US Treasury Orders Banks to Report Red Flags Tied to Unauthorized Worker Payroll Schemes

WASHINGTON — The U.S. Treasury Department’s financial crimes unit on Friday directed banks and other financial institutions to intensify their monitoring for schemes related to the employment of unauthorized workers. The advisory, issued June 5 by the Financial Crimes Enforcement Network (FinCEN), details a series of “red flags” intended to help banks identify and report suspicious activity connected to identity theft, payroll tax fraud, and money laundering. The guidance is the latest measure from the Trump administration aimed at curbing illegal immigration by leveraging the nation's financial system. It instructs institutions to watch for specific transactional patterns and customer behaviors that could indicate a business is paying workers who are in the country illegally. In a statement accompanying the advisory, Treasury Secretary Scott Bessent said the administration “will not allow illegal aliens to abuse financial institutions to steal billions of dollars from hardworking American taxpayers.” He added, “Schemes to pay unlawful workers often rely upon access to the U.S. financial system, including U.S. banks.” The FinCEN advisory follows a May executive order signed by President Donald Trump that required bank regulators to increase scrutiny of customers' citizenship status. While that order was less stringent than some in the financial industry had anticipated—stopping short of mandating the collection of citizenship information—this new advisory provides more concrete instructions for what banks should be looking for in their existing customer data and transaction monitoring. For financial institutions, the directive increases compliance responsibilities, though it does not grant new legal authority to collect data on immigration status. According to The Associated Press, banks have not historically collected this information, making it difficult to produce reliable public figures on the scale of financial risk posed by these activities. The advisory encourages banks to look for indicators that are common in broader anti-money laundering (AML) and fraud prevention efforts but applies them specifically to the context of payroll schemes. These red flags include both suspicious personal information and atypical transaction patterns. For example, banks are told to be wary of customers providing minimal or inconsistent identifying information, such as an email address that does not match the customer's name or the use of proxies to obscure an IP address. Transaction-based red flags include payroll activity that appears unusual for a business of a certain size or type. This could involve a single business account making numerous small-dollar payments to a large number of individual accounts, especially if those recipient accounts show other suspicious signs. Another key indicator is multiple employee paychecks being deposited into a single shared account, which could suggest a system to obscure the identities of the ultimate recipients. These instructions build upon an existing framework known as the Red Flags Rule. According to the Federal Trade Commission, that rule already requires “financial institutions” and certain “creditors” to implement a written program to detect, prevent, and mitigate identity theft. The rule applies broadly to entities like state and national banks, credit unions, and any business that holds a transaction account for a consumer or regularly extends credit. FinCEN’s new advisory effectively adds a specific focus area to these pre-existing obligations. For small and mid-sized businesses, the heightened scrutiny could create new operational hurdles. Companies, particularly in sectors that rely heavily on immigrant labor, may find their bank accounts subject to more frequent reviews, transaction holds, or requests for additional documentation. Payroll processing could be delayed if patterns trigger automated flags in a bank’s monitoring system, even for businesses employing a fully authorized workforce. The pressure on banks to identify these schemes may also lead to a lower tolerance for risk, potentially affecting banking relationships for businesses whose financial activities appear complex or unconventional. This places a greater burden on business owners to maintain meticulous records and ensure their payroll and payment processes are transparent and easily justifiable. In our experience, this type of top-down regulatory pressure often causes financial institutions to become overly cautious, casting a wide net that can ensnare legitimate businesses in compliance dragnets. Small and mid-sized companies, which typically lack large, dedicated compliance departments, are particularly vulnerable to the disruption caused by a frozen account or a prolonged investigation triggered by a false positive. The key for business owners is proactive defense: ensuring that financial records are impeccable and that all payroll and payment systems are structured for maximum transparency. This is not just about avoiding penalties but about ensuring business continuity when faced with heightened scrutiny from banking partners. Navigating this environment requires a sophisticated approach to financial risk management. For businesses concerned about their exposure, the advisory team at C&S Finance Group LLC at csfinancegroup.com can help design and implement the robust internal controls needed to operate confidently. Looking ahead, financial industry associations are expected to seek clarification from FinCEN on implementing the advisory in a way that is both effective and non-discriminatory. The long-term impact will depend on how aggressively banks apply these red flags and the extent to which the measures disrupt financial services for immigrant communities and increase compliance costs for businesses across the country.