Global crime networks are continuously devising sophisticated ways to launder illegally earned money. The United Nations Office on Drugs and Crime estimates that the value of global money-laundering transactions is $800 billion to $2 trillion annually, or 2% to 5% of global gross domestic product (GDP).
Given the high volume of transactions in the financial services sector, financial instruments have become a popular vehicle for criminal organizations looking for a way to move illicit funds into a legal financial system.
Anti-money laundering regulations (AML) and Combating the Financing of Terrorism (CFT) legislation helps organizations to fight financial crime by detecting and blocking criminals' efforts to make their money appear legitimate.
Transaction monitoring mitigates financial crime risk by tracking high volumes of transactions to detect suspicious activities.
By choosing the right transaction monitoring software product, financial services organizations can comply with regulations and legislation, protect their reputation, and maintain client trust – all of which would be significantly undermined by any involvement with financial abuse and illegal activity.
Transaction Monitoring Process for AML
By watching customer behavior and tracking those identified as high risk, transactions that seem suspicious can be flagged and investigated.
A transaction monitoring system uses rules to ask critical questions about a transaction or activity on an account; is it consistent with the customer profile and risk level, does it fit with expectations, does it match any financial crime typologies, or stand out as an anomaly?
Who Is Involved?
The financial services sector is a prime target for criminals.
It is not just banks that are susceptible to this type of risk; insurance companies, gaming companies, and cryptocurrency platforms that move funds in and out of customer accounts need to be able to identify and investigate any unusual patterns or behaviors that could indicate a possible crime.
Within organizations, various individuals or teams are involved in designing, deploying, and managing the activities that ensure AML compliance. These include compliance officers that oversee anti-money laundering policies and ensure compliance, as well as analysts responsible for putting the proper transaction monitoring rules in place to achieve this.
At a more senior level and with a broader remit, the risk officer needs to incorporate AML activities into the overall corporate strategies to mitigate the organization's risks.
The risk and compliance teams in organizations face a wide range of challenges that are complex and change frequently. In some cases, the challenges are internal to the organization and may involve a planned and proactive approach.
In others, there is an immediate response required driven by an external event such as a change to a regulatory requirement or the discovery of a new threat.
Here are some common challenges that need to be understood and managed.
- Threat evolution - Although organizations and regulatory authorities are continuously developing processes and policies to fight financial crime; bad actors are constantly looking for ways to cheat transaction monitoring technology and find ways to operate undetected.
- Regulatory environment - Regulations and legislation continue to increase and evolve, putting the burden on organizations to understand their obligations. The discrepancy in what is acceptable to different regulators and variations in requirements by region also adds confusion to complexity.
- False positives - Any suspicious transaction is immediately suspended and must be investigated. If the rules used to identify possible fraudulent activity are not accurate enough or cannot be adapted for different types of customers, they produce false positives. This comes at a considerable cost to the business regarding the time and money needed to investigate the backlog of non-suspicious transactions.
- Resource retention - Fraud prevention professionals play an essential role in protecting a financial organization's operational and strategic success, and are in high demand in the sector. Spending an inordinate amount of time addressing false positives instead of investigating genuine fraud cases may tempt these professionals to move elsewhere, leaving a gap in essential knowledge and experience.
Repercussions of Non-Compliance
The financial services industry has invested heavily in understanding and addressing their obligations; however, some organizations fail to meet the requirements.
They face increased risk and the penalties imposed by regulators and the associated reputational damage that can have longer-term implications.
- AML fines - The financial penalties for non-compliance issued by federal regulatory agencies are significant and can have dire consequences for the organization. In 2021, FinCEN determined that Capital One had failed to implement and maintain an effective Anti-Money Laundering (AML) program to guard against money laundering and enforced a $390,000,000 Enforcement Action.
- Business disruption - In addition to the fines imposed by the regulators, organizations that fail to mitigate their fraud risk have to deal with significant and costly disruption to their business. They may be required to revise and implement new processes and roll out training to staff.
- Reputational damage - Being associated with a financial crime can damage an organization's reputation in an industry where trust is paramount. Customers, partners, and employees may not want to work with a financial organization that has been called out for failing to comply with AML regulations or legislation.
What is Transaction Monitoring Software?
With high volumes of transactions being processed 24/7, monitoring for suspicious transactions to and from customer accounts and detecting any issues in a timely fashion requires automation.
Transaction monitoring software allows financial institutions to analyze customers' transaction and event data in near real time, and detect outlier behavior based on sophisticated models. If suspicious activity is detected, an alert is generated.
Compliance and risk professionals can then investigate and report suspicious activity to AML, CFT, and KYC regulators in the form of a Suspicious Activity Report (SAR).
Having effective Transaction Monitoring Software allows organizations to:
- Identify and respond to high-priority suspicious activity using a process that organizes the workflow based on the risk levels of the alerts.
- Reduce the number of false positives that cost the business time and money without compromising regulatory obligations or customer experiences.
- Ensure systems and processes are updated to ensure adherence to regulatory requirements.
- Adapt nimbly to make the adjustments needed to keep ahead of threats from criminals, using complex models and accurate data to test and deploy rules quickly.
