Institutions must know the transaction monitoring importance. Transaction monitoring is an ongoing process performed by the Money Laundering Reporting Officer or MLRO through the defined monitoring processes and review mechanisms. Transactions or activities of the customers are also monitored through the trigger of the red flag or red alert.
Monitoring a transaction or an activity due to generating a red flag is an event-based monitoring process. Such event-based monitoring is needed because of a breach of transaction threshold or irregular patterns of inflows or outflows, which may indicate the occurrence of money laundering, corruption, bribery, tax evasion, or terrorist financing risk incidents.
Transaction Monitoring Importance
Trigger event monitoring of the customer relationship is likely to be based on a considered identification of transaction characteristics, such as the following:
The unusual nature of a transaction, such as abnormal size or frequency of the customer transaction or peer group;
The nature of a series of transactions; and
The geographical destination or payment origin, such as the origination of payment or transaction from or to the high-risk country.
Certain high-risk indicators must be highlighted, reviewed, and investigated when the related activities and transactions fall outside the expected customer activity or breach the predefined transaction threshold. Red flags should be generated irrespective of the amount, customer type, and nature of the transaction.
The number of alerts generated within each bank varies based on several factors, including the number of transactions running through the monitoring system, as well as the rules and thresholds the bank employs within the system to generate the alerts. Banks typically score alerts based on elements contained in the alert, which determines the alert’s priority.
Banks typically review and re-optimize their alert programs every 12 to 18 months. Banks noted that many alerts are ultimately determined to be “noise” generated by the software. One bank noted that it works continuously to reduce the software’s “noise” and develop typologies to enrich the data and reveal the most critical information.
Banks focus extensively on the narrative part of the SAR. In some cases, the managers and investigators usually are from the background of the regulatory job and have experience with ML and financial investigations, and possess knowledge about the relevant regulatory requirements.
To tell a clear story of the suspicious activity and then construct the narratives is a good process in SAR. Different tools track the relevant information for preparing SAR and its filing. The information may be the transaction data, customer profile data, and related account activity and information. The system allows the monitoring analyst to check other information databases to pull all available information into a concise form for analysis, management review, and approval. Investigators focus on determining where the money came from, what happened while at the bank, and where it went when it left.
After the filing of the SAR, the bank conducts a post-investigation to determine if suspicious activity continues and if a supplemental SAR is required. The account closure process must be initiated in case of a second SAR. The bank uses the suggested SAR filing tool to include investigative details before proceeding and/or submitting the SAR.
Transaction investigators also participate in monthly group meetings that provide the ability to discuss issues across various channels. A business group discusses cases or new trends that allow cross-training to understand the ML risks within the different processes. Once the monitoring system generates a transaction alert, six months of account activity is reviewed. Once a decision is made to initiate an investigation, the alert is entered into the bank’s case management system. At this point, the timeline for filing a SAR starts.
If a SAR is not filed, the investigator reflects this as an “unfiled case.” The respective customer file includes supporting documentation as to why the SAR is not to be filed. An indication of whether the account will continue to be monitored is also mentioned for reference purposes.
Final Thoughts
Transaction monitoring is an essential process that is used by financial institutions to detect and prevent fraudulent and illicit activities, such as money laundering, terrorist financing, and other forms of financial crimes. Transaction monitoring is crucial for financial institutions to comply with regulations, manage risks, protect customers, and maintain their reputation.
