Transaction Monitoring in the Fight Against Fraud, Money Laundering and Terrorist Financing

2. June 2021 / in Knowledge

The United Nations estimates that 2.7% of global GDP is linked to money laundering operations – representing a gigantic loss of around 500 billion euros per annum. The need for stronger laws, institutions and penalties to prevent corruption and money laundering is an ongoing discussion among governments around the world.

For the financial industry, money laundering and terrorist financing are one of the greatest challenges of the present day. Combating fraud and money laundering is high on the agenda of financial institutions, spending over $200 billion annually just to comply with money laundering prevention requirements. In the EU alone, the cost is estimated to be around 100 billion euros.

In recent years, transaction monitoring has become a crucial part of the anti-money laundering strategy. Virtually all banks and financial institutions implement some form of transaction monitoring to monitor customer transactions and identify suspicious activity.

What is Transaction Monitoring?

Effective transaction monitoring enables financial institutions to monitor their customers’ transactions in real time or on a daily basis. Intelligent solutions not only look at current transactions; they also analyse historic data and the customer’s account profile. This serves as a basis for customer analysis, risk management and predicted future activity.

Transaction monitoring also provides banks with an overview of customers’ regular financial activities. If a transaction deviates significantly from this, the system sounds the alarm.

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Why Transaction Monitoring?

Transaction monitoring is critical to a financial institution’s anti-money laundering efforts. It can detect suspicious activity such as the deposit of large sums in an automated and therefore scalable manner.

However, financial institutions don’t use the information from transaction monitoring simply for the purpose of protecting themselves. It’s primarily used to meet various requirements of money laundering laws, for filing suspicious activity reports and other reporting obligations. Financial regulators around the world have already made transaction monitoring a regulatory requirement. In Europe, it has been mandatory for several years as part of the 4th Money Laundering Directive.

Even those companies for which transaction monitoring is not (yet) a legal requirement can get into big trouble if they don’t do it. Continuous transaction monitoring should be part and parcel of any risk-based approach. The absence of such a system can not only damage an institution’s reputation; it can also lead to heavy fines and penalties.

Effectively combating money laundering and fraud starts with “Know Your Customer”. Discover more about the KYC principle here!

Why Is Transaction Monitoring so Important for Banks?

Banks are required to monitor the behaviour of customers to check for possible money laundering activities and to report any suspicion of money laundering. Transaction monitoring enables banks to reliably detect suspicious account activity and prevent large sums of money from being laundered.

If the obligation isn’t reason enough, there are also many other benefits: no bank can afford to be involved in a money laundering scandal. Moreover, adequate fraud management builds trust with regulators and partners, as it shows that the financial institution takes the provisions of the Money Laundering Act seriously and does everything in its power to prevent criminal activity.

Transaction monitoring also enables banks to adopt a risk-based approach, which means they’re able to determine and factor in the potential risk of customers. For example, a low-risk customer account requires less monitoring than a high-risk customer. Once the level of risk is determined, banks can simply adjust the monitoring.

Why Automated Transaction Monitoring?

Transaction monitoring is indispensable, but up to now it has entailed many complications and additional work:

  • Manual transaction reports are very time-consuming and expensive.
  • Manual transaction monitoring is extremely error-prone.
  • Repetitive monitoring tasks keep employees from performing actual tasks.

That’s why automated transaction monitoring is increasingly replacing manual transaction monitoring. Is it wise to leave such a risky process to artificial intelligence? Not entirely, which is why an important manual aspect always remains with automated transaction monitoring. As soon as the system reports a transaction, a trained employee investigates whether it’s actually suspicious.

By the way, intelligent transaction monitoring software is so adaptable that banks neither receive too many false reports nor does genuine suspicious activity go undetected.

Monitoring your own customers? With Open Banking, you can bridge the gap between anti-money laundering and the customer experience.

What Should Banks Look for in Transaction Monitoring?

The flexibility and scalability of the transaction monitoring system plays a major role in legally compliant fraud management. Banks must be able to customise the solution both to their own needs and to the frequent changes in the Money Laundering Act and other transaction monitoring regulations.

Creating a legally valid audit trail of all activities is a prerequisite for being able to trace processes and submit them to the relevant authorities upon request. Solutions that work with artificial intelligence offer maximum security and efficiency combined with less susceptibility to errors and tailored monitoring.

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Schlagworte: Knowledge

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