Transaction monitoring is the process by which potentially suspicious payments are detected, investigated and reported. It is a cornerstone of compliance and plays an essential role in the global fight against money laundering.
Financial institutions are required to ensure that they not only have a clear understanding of their customer base (Know Your Customer (KYC) identity checks) but also of how their services are being used. If they fail to fulfil their duties, they risk huge financial and legal repercussions.
The challenges of transaction monitoring are increasingly evident today, and they are a real cause for concern. In 2020, Commerzbank was fined almost 38 million USD for anti-money laundering (AML) failings, and the Australian bank Westpac was fined over 900 million USD for breaking AML and terrorist financing laws.
As governments crack down on non-compliant financial institutions it becomes clear how widespread and deep-rooted the issues are, but why is the global finance industry struggling to keep up with evolving criminal activity?
Increasing volumes of transactions and payments
There is no doubt that banks and financial institutions are under enormous pressure as the volumes of payments and transactions in today’s world are at their highest ever. The US Federal Reserve processed 4 billion financial transactions every day in the fourth quarter (October to end December) of 2019. The daily total average value of payments during this period was $119bn, whilst the average transaction had a value of $1,836.
According to the trade association UK Finance, there were 34.9 billion consumer payments made in the UK during 2019; with 85% of these payments being spontaneous. During the same period, there were 4.4 billion business-to-business and business-to-individual payments made in the UK.
Finding the needle in the haystack
Finding the proverbial needle in the haystack – the anomalies that point to suspicious activity, is proving to be challenging. In the UK, the National Crime Agency received only 478,437 Suspicious Activity Reports (SARs) between April 2018 and March 2019 (a 3.13% increase on 2017-18 [463,938]). It is implausible to make a direct comparison, but at a glance this number, when compared with the billions of transactions that flow through the banks daily, raises concerns that the volume of SARs is too low, indicating that large numbers of suspicious transactions are going undetected. While it is impossible and inaccurate to compare the total amount of payments versus the number of SARs based on numbers alone – they simply do not tally.
The scale of the problem
The volume of illicit funds being laundered through the global financial system is very difficult to estimate. The European Union Agency for Law Enforcement Cooperation (Europol) considers it to be “significant” and the United Nations Office on Drugs and Crime (UNODC) estimates that between 2% and 5% of global Gross Domestic Product (GDP) is laundered. This amounts to between €715 billion and €1.87 trillion of illegally obtained money being laundered by criminals through the global financial system each year.
While the number of SARs (or Suspicious Transaction Reports (STRs)) being recorded may amount to hundreds of thousands versus billions of transactions within most countries, and with up to 5% of a country’s GDP reported as being laundered each year, the role of transaction monitoring control clearly needs to do more to “find the many needles within the many haystacks ”.
The challenges in getting it right
The challenges in implementing effective transaction monitoring systems will differ considerably depending on the nature of an organisation’s customers, the markets they service, and the maturity of their business.
Larger, more established institutions may have a better understanding of the risks they face as they have had longer to monitor and identify patterns. However, they often struggle with the inefficiency of legacy technology and systems that produce too many false positives and have inflexible rulesets.
Most firms accept it would make business sense to implement new technology to overcome these challenges. But the reality is that for big institutions this is too often a largescale project that takes a lot of time and resource to implement, which can be particularly expensive if not managed correctly.
In contrast, FinTechs, such as Payment Service Providers (PSPs) and challenger banks, may find it easier to introduce new technology. However, these firms are often driven primarily by technological development and innovation, with compliance as a secondary consideration. Plus, there is a concern they may be less aware of the financial crime risks and compliance responsibilities because of the relative infancy of their business.
We can see that there are a lot factors to consider when we look at why the estimated global total for laundered funds is so high. The volume of transactions alone is staggering, and creates a mammoth task for the financial industry to tackle. Combined with the fact that the majority of transaction monitoring systems currently in place are clearly not effective enough, and institutions are struggling to keep up.
We need to look to implementing effective technology, in which the role of A.I. will be integral , thus allowing highly trained professionals to spend more time investigating and less time wading through endless streams of data. This is the only way to ensure that all suspicious activity is identified and reported.
This article is an extract from our larger paper on Transaction Monitoring.
If you are would like to read more about how firms can leverage a managed service to reap the benefits of cutting-edge technology for transaction monitoring, download Successful Transaction Monitoring: Overcoming Challenges Through Collaboration co-authored with Lysis.