Transaction monitoring is a requirement for AML/CFT programs around the world and a vital tool in the fight against money laundering and terrorism financing. Implemented effectively, transaction monitoring allows banks, financial institutions and other obligated entities to detect, report and ultimately prevent criminals from using their services to launder money.
Transaction monitoring can be a challenging compliance obligation: firms must collect and analyze large amounts of data about their customers in order to be able to spot potential money laundering activities in a timely and accurate manner. In practice, transaction monitoring involves scrutinizing customer accounts for a range of indicators, including:
- Unusual transaction frequency or volume
- Transactions with high-risk countries
- Transactions with sanctioned customers and countries
- Transactions with politically exposed persons (PEPs)
- Adverse media stories involving customers
The transaction monitoring process is time- and resource-intensive and can often result in false positives or, worse, false negatives if implemented incorrectly. Adding to the challenge is the fact that firms must maintain transaction monitoring standards on an ongoing basis, managing changing levels of customer risk, emerging criminal threats and the introduction of new AML/CFT legislation.
At the risk of costly compliance penalties and to ensure their AML/CFT response is ready for a variety of criminal methodologies, it is important that firms are familiar with a range of transaction monitoring best practices.
Effective CDD and KYC:
The transaction monitoring process relies on information about customers that firms must acquire during the customer due diligence (CDD) and know your customer (KYC) process. The CDD/KYC process must be able to accurately verify customer identities at onboarding and throughout the business relationship in order to create effective risk profiles. The more effective the CDD, the better able firms will be to use that information to set transaction monitoring parameters, spot discrepancies in account activity and, ultimately, determine whether a customer is engaged in potential money laundering activity.
Risk Prioritization and Grouping
Most firms use transaction monitoring software to manage the significant amounts of data necessary to analyze their customers’ account activity. However, when implemented effectively, transaction monitoring software offers additional specific advantages for the risk-based approach to AML/CFT recommended by FATF: an approach that requires firms to adjust their anti-money laundering response to reflect the level of risk they face.
Beyond the accuracy and efficiency benefits that automation brings to data management in risk-based strategies, AML transaction monitoring software may integrate smart technology in order to organize customers, grouping them by the level of risk they present. Best practice suggests that high-risk customer groups should be subject to increased monitoring measures, while lower-risk customer groups should be subject to simplified measures. Similarly, transaction monitoring software can help firms manage their regulatory priorities, setting their AML/CFT response to reflect the needs of their local compliance environment.
In addition to developing accurate risk profiles, firms should also seek to develop and maintain transaction profiles to better spot unusual transactions when they occur. Transaction profiles should be specific, including a comprehensive set of details, like payment limits, payment frequencies and descriptions of expected items and amounts. Transaction profiles can be used to establish money laundering risk by identifying activity with high-risk countries, PEPs or sanctioned individuals. Transaction profiles should be linked to customer files and, where possible, supported by relevant documentation.
Firms should periodically test their transaction profiles within their AML/CFT infrastructure by running alerts through their system. Such quality assurance testing helps to identify weaknesses in transaction monitoring systems and enhances the ability of AML teams to use transaction profiles effectively.
Documentation and Record-keeping
The transaction monitoring process is a precursor to the submission of suspicious activity reports (SARs) and ultimately the commencement of criminal investigations. Given the potential legal consequences, guidance for effective AML transaction monitoring should include the need for effective documentation and record-keeping of all internal monitoring activities.
Documentation requirements should cover all aspects of the monitored transactions, including the reasons they were selected for scrutiny, which specific components of the transactions were considered suspicious, and any additional contributions, such as notes or guidance from the firm’s compliance officer and senior management employees. Documentation and record-keeping with the goal of creating a clear, comprehensive audit trail will be vital to the legal process should a money laundering investigation eventually take place.
Transaction monitoring, and risk-based AML in general, is predicated on an awareness of the risk that firms face. Accordingly, best practice suggests that firms should encourage a culture of risk awareness not only in their AML teams but throughout their organization. Practically, that might mean establishing a list of money laundering red flags pertinent to the firm’s customers and industry sector and offering AML employees feedback in dealing with more complex transactions or transaction patterns. Transaction monitoring training should also be a consideration: firms should develop a training program focused on the specific risks they face, along with a schedule for delivering that program to employees.
Reassessment of Previous Transactions
When a firm detects potential money laundering, it should seek to clarify that activity with as much contextual information as possible. Accordingly, AML transaction monitoring guidance should include a requirement to reassess previous and related transactions when suspicious activity is detected. Reviewing previous transactions with new insight and information can reveal patterns of behavior that were previously concealed or, in the case of related transactions, reveal the full extent of the suspicious activity. Ultimately, this kind of post-analysis helps firms build their understanding of current and emerging money laundering methodologies.
To facilitate analysis of previous and related transactions, best practice suggests that AML/CFT teams should have full access to past data. Practically speaking, that means firms should move away from a siloed approach to data storage and towards a consolidated strategy, in which teams from all departments may access the information they need from a centralized source in order to expedite important processes such as transaction monitoring.
Transaction monitoring is only useful to firms and effective in combating money laundering if the results of the process are managed and overseen by effective governance. This means that senior employees of financial institutions should be involved at every level of their transaction monitoring infrastructure, from implementation through to contact with the financial authorities, to address issues and ensure that the process is as smooth and consistent as possible.
In practice, senior employees should inspect the transaction monitoring policies and processes that their firm puts in place, establish clear communication channels and ensure AML/CFT employees have the resources and expertise they need to do their jobs. Those senior employees should also be responsible for implementing effective reporting systems to ensure that SARs are issued appropriately and in a timely manner to the relevant authorities.