Why is AML Transaction Monitoring Important?
Transaction monitoring is a key component of the anti-money laundering program that all financial institutions are required to have in accordance with the Bank Secrecy Act. Transaction monitoring’s primary purpose is to prevent financial fraud, which 2.2 million consumers reported to the Federal Trade Commission (FTC) in 2020 for losses totaling $3.3 billion.
To conduct adequate transaction monitoring today, your institution faces an uphill battle on multiple fronts. The most effective way to shield yourself from money laundering and other financial crimes is to understand what’s driving this latest set of challenges. Using this information, you can combine technology and best practices to improve your transaction monitoring efforts.
Why Has AML Transaction Monitoring Become So Challenging?
Change is constant, but the COVID-19 pandemic dramatically accelerated its pace, which has made transaction monitoring more challenging than ever for financial institutions.
The Current (and Future) Consumer Mindset
Heading into 2020, consumers were slowly but surely moving toward digital-first consumerism. Once the pandemic hit, almost every consumer—even those who were previously unwilling—made a full-fledged leap in that direction. In fact, McKinsey says it took just 90 days into the pandemic for the level of e-commerce adoption to match that of the entire previous decade.
In response to this elevated e-commerce demand, many traditional retailers and modern e-tailers started competing for their share of this expanded customer base by offering premium subscription services that included things like insider access to free shipping and greater discounts. That, in turn, further convinced consumers of the ease and advantages of a digital-first lifestyle.
In the physical world of yesteryear, financial fraudsters had to interact with another person, such as the sales clerk, and present a debit or credit card. In the digital realm, the inherent obstacle created by that personal interaction and physical card is completely eliminated.
Furthermore, criminals no longer have to steal or fake a debit or credit card to use for e-commerce scams. They simply compromise the consumer’s bank account credentials through social engineering tactics. Once in, they slowly take over the account, changing a notification here, updating a contact number there, until they eventually lock out the legitimate account owner. This type of activity is far more difficult to detect than a random, uncharacteristic charge at a big box store or major e-commerce site.
What’s at Risk When You Ignore These AML Challenges?
Financial institutions who don’t fully understand these challenges and haven’t adjusted their transaction monitoring efforts face an elevated level of risk in these critical areas:
Anti-Money Laundering Fines
Not effectively assessing or mitigating anti-money laundering risks can increase the chance of non-compliance. This comes as federal regulatory agencies place a greater emphasis on compliance with anti-money laundering regulations and meting out harsh civil money penalties. For example, in 2021, this included a $390 million BSA/AML-related fine and a $100 million one.
The National Law Review explicitly warned that, “Companies should expect to see a continued focus on AML compliance in 2021 with regulators and law enforcement using the new tools they have been given through the AML Act, assessing increased monetary penalties, and making a concerted effort to monitor AML compliance of non-banking entities.”
Financial institutions that aren’t effectively mitigating their fraud risk are setting themselves up for a significant hit to their bottom line. According to PwC’s Global Economic Crime and Fraud Survey, just 5,000 companies amassed a total of $42 billion in fraud losses in a 24-month period, which includes the actual money stolen plus other associated expenses.
One unnecessary fraud-related cost that institutions struggle with is the extra staff needed to analyze alerts stemming from a high percentage of false positives. Another is the expense of reissuing cards to all customers after a merchant breach when their transaction monitoring system can’t pinpoint impacted customers.
Staff Productivity and Motivation
Those working in fraud prevention often get burned out when they are constantly working through a backlog of false-positive alerts rather than investigating actual cases of fraud. As a result, these employees seek greener pastures at other firms, likely for more pay given today’s increased demand for highly qualified compliance professionals.
How Can Financial Institutions Overcome AML Transaction Monitoring Challenges?
Although these global trends in AML transaction monitoring sound discouraging, there is an antidote that can keep financial institutions on the right side of anti-money laundering regulations and better protected from fraud losses.
The Hallmarks of an Effective Transaction Monitoring System
Transaction monitoring systems have evolved to meet the demands of today’s fraud environment. Your institution can meet these demands by leveraging a transaction monitoring system that incorporates the following functionality:
- System integration: The effectiveness of your anti-money laundering compliance program depends on your ability to create an accessible, holistic view of customers. This means grabbing all the scraps of information located in each of its various systems, including every name, physical address, transaction, IP address, sign-on, purchase location and transfer associated with a particular customer. In order to access all that information, your transaction monitoring system must be fully compatible with and seamlessly connected to those other systems.
- Behavioral analytics: All of that information adds up to millions of data points, even for smaller The human eye might be able to detect an obvious fraud, but it cannot recognize patterns of suspicious activity or relationships using multiple data points for every transaction. But transaction monitoring systems that use machine learning are able to make those connections quickly and accurately across very large volumes of customer data and transactions to stop the initial fraudulent act and any subsequent acts.
- Real-time processing: Although transaction monitoring is still conducted via batch processing at many financial institutions, real-time or continuous transaction monitoring helps stop fraud before it occurs and limits the amount of unnecessary friction to which customers are exposed. The primary argument institutions give for not moving to real-time transaction monitoring is the lack of staff to sort through the alerts. However, your institution can outsource this task to a credible AML compliance provider with highly skilled staff for 24/7 coverage.
- Time-to-detection: In addition to real-time processing, the most effective transaction monitoring systems allow your institution to set a desired timeframe for detection, including a real-time option, and a desired timeframe for transfer to an internal or outsourced staff member to evaluate, resolve or escalate the alert for further investigation.
- Risk mitigation: Your transaction monitoring system must effectively monitor and mitigate your real-world risk, encompassing the types of products your offer, customers and footprints you serve and channels your customers use.
The Key Elements of Effective Transaction Monitoring Internal Controls
Your transaction monitoring system must be supported by effective internal controls, which include these best practices:
- Comprehensive risk assessment: As tempting as it is to quickly peruse your institution’s last BSA/AML risk assessment and rubber stamp it for this year, that doesn’t help gain a better understanding of your existing risks, which is the whole point of this exercise. Your institution needs to take the time to evaluate current key risk areas and assess the ability of your controls to limit and mitigate them.
- Clear and definitive policies and procedures: Based on the findings from the risk assessment, your institution should update its policies and procedures for stronger financial crime prevention.
- Thorough documentation: In addition to a written risk assessment and subsequent policies and procedures, your institution should document the functionality of its transaction monitoring systems, including the rules and behavioral analytics it uses and the other systems it integrates with, as well as how your institution applies that functionality to comply with policies and procedures.
- Program validation: Finally, your institution should test its transaction monitoring system and internal controls to make sure they work as expected to combat financial crime.
What Is Anti-Money Laundering Compliance without Transaction Monitoring?
Identity verification, suspicious activity reporting and sanctions screening are all vital parts of anti-money laundering compliance, but your program is incomplete without robust transaction monitoring, which takes full advantage of today’s advanced functionality such as real-time processing and behavioral analytics. Without these things, your institution is left with more risk, more work for its compliance staff and more friction that negatively impacts the experience of legitimate customers.
You can learn more about how to use transaction monitoring to create a modern anti-money laundering program by reading our AML Compliance Guide.