In order to satisfy AML/CFT compliance requirements, banks and financial institutions must monitor customer transactions for signs of money laundering activity. However, since that process requires firms to collect and analyze a significant amount of data, manual transaction monitoring can be resource-intensive and time-consuming and run the risk of costly human error. By contrast, transaction monitoring software helps firms mitigate those factors, increasing accuracy and efficiency and enhancing a firm’s compliance performance.
To get the most out of their transaction monitoring software, firms should understand not only how to implement it as part of their AML/CFT process but why it is important to their compliance efforts.
What is transaction monitoring software?
Anti-money laundering transaction monitoring software is used to detect suspicious customer transaction activity that might indicate money laundering or terrorism financing. AML software serves the same purpose as manual transaction monitoring but allows banks and financial institutions to automate their data analysis in real time, on an ongoing basis, as part of their wider AML/CFT program.
AML transaction monitoring software is a way for firms to build a comprehensive, accurate picture of their customers’ financial behavior quickly and efficiently, gauge that activity against existing risk profiles and even predict future activity to determine whether customers present an ongoing money laundering or terror financing threat. When suspicious activity is detected, transaction monitoring software can be used to automatically alert AML teams of the need for closer scrutiny and to generate suspicious activity reports for the appropriate financial authorities.
AML transaction monitoring software can be applied with the same scope as manual transaction monitoring, covering every kind of transaction, currency exchange, wire transfer or credit-related activity that a firm might handle. The monitoring mechanism can be calibrated to detect a range of specific behaviors, including:
- Transactions that exceed a certain threshold
- Frequency of transactions over a certain time period
- Unusual or out-of-character customer account behavior
- Transactions involving individuals on an international sanctions list
- Transactions involving politically exposed persons (PEPs)
- Transactions involving high-risk countries
- Transactions that otherwise do not match a customer’s risk profile
- Adverse media involving a customer that might indicate their risk profile has changed
Transaction monitoring software offers numerous benefits for the AML/CFT process, including:
- Detection: Transaction monitoring software can detect suspicious behavior at the point at which a customer interacts with the firm’s services.
- Efficiency: Monitoring software not only offers procedural efficiency and accuracy but also minimizes false positives.
- Usability: Firms can install and implement transaction monitoring software quickly and easily without the need for extensive training or technical knowledge.
- Prioritization: Monitoring software helps firms automatically manage their regulatory priorities and organize customers into risk tiers.
- Adaptability: Transaction monitoring software can easily be adjusted for different risk levels and regulatory environments without the need for technical support.
- Confidence: Firms can select tried-and-tested transaction monitoring software that offers a level of industry confidence and that has been used in previous audits and investigations.
Ideally, every customer of a bank or financial institution would be subject to a level of individual AML/CFT vigilance that would eliminate criminal threats and satisfy compliance requirements. Unfortunately, the sheer amount of transaction data that would need to be analyzed under that scenario makes doing so unrealistic. However, by automating that analysis with transaction monitoring software, firms can effectively implement a risk-based approach to AML/CFT that balances their resources and compliance obligations.
The risk-based approach is recommended by FATF and underpins AML/CFT regulations in most global jurisdictions. Under the risk-based approach, transaction monitoring should be flexible: firms should apply more intensive monitoring measures to higher-risk customers and simplified measures to lower-risk customers. Transaction monitoring software has become a crucial component of the risk-based approach to AML because it lets firms build automated flexibility into their AML/CFT response, tailoring the rules by which customer transactions are monitored according to individual risk profiles, and sorting customers into high and low risk categories.
By adjusting their AML response automatically, firms can better manage their AML/CFT resources, balancing compliance obligations with budgetary and customer service needs. With that in mind, factors that might affect transaction monitoring software’s automated AML response include:
- The nature, scale and complexity of a financial institution’s business.
- The diversity of a financial institution’s operations, including geographical diversity.
- The financial institution’s customer, product and activity profile.
- The distribution channels as well as the volume and size of transactions.
- The degree of risk associated with each area of the financial institution’s operation.
- The extent to which the financial institution is dealing directly with a customer or is dealing through intermediaries, third parties, correspondents or non face-to-face access.
While transaction monitoring software provides significant AML/CFT efficiency and accuracy benefits, it is most effective when it is combined with human judgment and experience. Money laundering and terror financing methodologies evolve constantly, and software platforms may struggle to keep up with emerging threats. Transaction monitoring software itself may not be able to respond effectively enough to criminal or legislative changes, meaning that firms will continue to rely on the ability of AML compliance teams to set software parameters and respond to unexpected changes.
Accordingly, AML/CFT teams should assess the needs of their institution in order to determine which transaction monitoring software platform will work best for them: considerations might include their regulatory environment, their customer base, upcoming legislative amendments and the training needs of staff.