On a daily basis, criminals are inventing new ways to outsmart banks and regulatory authorities, forcing a constant change in compliance requirements. This makes the transaction monitoring process in banks one of the most important aspects of Anti Money Laundering (AML) today. Although AML regulatory bodies like the Financial Action Task Force (FATF) have established laws to checkmate these activities, banks need to themselves, adequately grasp their customer’s financial activity by implementing effective transaction monitoring as a small part of their larger AML/CFT structure.
What is Transaction Monitoring in Banks?
Transaction monitoring in banks simply refers to the process through which a bank monitors its customer’s overall financial activities for suspicious signs of terrorism financing, money laundering and other related financial crimes.
The transaction monitoring process helps banks understand their customer activities from deposits to withdrawals and transfers. It also exposes to the bank, who their customers are doing business with and other important details. The transaction monitoring process in banks is a very crucial part of an effective AML/CFT framework because it helps banks stay afloat with criminal methodologies while satisfying compliance requirements.
Here are some of the most important customer data and questions banks need to capture to effectively implement transaction monitoring:
- The amount of money involved in their transactions
- How regular the customer engages in exact transactions or general transactions
- The senders and recipients of transaction funds
- Data correlation between a transaction/ series of transactions and the customer’s expected financial behaviour
- Involvement of high-risk personnel and surrounding factors like sanction targets, blacklists, politically exposed persons (PEP), and more.
- The geographical origin (country or jurisdiction wise) and destination of funds in a transaction
What are the Different Stages of Transaction Monitoring?
Banks can design their AML transaction monitoring structure to accommodate several stages for the most effective outcome. Generally, the structure should be built based on FAFT recommendations and banks are expected to take a risk-based approach. This approach means that banks need to perform individual assessments on customers and then carry out the recommended compliance steps proportionate to the risk the customer poses.
Risk-based approach for transaction monitoring depends on how well the bank is able to accurately build their customer's risk profiles.
However, the transaction monitoring process in banks should generally include the following stages:
1. Proportionate Customer Due Diligence:
Customer due diligence (CDD) is the first and most important stage of transaction monitoring to help banks understand and access custom risk profiles. CDD involves proportionate KYC to help verify customers' identities. Essentially, the bank collects identity information from customers including their names, date of birth, address, company details and relevant government-approved IDs.
2. Sanction Screening:
In this stage, banks screen their customers against global sanctions and watchlists. This is to ensure that the bank is not conducting business with an individual who is under any sanction(s).
3. Politically Exposed Persons (PEP) Screening:
Politically Exposed Persons are individuals that pose a higher risk of AML/CFT activities. These include government officials, elected persons, high-ranking military officials, high-ranking judges, Central Bank Governors, etc. Banks should screen such individuals appropriately and on an ongoing basis to establish their PEP status.
4. Adverse Media Monitoring:
This stage involves monitoring adverse media stories of customers to ensure their risk profile remains accurate. Avenues to monitor include print, screen and relevant online sources. Adverse media monitoring is important because the risk level associated with a certain transaction may be affected by a customer’s involvement in detrimental media stories.
Why is Transaction Monitoring Important in AML Compliance?
The transaction monitoring process in banks is necessary for helping banks stay compliant with the global money laundering regulations. It may be implemented using a traditional approach or buffed up with artificial intelligence in order to fish out underlying suspicious customer activities. Transaction monitoring also provides vital intelligence for analysts and compliance officers.
Since criminals constantly evolve their money laundering strategies, transaction monitoring has to be a fine blend of human expertise and effective technology to be able to stay on par with criminal strategies.