Optimizing Transaction Monitoring Parameters: Comprehensive Strategies for Enhanced Compliance and Reduced False Alerts

Posted in Sanctions Compliance on February 1, 2024
Optimizing Transaction Monitoring Parameters

Optimizing transaction monitoring parameters is crucial for financial institutions to strike a balance between detecting genuine threats and reducing false positives, ensuring efficient compliance with AML/CFT regulations while minimizing operational disruptions. In the transaction monitoring optimization process the compliance specialists need to ensure that all kinds of transactions and activities, initiated or executed by the customers, are identified and assessed. 

The monitoring process aims to reduce efforts including generation of inappropriate transaction red-alerts for reviews. The transaction monitoring optimization configures the customer and compliance data to integrate with the technology enabled compliance system, which helps to identify the hidden patterns and anomalies in the compliance screening process. 

Optimizing transaction monitoring parameters interlink the entire relevant customer and transactions data sets to configure with monitoring sub-processes including scanning customer lists, scanning customer types, categories, sources of income, sources of funds, jurisdictions, purpose of accounts, loan products and services availed, history of defaults, negative media news. 

The optimization of the transaction monitoring process also aims to include the applicable components of regulatory requirements, such as AML, customer and transaction sanctions, anti-corruption, tax evasions, data protection, fraud prevention, etc. 

To optimize the transaction monitoring process for regulatory compliance, the identification and assessment of applicable laws and regulations is crucial, without which the whole process of transaction monitoring would not be effective and complete.

Optimizing Transaction Monitoring Parameters

Optimizing Transaction Monitoring Parameters

The appropriate introduction of a context to the transaction monitoring process, including entity level and activity or transaction level helps in the assessment of the operating effectiveness of transaction monitoring controls. 

When assessing operating effectiveness of controls, the multi-geographical, multi-functional, and complex transaction scenarios are considered to develop more robust transaction monitoring controls. 

The transaction monitoring optimization includes performing deep compliance reviews of systems and procedures, to identify the irregularities or errors in the transactions data and delivery channels. This helps in the reduction of false positive alerts and reduces the overall compliance cost. 

The regular process of performing transaction monitoring optimization highlights the compliance breaches in terms of missed suspicious transactions and their reporting to regulatory authorities. 

The missed suspicious transactions may be due to the availability and use of low quality or legacy customer data. The optimization requires review and improvement to the legacy data, to convert into an updated data for transaction monitoring.

Transaction monitoring optimization also includes reviews of transaction review algorithms used to generate the red-alerts based on threshold breaches or irregularities in accounts. 

There may be situations where the transaction monitoring tools and algorithms may not be linked to the right customer data points, causing generation of wrong red-alerts leading to generation of excessive false positives.

Gathering current and relevant customer information for all existing and new customers, improves data quality and improves compliance reporting to the senior management and regulatory authorities. 

Optimizing Transaction Monitoring Parameters

The existing customers are contacted to share their updated business profiles and suspicious transactions justifications. The compliance specialists recommend updates of internal customer data and compliance systems. Further, the new customers are required to share true and complete information at the time of onboarding, to avoid the risk of onboarding criminals. 

Additionally, the regular review of customer transactions enables timely update of data points and links it with the monitoring algorithms to perform real-time transaction monitoring. 

As part of the optimization of the transaction monitoring process, the due diligence and know your customer (KYC) processes are improved to ensure effective compliance with applicable AML/KYC laws and requirements. 

The improvement to the due diligence and KYC processes prevents the risk of missed suspicious transactions and existing criminal customers. Optimizing transaction monitoring parameters improves processes such as:

  1. Client’s identification and categorization; 
  2. Identifying the true beneficial owner of the customer and taking appropriate measures to verify his or her identification; and 
  3. Understanding the objective or purpose of opening the account or establishing the relationship. 

The identification and verification of the client and true beneficial owner is part of the Board-approved KYC policy. 

Identity verification of the prospective customer should be appropriate and reasonable to meet the applicable regulatory requirements. The purpose is to onboard only identified and verified customers. 

Verification of the information of the customer is also performed by utilizing the information from independent sources such as media news, websites, and other readily available public information.

Optimizing Transaction Monitoring Parameters

Final Thoughts

Transaction monitoring optimization is vital in ensuring robust compliance and reducing inefficiencies in the alert generation process. Compliance specialists aim to capture and assess every customer transaction, integrating customer and compliance data with advanced technology to unearth hidden patterns. This streamlined process considers various factors from customer information, loan histories, to regulatory requirements like AML and data protection.

Moreover, continuous reviews of monitoring algorithms and system procedures are crucial to limit false positives and enhance compliance reporting. Enhancing due diligence, KYC processes, and ensuring customers are verified using diverse information sources are pivotal components. This holistic approach ensures that regulatory compliance is met while mitigating the risks associated with erroneous or missed alerts.