and destination of funds.

4. Sudden Change in Payment Behaviour

A customer who normally receives payments from known business customers suddenly starts receiving funds from multiple unrelated parties.

A significant change from expected transaction behaviour can warrant additional investigation.

5. Third Party in a High-Risk Jurisdiction

A third party located in a higher-risk jurisdiction may require additional scrutiny, particularly where there is no clear business reason for the payment route.

The geographical risk should be considered alongside other customer and transaction factors.

6. Unclear Economic Purpose

The customer cannot provide a reasonable explanation for why the third party is paying or receiving funds.

An unexplained payment arrangement can make it difficult for a business to understand the transaction.

7. Multiple Unrelated Third Parties

A customer receives payments from numerous unrelated individuals or companies.

This may be particularly unusual if the customer's stated business model does not normally involve receiving payments from multiple third parties.

What Should a Business Do When It Identifies a Third-Party Payment?

Businesses should avoid automatically treating every third-party payment as suspicious.

Instead, the transaction should be assessed within the customer's overall risk profile.

The business may consider:

Identify the Third Party

Establish who is making or receiving the payment.

Understand the Relationship

Determine the relationship between the customer and the third party.

Establish the Purpose

Ask why the third party is involved in the transaction.

Check Supporting Documents

Depending on the circumstances, relevant documentation could include contracts, invoices, agreements, authorization letters, or corporate records.

Review Source of Funds

Where appropriate, the business should establish whether the source of funds is consistent with the customer's profile and the transaction.

Compare With Expected Activity

Consider whether the transaction matches the customer's expected business activity, transaction pattern, and risk profile.

CBUAE transaction-monitoring guidance emphasizes assessing whether transactions are consistent with information held about the customer, including the customer's activity, risk, and, where necessary, source of funds.

When Should Additional Due Diligence Be Considered?

Additional Customer Due Diligence (CDD) or Enhanced Due Diligence (EDD) may be appropriate when the circumstances indicate increased risk.

For example:

The third party has no obvious relationship with the customer.
The transaction is unusually large.
The payment route is unnecessarily complex.
The customer provides inconsistent explanations.
The transaction involves higher-risk jurisdictions.
The source of funds cannot be adequately explained.
The activity is inconsistent with the customer's known business.
Multiple unusual third-party payments occur.

The appropriate response should depend on the customer's risk profile and the applicable regulatory requirements.

Does a Third-Party Payment Require an STR?

Not automatically.

The existence of a third-party payment alone does not necessarily mean that a Suspicious Transaction Report (STR) should be submitted.

The business should assess the transaction and the surrounding circumstances.

If the overall facts create reasonable grounds for suspicion, the business should follow its applicable AML reporting procedures.

The CBUAE's suspicious-transaction guidance lists requests for third-party payments among potential suspicious activity indicators, while also identifying other factors such as unexplained changes in business activity and situations where CDD cannot be completed.

This means businesses should consider multiple indicators and the overall customer relationship, rather than relying on one factor alone.

Third-Party Payments and goAML Compliance

Third-party payment monitoring forms part of broader AML controls, including customer identification, CDD, transaction monitoring, risk assessment, record keeping, and suspicious transaction reporting.

For businesses dealing with unusual payment activity, understanding the customer's expected transaction behaviour is important.

You can learn more about goAML compliance in the UAE and the wider AML reporting framework.

The key point is that goAML reporting is only one part of an effective AML compliance programme. Businesses should also have procedures for identifying, reviewing, documenting, and escalating potentially unusual transactions.

How Businesses Can Manage Third-Party Payment Risks

A practical third-party payment control framework can include:

Identifying all parties involved in significant transactions.
Maintaining accurate customer and beneficial ownership information.
Understanding expected payment patterns.
Screening relevant parties according to applicable requirements.
Monitoring unusual transaction activity.
Requesting supporting documentation where appropriate.
Recording the rationale for unusual payment arrangements.
Escalating transactions that require further review.
Applying EDD when the risk assessment supports it.
Maintaining appropriate compliance records.

CBUAE guidance also states that institutions should tailor red flags to their particular products, services, and risk environment.

Frequently Asked Questions

1. Are third-party payments automatically suspicious?

No. Third-party payments can have legitimate business or personal reasons. The payment should be assessed based on the relationship between the parties, the purpose of the transaction, and the customer's overall risk profile.

2. When is a third-party payment an AML red flag?

It can become a red flag when the third party is unrelated or undisclosed, the payment has no apparent economic purpose, the source of funds is unclear, or the transaction is inconsistent with the customer's expected activity.

3. Should businesses reject all third-party payments?

Not necessarily. Businesses should assess the transaction according to their AML policies, customer risk profile, and applicable regulatory requirements.

4. What information should a business collect about a third-party payment?

Depending on the circumstances, the business may need information about the third party, their relationship with the customer, the purpose of the payment, the source of funds, and supporting commercial documentation.

5. Does a third-party payment automatically require an STR?

No. A third-party payment alone does not automatically require an STR. The business should assess the complete circumstances and follow applicable suspicious-transaction reporting requirements where grounds for suspicion exist.

6. Why are unexplained third-party payments risky?

Unexplained third-party payments can make it more difficult to establish the true source, ownership, or purpose of funds. They may therefore require additional scrutiny.

7. Can family members make legitimate third-party payments?

Yes. Family members may have legitimate reasons to make payments on behalf of another person. The business should understand and document the relationship and purpose where appropriate.

8. How can businesses monitor third-party payments?

Businesses can establish expected customer transaction profiles, monitor payment activity, identify unusual third-party involvement, review supporting information, and escalate potentially higher-risk activity according to their AML procedures.

Conclusion

Third-party payments are not automatically an AML problem. Businesses regularly encounter legitimate situations where one person or company makes a payment on behalf of another.

The AML concern arises when the third party's involvement is unexplained, inconsistent, unnecessarily complex, or difficult to reconcile with the customer's known profile and transaction purpose.

Businesses should therefore focus on understanding the relationship between the parties, the reason for the payment, the source and destination of funds, and whether the activity is consistent with the customer's expected behaviour.

When additional risk indicators appear, appropriate CDD, EDD, transaction monitoring, escalation, and reporting procedures should be considered.

A risk-based approach allows businesses to distinguish ordinary third-party payments from transactions that require closer AML scrutiny.