Transaction monitoring to AML is a critical component of its programs. AML laws and regulations require financial institutions to implement systems and controls to detect and prevent money laundering and terrorist financing. Transaction monitoring is an essential part of these systems and controls, as it allows financial institutions to identify and investigate suspicious activity.
Having a lower money laundering and terrorist financing risk for identification and verification purposes does not automatically mean that the same customer is at lower risk for all types of CDD measures, in particular for ongoing monitoring of transactions.
Customer Due Diligence or CDD information comprises the facts about a customer that should enable an organization to assess the extent to which the customer exposes it to a range of risks. These risks include money laundering and terrorist financing.
Relevance of Transaction Monitoring to AML
Organizations need to know their customers for the following reasons:
- Comply with the requirements of relevant legislation and regulation.
- To help the firm when the due diligence is carried out, to be reasonably certain.
- The customers are who they say they are, and it is appropriate to provide them with the products or services requested.
- To guard against fraud, including impersonation and identity fraud.
- To help the organization identify what is unusual and enable the unusual to be examined during a continuing relationship. If unusual events do not have a commercial or otherwise straightforward rationale, they may involve money laundering, fraud, or handling the criminal or terrorist property. To enable the organization to assist law enforcement, it requires providing available information on customers being investigated following the making of a suspicion report to the FIU.
The information collected through an initial meeting or from a completed application form will start the procedure for developing a profile from which a customer risk assessment can be determined. Who the customer is, where they live and/or conduct their business, what they do, and the nature of the product or service they require must be considered in determining the risk level and the consequent necessary CDD and monitoring.
CDD process and information obtained through it are used by the AML compliance team to perform the transaction monitoring of customers after establishing a business relationship with them. Knowing customers also enable the organization to proactively identify the ML/TF risks and apply relevant transaction monitoring procedures to relevant customers’ accounts.
AML requirements include avoiding setting up anonymous accounts or relationships with shell companies or banks. Therefore, the initial CDD process restricts such accounts. In case such accounts are missed out, the transaction monitoring process help management in the identification of such accounts or links existing customers with such type of prohibited accounts.
The monitoring requirements should also be determined based on the risk assessment, with higher-risk customer or product combinations subjected to more frequent checks and/or scrutiny.
Therefore, the transaction monitoring process includes the results obtained by performing ML/TF risk assessment. It identifies the high-risk accounts and customers for which enhanced monitoring procedures are to be applied by the AML team, including detailed scrutiny of transactions, identification, verification of fund sources, detail of beneficiaries, the purpose of transactions, etc. The initial CDD information is also corroborated with the ML/TF risk assessment results to perform relevant and targeted monitoring of customers’ transactions.
Transaction monitoring involves analyzing financial transactions for indicators of suspicious activity, such as large or unusual transactions, transactions with high-risk countries or individuals, or transactions that deviate from a customer’s typical behavior. Transaction monitoring systems use algorithms and rules-based systems to identify patterns and anomalies in transactional data. When suspicious activity is detected, the financial institution is required to investigate the activity and report it to the relevant authorities if necessary.
By implementing effective transaction monitoring systems, financial institutions can identify and prevent money laundering and terrorist financing, protect their customers and their business from reputational and legal risk, and comply with AML laws and regulations. Therefore, transaction monitoring is an essential tool for AML compliance and plays a critical role in the fight against financial crime.