What is Transaction Monitoring in AML? (2024)

What is transaction monitoring in AML (Anti-money laundering)?

Transactionmonitoring refers to the monitoring of customer transactions, includingassessing historical/current customer information and interactions to provide acomplete picture of customer activity. This can include transfers, deposits,and withdrawals. Most financial firms will use software to automatically analysethis data.

Potentially,the most effective approach to transaction monitoring in AML would be to have an employee manuallystop and interrogate every transaction completed by a customer. Only after thisreview would the transaction be authorised for completion.

While thesheer amount of resources required makes this a ridiculous proposition, someorganisations could be exposing themselves to potentially greater levels ofrisk through the automated approach adopted for their transaction monitoringsystems (TMS).

The role of transaction monitoring systems in AML

A TMS ofsome description has been a mainstay process within firms for many years,providing risk-based AMLtransaction monitoring. The TMS will typically use information from knowyour customer (KYC) processes to account for the client risk. The risk measuresare then used as part of rules/scenarios to identify certain account-basedactivities for investigation and possible disclosure.

Moreoften than not, the approach to a TMS is only reviewed following some form ofsanction/investigation by the regulators.

As a result of infrequent TMS review, three issues arise:

False Positives: the number of cases highlighted by the TMS that do not warrant review.

One of the main areas of operational cost relates to the number of people who need to review the output from the TMS. If the system is creating a large number of cases which do not warrant review; the operational costs increase, potentially creating a backlog and risking legitimate cases not being investigated in a timely manner.

Dependingon the approach to TMS, true detection rates of cases worthy of investigation canbe between 0.5 to 7%. Over 80% of those were submitted by credit institutions - banks. Usingthe detection rates outlined above, this means firms as a whole could beinvestigating between 8.8 - 124 million false cases.

Addressingfalse positives through regular review of output, false positive ratios andalso the quality of scenarios, is a major part of effectively managing transaction monitoring systemsin AML. Detailed usage of analytics is typically the best approach tomanaging this.

One size fits all: clientsand activities grouped with the application of a single scenario that appliesto all.

Theimpact of this approach is typically an increase in false positives over time;it also indicates a gap in monitoring. Even if clients are segmented intosimilar accounts or business types, there are normally lower levels ofgranularity associated with the segmentation. Instead, firms can adopt a more analyticalapproach to dynamic segmentation. This allows firms to use underlyingcharacteristics of the client activity (e.g. transactional behaviour) todescribe more focused segments - and then scenario/thresholds settings.

Updates to the segments may only occur once every 12-18 months., Being able to describe the segments in greater detail will provide greater clarity. Moreover, it also provides the opportunity to apply greater targeting of scenarios/rules to be applied.

Too many rules/scenarios: toomany must be contextualised on the firm, but a growing number of scenarios canmean duplication of efforts.

Aschanges in the internal and external business environment occur, there can be atendency to increase the number of scenarios. Over a period, the number of scenarios has increases. This presents atwofold issue: Firstly, management/administration of the scenarios becomeschallenging in terms of understanding which to review and when. Secondly, theoverlap between scenarios and potential duplication of case creation becomes an
issue.

Themanagement/administration of scenarios is key to understanding the performanceof each - and provides an indication of effectiveness. If there are too manyscenarios, a risk is that timing the for review of scenarios can become ad-hocand poorly directed.

Overlapbetween scenarios, typically duplicating cases for investigation, also becomesa significant issue. If a customer has different accounts which create cases,centralising the cases into a single customer view (if not already catered forthe in TMS approach) becomes an overhead. In addition, understanding where and by how much scenarios overlap can provide additional clarity relating to gapsin the compliance coverage and where adjustments can be made to scenarios tocater for the overlap.

How SAS' approach to transaction monitoring in AMLcan help your business

Applicationof advanced analytics to improving TMS processes will deliver benefits. As aleader in analytics, SAS is well placed to offer technologies and process tosupport an ongoing process review.. With SAS, you can increase the coverage ofcustomer transaction activity while reducing false positive alerts whilemanaging the risk of regulatory penalties.