A red flag is a warning sign or indicator that suggests potentially suspicious or risky behavior, transaction or activity which would require additional investigation or a decision on how to proceed - including a calculation of this risk. 

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Red flags can include unusual transaction patterns, inconsistencies in provided information, connections to high-risk jurisdictions and reluctance to provide necessary documentation. These signals prompt further investigation and scrutiny to ensure compliance with regulatory standards and to prevent financial crimes such as money laundering, fraud or terrorist financing. Identifying red flags is crucial in Know Your Customer (KYC), due diligence (DD) and screening processes for financial institutions and businesses to maintain the integrity of their operations and to mitigate potential risks effectively.

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During the screening process (for example with sanctions screening), the term red flag can be used to indicate that a result has come back as a match / hit. That is, your target has been found on a sanctions list - leading to the counterparty now having a red flag.