Transaction monitoring is the process of monitoring a customer’s transactions such as transfers, deposits and withdrawals. A transaction monitoring system will seek to identify suspicious behaviour which could indicate money laundering or other financial crime occurring.
Transactions that the monitoring system flag as suspicious need to be investigated to determine whether the alert is a true hit or a false positive. True hits should be filed as a suspicious transaction report (STR)* to alert law enforcement to suspected cases of money laundering or terrorist financing. Ongoing transaction monitoring is a regulatory requirement for the wide range of business sectors that come under money laundering regulations.
There are several ways a business can conduct AML transaction monitoring. The chosen transaction monitoring process will depend on many factors and considerations unique to the business, including:
While money laundering regulators do not provide prescriptive guidance on the transaction monitoring process , there are a number of considerations:
Transaction monitoring procedures: the risk-based approach
Regardless what of transaction monitoring process a business chooses to adopt, regulators around the world expect to see a risk-based approach to AML activities with enhanced due diligence for high risk customers. For transaction monitoring this means adjusting the process according to the customer risk profile.
Financial Action Task Force (FATF) advises that financial institutions adjust the extent and depth of their transaction monitoring in line with their institutional risk assessment and individual customer risk profiles.
FATF also advises that ongoing transaction monitoring/customer due diligence should be carried out on a continuous basis or triggered by specific transactions.
The Joint Money Laundering Steering Group (JMLSG) makes the case for when simplified due diligence might apply, acknowledging that the frequency and intensity of transaction monitoring may be reduced to carefully considered thresholds when the risk is considered low.
In contrast, where the risk is greater, there is the case for enhanced due diligence measures, such as increasing the frequency of reviews, in order to sufficiently manage risk and gain further intelligence.
The risk-based approach was first introduced by the Third Money Laundering Directive in 2005. It later became central to adopting the global FATF Recommendations.
Reduce risk with Napier’s AML Transaction Monitoring System.
Most transaction monitoring is run as a batch process, where transactions are uploaded to the system and analysed at the end of the day.
Transaction monitoring can also be a real-time process, where transactions are analysed as they occur. Although not a regulatory requirement, real-time transaction monitoring can facilitate faster, more timely decision making and even real-time payments.
Napier has several recommendations to achieve the most efficient and effective detection of financial crime:
Rules are integral to transaction monitoring but require ongoing work to be as effective as they can be at detecting suspicious activity. For this reason, the transaction monitoring system should provide independent, flexible rule-building and testing. This will avoid a scenario of lengthy timescales, high operating costs, ineffective monitoring and high levels of false positives.
Transaction monitoring systems traditionally rely on rules to help detect anomalous activity. For example, a rule may dictate that an alert is generated if a customer spends over £10,000. While rules are important for detecting suspicious activity, they can only detect what is already known about money laundering.
While traditional rule-based transaction monitoring processes are straightforward to monitor and audit, they are not very effective or accurate because criminals are constantly changing their tactics.
For this reason, transaction monitoring systems should be enhanced with artificial intelligence (AI) that give greater insight and spot behaviour and patterns that rules cannot. This helps to reduce the incidence of false negatives.
While regulators do not require organisations to use AI for transaction monitoring, AI is now widely recognised as relevant and important to fighting financial crime. AI is able to look at all data and detect anomalous transactions that humans can’t. Moreover, AI is able to detect the unknown unknowns, i.e. new patterns of suspicious behaviour that slip past the rules.
AI’s role in transaction monitoring is to enhance, not replace, a rule-based approach.
A snapshot view of a customer’s transactions is often meaningless. To provide real intelligence and insight, AML transaction monitoring must bring together disparate sets of customer-related data to give a ‘single view of the customer’ across the entire customer lifecycle.
End-to-end AML should be the aim. While this will look different for every organisation, the basic principles (which follow a successful customer onboarding process) are the same:
End-to-end AML is the practice of implementing a fully connected compliance infrastructure to seamlessly link the mandatory money laundering regulatory requirements of client screening, transaction screening and transaction monitoring.
Depending on the compliance maturity of the organisation, this process can extend into additional best practice activities, including customer activity reviews, customer risk scoring and advanced AML intelligence insights.
An end-to-end approach to AML provides:
Transaction monitoring is a mandatory process for any organisation that falls within the remit of the money laundering regulations. Transaction monitoring may follow a simple, traditional rule-based approach or be enhanced with artificial intelligence to detect unknown suspicious activity and equip analysts with vital intelligence.
Effective transaction monitoring requires a fine combination of processes, technology and human expertise to successfully separate innocent transactions from the suspicious as criminals constantly evolve their methods of money laundering.
Napier’s Intelligent Compliance platform is trusted by the world’s leading financial institutions and is transforming compliance from legal obligation to competitive edge. As a single unified platform, it integrates multiple compliance solutions into one master dashboard:
*Suspicious transaction reports (STRs) is the term used in North America and by FATF. In the UK these reports are known as suspicious activity reports (SARs) while in Australia they are suspicious matter reports (SMRs).