What is Transaction Screening? Understanding Transaction Screening & How it Works

Due to the constant increase in financial crimes over the past decade, anti-money laundering (AML) rules have taken a more proactive approach, setting up structures to detect and prevent these crimes before they happen. The global anti-money laundering rules require that financial institutions take the necessary steps to detect and report suspicious activities that may be related to money laundering. A very vital aspect of this is transaction screening. 

Transactions screening is used to early detect the risks associated with both parties (sender and recipients) as well as other elements involved in a transaction before a crime is committed.
 

What is Transaction Screening? 

Transaction screen is a part of the AML process that financial institutions use to observe customer transactions in real-time in order to sport red flags or suspicious activities. The process involves firstly verifying the customer’s identity (KYC) and the continuous screening of their transactions.

The process is resource-intensive and time-consuming when carried out manually. Financial institutions today establish internal systems consisting of human resources and software automation to screen large volumes of transactions against preset rules. Every customer is also screened against the latest global sanction lists. This system is constantly updated to reflect the latest challenges and requirements as things evolve. 
 

What are the Benefits of Transaction Screening? 

Transaction screening is designed to stop financial crimes in their tracks. To achieve this, it focuses on different elements of a transaction, screening it to ensure it's not being carried out on behalf of sanctioned individuals or a restricted jurisdiction. 

Some of the pros of transaction screening include: 

• It helps financial institutions detect criminal transactions in real time
• It accelerates the remediation process 
• It helps flag suspicious activities that may require further investigation
• It helps financial institutions satisfy regulatory requirements 

An effective transaction screening system makes it difficult for criminals to perpetrate their acts. It monitors, screens, and analyzes as much information as possible, making an informed decision based on the available data. 

Recommended - Top 10 Red flags for Money Laundering Detection in the Finance Sector (Recommended By FATF)
 

What are the Challenges of Transaction Screening? 

Despite its numerous benefits, transaction screening comes with some drawbacks too. From overcomplication to long and expensive implementation, an ineffective transaction screen system could open doorways for criminals to exploit. 
 

Some of the most common challenges include: 

1. Poorly configured systems: 

The effectiveness of a transaction screening system is largely down to how well the system is configured. Third-party data like watchlists, customer details, and more needs to be synchronized for an effective outcome. The process of setting this up often results in technological hiccups that could make lead to inefficiency. 

2. Varying regulatory requirements: 

Regulatory requirements are being changed on a frequent basis to reflect the latest needs based on criminal activities. This means a transaction monitoring system needs to be updated frequently too or the institution risks compliance problems. 

3. False positives: 

Transaction screening systems could also falsely flag a client who poses no threat for suspicious activities. This is a common occurrence, especially when the system is yet to be fully developed.

4. Constant updates and maintenance: 

The models and data feed in a transaction screening system need to be constantly updated to stay on par with the increasingly sophisticated methods criminals use to avoid detection.   
 

Bottom Line

Transaction screening is growing in importance on a daily basis due to the more sophisticated methods criminals are devising. It can help satisfy compliance and detect money laundering activities in real time compared to other AML strategies. However, transaction screening is not very effective as a stand-alone AML measure and should be applied along with other strategies and trained compliance agents. 
 

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