• Kirsten Saliba
  • 13 May 2022
  • 5.7 mins

Transaction Monitoring is an essential component of an Anti-Money Laundering program that all financial institutions must have under the Bank Secrecy Act. Transaction monitoring can help financial institutions to spot financial crimes early on, or before they even occur, making it a vital tool in the fight against financial crime. With that being said, it is not without its challenges, and it is important to make sure that it is properly implemented, maintained, and updated to be at its most effective.

What is Transaction Monitoring?

Transaction monitoring refers to the examining of customer transactions, which includes assessing both historical and current customer information and interactions to provide a full view of customer activity. This includes transfers, deposits, and withdrawals among other activities. Most firms will use software to analyse this data autonomously.

With the challenges that transaction monitoring can bring, having someone comb through each and every transaction made by a customer would probably be one of, if not the, most effective ways of making sure your transaction monitoring is accurate and effective.

The sheer scale of transactions that would have to be inspected, plus the margin for human error means that this is still not foolproof and is, quite frankly, a ridiculous proposition for any organisation to consider. But if you do not have your automated process fine tuned then you could leave yourself open to greater danger.

The Role of Transaction Monitoring

Transaction monitoring systems have been a mainstay process within organisations for years, providing risk-based anti-money laundering (AML) transaction monitoring. The system will typically use information gleaned from Know Your Customer (KYC) processes to account for client risk. The risk measures are then used as part of rules or scenarios to allow a business to identify particular account activities for investigation and possible disclosure to relevant authorities.

Most of the time institutions’ approaches to transaction monitoring systems are only evaluated following some form of investigation or sanctioning by regulators, which is far too late.

What are the Challenges?

“One size fits all” Approach

When transaction monitoring systems became a regulatory requirement, many businesses ran out and purchased off the shelf systems and implemented them with little to no customisation

Ready to use rules can be applied in transaction monitoring systems. These rules can make it much easier for an institution to do its job and not have to worry about customer irregularities. But, because these rules are generalised and not prepared according to an institution’s specific risk exposures, problems can rear their head.

An inappropriate system, not calibrated to personal risks, can be majorly damaging. While off the shelf systems can and have offered a quick fix, they will more likely be a massive drain on resources as you try to fix errors and problems that are thrown up by the generic nature of the system. In the long-term, they are costing far more long-term than ever anticipated.

False Positives

Preset rules are helpful, and they can help, especially if you do not have the expertise needed to implement a system, but they can never be wholly accurate. In the case of transaction monitoring systems, these presets will result in the system generating a high volume of positives, not all of which will be true positives, which increases the workload for compliance officers.

Traditional transaction monitoring systems can get it wrong up to 90% of the time, so for every 1,000 alerts, 900 of them could be false positives. This is an incredibly high number and results in spiralling costs; not only in terms of incorrect alerts but trying to fix or patch the broken system and the resources it will take to sort through the backlogs these false positives can create. False positives come at a huge cost for manpower and some banks have backlogs of alerts they simply can’t cope with.

This issue has resulted in a gargantuan amount of spending by companies; Deutsche Bank spent $1 billion enhancing AML, while Wells Fargo spent $20 billion, just two examples. The highest cost however is in time and manpower, much of which will be wasted dealing with this issue.

The application of predictive analytic methods like machine learning or artificial intelligence can help eliminate the occurrences of false positives and, as a result, increase the accuracy of results.

Poor Data Hindering AI

A truly successful transaction monitoring system that leverages the power of AI will rely on a single source of truth for all data, meaning that it aggregates the data from many systems within an organization to a single location. AI must be integral to any AML strategy, so ignoring weaknesses and inaccuracies in data is not a viable option. Preparing data for AI deployment is a process that must be handled effectively and efficiently, and not rushed.

Ignoring weaknesses in data isn’t a possibility as your AI will be rendered ineffective until your data is organised and completed. Data must be carefully collected, and great attention needs to be paid to any signs of corruption.

No Uniform Approach

An issue that affects areas of compliance and regulation across the board is a difference in viewpoints across different jurisdictions from different regulators. In the case of transaction monitoring, many regulators have differing ideas on what is acceptable. An example of this is system alerts. If an alert was to arise from a calibration issue, then some regulators would see it as acceptable not to review that alert, while others say an alert should be reviewed regardless of how it arises.

The differences in approaches and rules create confusion and further muddy the waters in an already complex regulatory landscape.

It is extremely important to know what your regulatory obligations are, but that is no easy task when it differs depending on who you are dealing with, and it’s not getting any easier.

What Should you Do?

Transaction Monitoring Software helps financial institutions monitor their clients’ transactions and is the most effective way to combat financial crimes. Also, it helps companies comply with Anti-Money Laundering (AML) / Counter Financing of Terrorism (CFT) regulation and support AML Compliance Programs.

Implementing a robust compliance platform from Sekuritance can help you effectively monitor transactions, obtain transaction risk scores and understand the reasons behind transactions to better assess their legitimacy.

Protect your business and move ahead of the competition, visit www.sekuritance.com and find out just how we can provide and customised, calibrated and scalable solution to help safeguard your organisation.

About Sekuritance

The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.

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