As online transactions have skyrocketed, so have online fraud and money-laundering. The United Nations Office on Drugs and Crime (UNODC) estimates that criminal proceeds from fraud amounted to 3.6% of global GDP, or 1.6 trillion USD. In general, criminals look to:

  • Place money into the financial system — Placement
  • Obfuscate where the money came from – Layering
  • ‘Clean’ the money so it doesn’t appear to have come from illicit means — Integration

Regulatory bodies around the world have taken notice. Last month FINRA (the Financial Industry Regulatory Authority) in the United States fined Raymond James $17 million for systemic anti-money laundering (AML) compliance failures. There has been over $6B in AML fines over the last three years.

The repercussions of non-compliance are high, but, what can an organization do to prevent criminals from using their institution for money laundering, while keeping regulators happy and continuing to grow? One of the first techniques is automating transaction monitoring.

Transaction monitoring is essentially watching the financial transactions that flow through your financial institution and determining if there is any potential suspicious activity involved. Typically, this means following the “transaction monitoring funnel”:

Step Mechanism Detail
1)    Look for suspicious activity Rules Automated or manual rules to find suspicious activity
2)    Notify team when suspicious activity found Alerts Notifications when suspicious activity has been discovered
3)    Create a case to manage the investigation of suspicious activity Case Management Escalations based on rules and alerts for closer examination
4)    Create a report to capture the activity and the results Reports Compliance and business reports
5)    Regulatory Filing Government Communication Send suspicious activity to applicable government agency

The funnel starts with rules that get applied to each transaction. These rules should be tuned to highlight the mandatory situations (e.g. CTRs), the highest areas of risk, and deemphasize the lowest risk areas. The goal is to make the process more efficient so that regulation is met, more risk is removed, and customers are inconvenienced less.

When set-up correctly, transaction monitoring is very efficient in rooting out suspicious activity and ensuring compliance. However, with a manual monitoring process there can be headwinds that slow down the process and increase its cost.

Manual transaction monitoring often has the following issues:

  • Low throughput. Each person on the team has a limited capacity or number of transaction that they can review. And, if cases are highly involved, then an even smaller number of transactions per person can be reviewed. Evidence from partners is that
  • More errors. Ensuring that everyone understands how to correctly review a transaction involves training. Training needs to be repeated as the process changes, money laundering techniques charge, new people are onboarded, etc… And, even with the best training, and the clearest process, errors will be made. Errors increase when there are judgement calls to be made, when processes changes, or when new people are added to the team.
  • Higher inconsistency. Analysts are different and operate in different ways. As a result, they will process things in different ways. Inconsistency leads to only certain analysts detecting suspicious activity. Moreover, in a manual system it is harder to pause and then pick up where you left off because of the need for memory or note taking. This is exacerbated when analysts are working on multiple cases.
  • Expense. As you grow, the number of transactions and cases will increase. Because each of your analysts has a limited capacity, you will have to add additional headcount just to maintain the required level of oversight.

Manual transaction monitoring can be effective in the short-term for low volume financial institutions, but higher transaction volume or rules changes will lead to additional cost, a higher error rate and other inefficiencies that could lead to serious compliance issues.

Automated transaction monitoring is a stronger solution that solves many of the issues seen with manual monitoring. Every large and medium sized financial institution has an automated transaction monitoring system. The benefits are:

  • Effective at any scale. Whereas manual monitoring can be effective in locating suspicious activity, scaling up requires additional headcount and additional cost. However, automation can scale by focusing existing resources on the most important situations, saving on manpower and providing economies of scale.
  • Better Consistency. Automated transaction monitoring follows the rules written into the system. There is no change depending on agent, transaction or time of day. It applies the rules consistently. As a result, automated monitoring only flags the issues, leading to fewer reviews.
  • Faster results. Automated systems process 24/7 and at a faster rate than manual systems.
  • Better results. Not only does automation reduce errors, but it also can see trends or patterns across transactions that may go unnoticed with manual transaction monitoring.
  • More manageable. Changing the rules in a manual process requires training and reduced speeds as the new processes become routine. With automated transaction monitoring, the switch to the new rules does not slow down the process.
  • Greater compliance. Because the data collection is stronger, tracking through the duration of the monitoring process is stronger (e.g pausing and resuming a review will not lead to forgetting information) and compliance reporting is more complete.
  • Regulators. Regulators like to see a well-defined automated process is in place. If you have a manual process they will ask for documentation and other items that are simply assumed when you have an automated system.

The right technology makes automated transaction monitoring possible and it:

  • Provides you with an easy ability to create rules.
  • Generates alerts based on exceptions that can integrate with your existing case management system. Exceptions might include an entity that has perpetrated fraudulent activity elsewhere, a suspicious pattern or even a repeat of something that has previously occurred.
  • Aggregates based on commonalities to highlight those users trying to hide their activities under disparate transactions.
  • Generates standard and custom reports for business tracking and compliance.

Ultimately, transaction monitoring is critical to your compliance and fraud prevention efforts. The right mix of approaches and the right technology platform makes all the difference.