In an evolving financial landscape, new criminal methodologies and regulatory obligations regularly change firms’ compliance obligations. In order to detect and prevent money laundering in this regulatory environment, banks must strive to understand the financial activity of their customers by implementing an appropriate transaction monitoring solution as part of the broader anti-money laundering and counter-terrorist financing framework. 

What is transaction monitoring in banks?

Transaction monitoring is the means by which a bank monitors the financial activity of its customers to detect signs of money laundering, terrorist financing and other financial crimes. The transaction monitoring process should allow banks to understand who their customers are doing business with and reveal important details about the transactions themselves: how much money is involved, where it is sent and so on. Transaction monitoring in banks is an important part of an AML/CFT framework, as it allows them to keep pace with criminal methodologies and ensure that they meet their risk-based compliance obligations.

With this in mind, to implement effective transaction monitoring, banks should seek to capture the following data:

• The volume of money involved in customer transactions
• The frequency with which customers engage in transactions
• Senders and recipients of funds from transactions
• Origin and geographic destination of funds involved in a transaction
• The correlation between a transaction and a client’s expected financial behaviour.
• The involvement of high risk factors in a transaction, such as sanctions targets, politically exposed persons or “blacklisted” jurisdictions.
• Monitoring challenges

Transaction monitoring is an AML/CFT requirement in jurisdictions around the world and should be a compliance priority. Because the transaction monitoring process involves the collection and analysis of large amounts of customer and transaction data, it also presents a number of compliance challenges that banks need to consider when implementing their solution.

The main challenges related to transaction monitoring in the banking sector include:

Anonymity: Online transactions allow a degree of anonymity that in-person transactions do not. This facility can allow high-risk customers to hide their identity when conducting transactions.

Speed: Money launderers can exploit the speed of online banking to transfer money quickly between accounts and across jurisdictions – while avoiding AML/CFT controls put in place to alert banks to criminal activity.

Scale: Banks need a transaction monitoring solution that fits their business. A reliance on manual monitoring and approval processes can become costly, slowing down operations and frustrating the customer experience.

Structuring: To avoid regulatory reporting thresholds, money launderers may seek to transact with certain amounts of money – even below these designated limits. Money launderers may use structured transactions in several different accounts to further conceal their criminal strategy.

Money mules: Some criminals may attempt to have third parties conduct transactions on their behalf to avoid AML/CFT measures and controls. These may be vulnerable members of society who have been incentivised or coerced by criminal actors.

Risk-based approach to transaction monitoring in banks

Following the recommendations of the Financial Action Task Force (FATF), banks should adopt a risk-based approach to transaction monitoring compliance. In practice, risk-based transaction monitoring requires banks to conduct assessments of individual customers and then conduct a compliance response commensurate with the risk they pose. Transactions involving higher risk customers may be subject to more stringent transaction monitoring measures, while lower risk customers may require simpler measures. Risk-based transaction monitoring depends on banks’ ability to create accurate risk profiles for their customers. Accordingly, a transaction monitoring solution should be supported by the following measures and controls:

Customer due diligence: In order to assess transactions against risk profiles, banks should establish and verify the identity of their customers by conducting appropriate checks. The customer due diligence process requires banks to collect identifying information including names, addresses, dates of birth and company incorporation details.

Sanctions checks: Banks should check their customers against relevant sanctions and watch lists to ensure that they are not facilitating transactions with sanctioned persons or entities.

PEP screening: Politically exposed persons (PEPs), including elected and government officials, pose a higher AML/CFT risk. Accordingly, banks should continuously screen their customers to determine their PEP status.

Monitoring negative press: The level of risk associated with a particular transaction can also be informed by a client’s involvement in negative media stories. Banks should monitor negative stories in the press, from on-screen, print and online sources, to ensure that their risk profiles remain as accurate as possible.