Transaction monitoring and due diligence requirements are important elements of compliance and risk management for financial institutions, such as banks, insurance companies, and money service businesses. These requirements are intended to prevent money laundering, terrorist financing, and other illicit activities by detecting and reporting suspicious transactions or activities.
In implementing a risk-based approach or RBA, the financial institutions and Designated Non-Financial Business Professionals or DNFBPs should have processes to identify, assess, monitor, manage, and mitigate the ML and TF risks. The aim of performing RBA is to ensure that where there are higher risks, the countries should require financial institutions and DNFBPs to take enhanced measures to manage and mitigate ML/TF risks. Simplified measures may be performed where ML/TF risks are lower.
Transaction Monitoring and Due Diligence Requirements
The FATF is an inter-governmental body with the mandate to set standards and promote the effective implementation of legal, regulatory, and operational measures. This institution combats money laundering, terrorist financing, and other related threats and proposes recommendations to perform due diligence on customers and various other recommendations. FATF requires financial institutions to perform normal and enhanced due diligence measures for PEPs, including the conduct of enhanced ongoing monitoring of the business relationship of such customers.
Enhanced due diligence measures include monitoring transactions regularly to ensure that money laundering activities or terrorist financing-related activities are not performed through the institution. For PEPs, the institutions must perform reasonable measures to determine whether the customer or a beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organization. These requirements should continue even after establishing a relationship with high-risk category customers and performing enhanced due diligence measures.
It is required to ensure that financial institutions include required and accurate originator information and required beneficiary information on transactions related to wire transfers and related messages. For monitoring purposes, such information is used. It is recommended that financial institutions perform monitoring of wire transfers to detect those transactions which lack required originator and/or beneficiary information and take appropriate measures.
Regulatory authorities also have powers to enforce the monitoring of transactions to be performed by financial institutions. State or central banks regulate financial institutions, such as banks, and they issue relevant AML/CTF regulations and guidance from time to time, which banks must follow and comply with. Those regulations and guidance require the performance of CDD, EDD, and reporting requirements and the performance of transaction monitoring aspects.
Regulators also require relevant institutions to identify and report suspicious transactions to the regulator, such as Financial Intelligence Unit or FIU. Therefore, this requirement is complied with through the performance of a risk-based transaction monitoring process, which may vary from institution to institution.
FATF also recommends establishing the FIU for the receipt and analysis of the following:
- Suspicious transaction reports, and
- Other information relevant to money laundering, associated predicate offenses, terrorist financing, and the dissemination of the results of that analysis.
The FIU may obtain additional information from the relevant institution regarding the reported transaction. Therefore, institutions should regularly monitor transactions to facilitate the needs and requirements of FIUs in their respective countries.
Transaction monitoring involves the ongoing review of customer transactions and activities to identify and investigate any suspicious or unusual behavior. Financial institutions are required to establish and implement effective transaction monitoring programs that are appropriate for their size, complexity, and risk profile. This may include using automated systems to detect patterns of suspicious behavior, such as large cash transactions or frequent transfers to high-risk countries.
Due diligence requirements refer to the process of gathering information about customers, counterparties, and other parties involved in a transaction or business relationship. Financial institutions are required to conduct due diligence on their customers and counterparties to assess their potential risk for money laundering or terrorist financing. This may involve verifying the identity of the customer, conducting background checks, and monitoring for changes in risk profile over time.