AML transaction monitoring plays a pivotal role in the development and implementation of effective real-time transaction monitoring procedures, helping businesses to identify and address high-risk transactions and prevent transactional fraud. Therefore, it's essential for professionals to grasp what transaction monitoring in AML truly entails properly.
What is transaction monitoring in AML/CTF?
A few basic rationales behind the Anti-Money Laundering (AML) and Countering Terrorism Financing (CTF) laws and regulations are:
- Effective transaction monitoring procedures can prevent money laundering and terrorism financing (ML/TF) and other financial crimes.
- Regulatory requirements related to AML/CTF obligations do not stop at the stage of establishing a business relationship with the customer.
- High-risk transactions should be identified, addressed and reported.
- Transaction risk monitoring extends to overseeing day-to-day ongoing compliance, financial crime risk management, etc.
- The initial customer due diligence (CDD) and allocating an ML/TF risk score to clients are not close-end processes. Rather they are part of the risk-based approach to AML/CTF compliance.
Part of Ongoing Due Diligence Obligations
AML transaction monitoring results should be linked to customers' ML/TF levels and vice versa.
An efficient AML/CTF compliance program should include a simple set of factors that would increase or decrease customers risk ML/TF risk level based on monitoring customers' transactions.
Changes in ML/TF risk level are generally expected to be recorded.
Other related ongoing due diligence obligations include but are not limited:
- Ongoing Sanctions and Politically Exposed Person (PEP) Screening.
- Reviewing customer's ML/TF risk levels.
- Conducting enhanced due diligence (EDD) on certain transactions.
- Promptly reporting certain suspicious transactions and prescribed transactions to the local law enforcement agency (generally the FIU or its equivalent) or the AML/CTF regulator. Depending on the jurisdiction, these include:
- Suspicious matter reports (SMRs).
- Suspicious transaction reports (STRs).
- Prescribed transaction reports (PTRs).
- Suspicious activity reports (SAR).
Click here for more information about transaction monitoring and the process overview.
Defining a High-Risk Transaction
High-risk transactions are generally complex, unusual and large deposits, trades and withdrawals and patterns.
National AML/CTF and AML/CFT Acts often contain specific sections requiring businesses covered by these laws to address high-risk transactions as part of ongoing transaction surveillance requirements.
This often includes an obligation to identify suspicious and high-risk transactions, conduct enhanced due diligence (EDD) on high-risk transactions or patterns and report suspicious transactions in a timely manner.
EDD on the High-Risk Transactions
Enhanced due diligence process is the source is a case-specific exercise when it comes to:
- Reviewing the nature and purpose of a particular transaction or a transaction pattern and
- Deciding on the sufficiency of documents and information on the sources of funds (SOF) for it.
We provide this both as part of our AML advisory services and as part of ongoing AML/ CTF compliance managed service.
AML Transaction Monitoring Guidance
In addition to laws, the national AML/CTF supervisors, such as FMA, DIA, AUSTRAC, FCA, etc., often publish general guidance on what they expect from transacting monitoring procedures.
To effectively reduce the risk of money laundering, the generic guidance is supplemented by the specific AML/CTF sector guidance.
Sector Specific Transaction Surveillance Guidance
Specific sector guidance covers specific transaction monitoring red flags for different types of financial service providers and businesses that are subject to the AML/CTF rules (aka Designated Entities).
For example, a peer-to-peer lending provider or crypto exchange accepting debit and credit cards as means of payment only for domestic customers would face slightly different real-time transaction monitoring challenges than a wholesale-oriented investment fund manager that only allows Swift and Bank Transfers.
Where one would have to focus on fraud reduction and shutting accounts operated by money mules, the other would need to dedicate its compliance efforts to deposits and withdrawals to high-risk countries.
A specific definition of a complex or a large transaction would also be different for different types of designated services. Something that is unusual or large for a retail investor is normal for an institutional one.
That is why the AML transaction monitoring services we provide are business-specific & customised for your specific business needs, including:
- Undertaking a tailored Risk Assessment.
- Drafting or enhancing your Compliance Program or a specific Transaction Monitoring Program.
- Reviewing your transaction monitoring system, etc.
FATF Guidance
The Financial Action Task Force (FATF) formulated the core of related transaction surveillance-related risks quite a while ago. However, the FATF does often provide useful updates to guide national regulators and designated entities on new international and country-specific developments.
Risk-Based Approach
In a situation where there are thousands of transactions per month or week, a designated entity must make sure that it knows where it stands, has an effective procedure to reduce the risks, addresses ML/TF-related red flags, document false positives, etc.
This is particularly important for reporting entities that are operating in higher ML/TF risk sectors, which are audited both frequently and thoroughly by the AML/CFT supervisors and other participants of the financial systems, such as banks and exchanges.
While there are plenty of anti-money laundering software vendors out there to help, it would be the AML/CFT professionals who are able to interpret the data, identify the areas of improvement and foresee future risks.
Resources allocation for monitoring transactions
The following factors determine the appropriate level of controls, the complexity of transaction monitoring processes and the size of the compliance team:
- The geographic location of an AML/CFT reporting entity, as well as the diversity of its operations;
- The size, nature, and complexity of its business;
- Whether the financial institution deals through intermediaries or third parties or does not have face-to-face access to customers (if applicable);
- How the financial institution distributes its products and services;
- The volume of transactions and size of transactions. Obviously, the bigger the volume, the more difficult it is to monitor something manually.
- ML/TF risks posed by each area of the AML/CFT reporting entity’s operation
- Customers, products, and activity profiles of the reporting entity.
If the business is considered as having a higher ML/TF risk level by a national regulator or a banking institution, it also pays off to have an escalation procedure with task owners responsible for risk level changes, depending on the nature of a particular change.
This is an area where many small reporting entities do not do that well. Having Anti-money laundering software or a transaction monitoring tool is great. However, the ultimate responsibility for AML/CFT compliance is with the reporting entity not the software provider.
Therefore determining what is transaction monitoring in AML/CTF obligations requires professional help.
Identifying Shortcomings
It is expected that a reporting entity identifies any shortcomings in the applicable AML/CFT monitoring software in its AML/CFT Risk Assessment and implements policies and procedures to mitigate these shortcomings in its AML/CTF Program.
Speedy Escalation
While real-time transaction monitoring helps to detect things that need to be addressed, an entity must have a set of escalation procedures to address triggers.
When conducting enhanced due diligence (EDD) on large, complex and unusual transactions, having qualified AML/CFT compliance specialists is essential, not only in terms of having personnel with appropriate knowledge but also in terms of internal resource allocation, so that for example high-risk transaction will be analysed by sufficiently skilled compliance team members with enough experience.
Real-Time Transaction Monitoring
Real-time transaction monitoring provides financial institutions with immediate data on ongoing transactions, facilitating the timely identification of any irregularities.
When combined with comprehensive AML transaction procedures, it allows for timely detection of potential money laundering and financial crime and timely reporting.
Transactional Fraud & Importance of Effective Monitoring
Online scams and identity theft coupled with transactional fraud are other forms of illegal activity that transaction monitoring procedures can help discover and prevent.
Given the increasing zero-tolerance approach to AML/CFT breaches coupled with shifting responsibility for scams to banking institutions is why transaction monitoring is important.