- Customize workflows to tailor the solution – without the need for engineering resources – for more effective investigations.
5 Features of the Best Transaction Monitoring Tools
To overcome the limitations of legacy systems, organizations need a solution that is designed to respond to their specific requirements. Although some tools automate standard workflows, they do not consider the broader context of the business or adapt rules accurately to prioritize cases. Transaction monitoring isn't the only component, but it's an essential part of a successful fraud and AML program.
There are some key features that transaction monitoring software should include to optimize the performance of the risk and compliance team.
- Easy to navigate UX - Transaction monitoring software needs to provide the features and functionality required by risk and compliance teams and present the data in a way that is easy to navigate and interact with. Delays in seeing or responding to information holds up the entire investigation when efficiency is essential.
- Ability to create complex statistical models - Many solutions rely on rules derived from known events, regulatory requirements, and the organization's experience. Historic-based rules can be easily interpreted and circumnavigated by criminals. More complex statistical models predict abnormal transactions and allow for obscure patterns to be detected - differentiating between possible money laundering and an innocent series of transactions. Advanced analytics anticipate the intent behind a transaction by looking at a wide range of behaviors, including click speed, IP address, pages visited, etc., enabling organizations to catch and report suspicious activity.
- No Code = no engineering resources required - Writing, testing, and deploying rules using a graphical user interface reduces the reliance on engineering resources and gives the risk and compliance team more bandwidth to focus on investigating high-risk and suspicious activities. With access to pre-configured rules in addition to the ability to customize rules to run against transactions, non-technical operations teams can set and develop new rules as the business requires without an engineer or data scientist.
- Ability to test rules before deploying - As criminals look for ways to evade detection and compliance requirements change, rules need to be modified and deployed quickly. By using actual data, new scenarios can be defined and tested to ensure rules perform as intended before they are deployed. Having a repository of ready-made rules and the flexibility to develop new rules can save significant and valuable time in the creation process. Compliance teams can validate and implement the rules they need to ensure their AML system remains robust and effective. This can be done in a matter of hours by testing new rules using historical data in a fully auditable manner.
- Flexibility to grow with you as you grow - Transaction monitoring software needs to evolve in response to the behavior of criminal elements as well as the growth in transaction volumes. Change is a constant in transaction monitoring, and being limited as opposed to enabled by a solution can limit the team's effectiveness and compromise the efforts of the organization's AML activities.
Have You Outgrown Your Legacy System? Here's How to Tell
Legacy transaction monitoring solutions can struggle to effectively monitor and analyze large volumes of data from all of their active customers' daily transactions. In addition, these systems cannot incorporate additional data or predictive analytics to provide the insights needed for a comprehensive assessment and management of risk.
Lack of data integration and low levels of data quality can lead to suspicious activities going undetected in some instances while also generating poor quality alerts that create high numbers of false positives.
Some legacy systems may have a limited number of transactions they can monitor each day. Depending on the number of accounts involved and the volume of activity, this could mean that not all of the transactions will be monitored, leaving the organization susceptible to financial crime.
The consequence of the inefficiencies of a legacy system is additional risk and unnecessary work for the investigation team as they work through large volumes of false positives that limit their availability to identify and investigate genuinely suspicious activity accurately.
Choosing a Transaction Monitoring Software: Key Takeaways
Effective transaction monitoring software can protect the organization from being targeted by criminals and help maintain compliance required by regulatory bodies and law enforcement agencies.
Transaction monitoring is a critical part of AML activities and needs to be robust to respond effectively to the relentless efforts of criminals to launder illegal funds.
Legacy systems lack scalability and focus on specific transactions identified as high risk. This can lead to overlooked suspicious activities, while false positives are flagged for manual oversight by an overloaded investigation team.
By choosing the right transaction monitoring solution, organizations collect and process more data from more sources. Then, using rules that can be quickly tested and deployed, they can respond to the ever-changing challenges of regulatory obligations and criminal activities.
Automating and tailoring monitoring processes allows for more effective transaction monitoring than possible with a legacy system, allowing investigators to focus on critical tasks that truly require their skills and training.
A fully customizable no-code platform, Unit21 enables risk and compliance teams to deploy rules and utilize complex statistical models that lower false favorable rates and improve alert performance, allowing investigators to focus on critical tasks.
- Enhance risk assessment - filter out false negatives for more accurate alerts allowing a more efficient response to high-priority cases.
- Maintain compliance - ensure systems and processes are updated in line with regulatory requirements.
- Increase efficiency - customize rules and create complex statistical models without engineering resources.
- Improve visibility - view and respond to suspicious events as they occur.
- Scale seamlessly - adapt to regulation changes, new threats, and more significant transaction volumes.
If a legacy system limits your organization, you need a solution that gives you the flexibility to tailor workflows and identify suspicious activities more effectively. While solutions can be built in-house, it's often more cost effective to buy a high-quality, comprehensive solution that offers flexibility and customization.
Request a demo to see for yourself just how Transaction Monitoring from Unit21 can help you more accurately detect suspicious behavior, and streamline investigations and reporting.