Transaction Monitoring – Establishing A Defence Mechanism Against Financial Crime

  • Richard Marley
  • November 03, 2021
  • 8 minutes read
  • 6815

With the rapid increase in the global volume of monetary transactions, money laundering methods are becoming more sophisticated. Conversely, financial organizations experience significant challenges associated with AML monitoring. Globally fintech firms invest $2 trillion yearly to fight money laundering cases. However, financial transaction tracking has become a viable element of anti-money laundering regulations over the past few years. As a result, banks and other financial institutions have developed a transaction monitoring framework in order to keep an eye over the unusual transactional activities to and from existing clients.

NatWest’s Failure to Monitor Transactions

Multinational NatWest bank failed to determine and deter money laundering of £400 million by only one client. This damaging seniority occurred because NatWest bank was not competent to monitor money laundering activities, as a client was able to deposit around £365 million into its account over five years, of which £264 million was deposited in cash.

This money laundering case was highlighted by the state watchdog Financial Conduct Authority (FCA).

After admitting money laundering allegations, NatWest bank has become the first British bank to accept chargers under money laundering law stated in 2007.

Intelligent technologies – Transforming Conventional Transaction Monitoring Approaches 

Today, most financial institutions are implementing automated approaches to keep an eye on transactional activities, yet financial crimes are surging, especially money laundering cases, are thriving globally. However, manual ways are not fruitful in this era of digitization as they are inadequate to determine and prevent sophisticated monetary crimes.

Intelligent technologies like machine learning and artificial intelligence embedded with big data effectively enhance the ongoing transaction monitoring and the mechanism of reporting suspicious financial activities. With this, financial institutions can automate transaction monitoring, processing, and evaluation of unusual transactions.

ML and AI-backed systems also provide more accurate verification results and generate complete assessments of ongoing enhanced due diligence. The transaction monitoring system also updates the customers’ profiles for emerging or existing financial crimes in the near future.

New technologies are beneficial in determining the anomalies and eliminating the redundancy from the customers’ records to improve the accuracy of risk analysis.

For instance, deep neural learning is the advanced application of machine learning. Artificial neural networks are developed that are genuinely stimulated by the human brain with several neural layers capable of learning heaps of data in quite an accurate manner. Deep neural network algorithms can perform tasks recursively, improving the outcomes while making transaction monitoring systems effective to overcome challenges without human intervention.


Repercussions Fintech Sector Could Face due to Non-Compliance with AML Regulations

Due to the non-compliance with Anti-Money Laundering (AML) regulations, inadequacy in transaction monitoring framework, and violations of global monetary regulations, financial institutions could face adverse consequences like NatWest bank. Aftermath includes hefty regulatory fines, criminal court proceedings, damaged credibility, and sanctioning. All the above-listed matters can put the financial institution on the road to destruction and also negatively impacts their business operation.

Additionally, the alleged financial institution also experiences non-compliant regulatory sanctions. Most likely in such financial crimes, the regulatory authorities limit the operations, imply partial or permanent bans, and restrict cross-border transactional services. Furthermore, the law enforcement bodies also freeze institutions’ financial assets that eventually put significant pressure on the alleged financial institution liquidity.

Regulations to Protect Financial Institution from Monetary Crimes 

Globally, the regulatory bodies are thriving to legislate financial laws and regulations to protect the financial institutions’ interests and to make them capable of countering money laundering and terrorist financing. Some of the regulatory requirements are listed below:

AML  Requirements in the UK

The financial sector has to meet the regulatory obligations to effectively counter financial crimes. These include implementing the customer due diligence procedure to validate their clients’ identities and determining the potential risk they pose to the system.

The financial corporation must also deploy internal control as well as ongoing transaction monitoring systems. The type of these controls relies on the size, complexity, and services they have to provide.

  1. Strict customer due diligence procedure while establishing B2B relationships
  2. Enhanced due diligence process must be conducted over customers that are not physically present or are high potential risk possessor like PEPs
  3. The high-value dealer customers that carry out €10,000 worth of transactions have to undergo CDD
  4. Appointing compliance officer to assure that employees are trained to report suspicious transactional activities 

Unfortunately, the financial organizations that don’t comply with such regulations face sanctions and regulatory penalties. Law enforcement agencies thoroughly monitor loopholes and vulnerabilities in firms’ transaction monitoring frameworks while providing institution anti-money laundering requirements accordingly.

The Sixth Anti-Money Laundering Directive (6AMLD)

Under the 6AMLD, financial institutions operating in Europe and US-based multinational companies are obliged to practice due diligence and transaction monitoring procedures to prevent financial crimes.

6AMLD implies stern requirements on financial corporations to counter monetary crimes and identify concealed Ultimate Beneficial Ownership (UBOs). Additionally, hefty regulatory penalties are established for institutions that fail to comply with anti-money laundering regulations.

  1. Strict punishments are constituted for the financial institutions that are alleged for money laundering, including harsh fines and temporarily or permanently halting access to public funding
  2. Criminal liability is extended to legit customers and financial institutions. In case the corporation is found guilty due to “ insufficiency in supervision or control”, they are held responsible
  3. If an individual is alleged with money laundering crimes, have to face imprisonment of at least four years

AML Requirements in the USA

The Bank Secrecy Act (BSA) is thriving in the USA to cover every side of the money laundering and terrorism financing risk associated with the financial institutions. 

  1. Financial institutions are obliged to develop AML programs to effectively fight the emergence of money laundering and terrorist financing crimes
  2. Know Your Customer (KYC) procedures are mandated for  financial institutions  to follow in order to acquire the customers’ detailed information before providing them with financial services
  3. Under BSA the financial institutions are required to maintain the records of the customers’ financial transactions. Additionally, the monetary transaction exceeding $10,00 is to be reported to FINCEN
  4. As per BSA requirements, the financial corporation is obliged to keep the Suspicious Transactions Reports for 5 years

AI-Based Transaction Monitoring – Time for a More Comprehensive Approach 

Financial institutions have a broad and holistic perspective of the financial threat linked with each client to combat surging cases of financial crime. To counter criminal activities financial institutions are implementing Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures both upfront and daily.

The core objective of the transaction monitoring framework is to identify and effectively combat money laundering and terrorist financing activities. Financial firms need to incorporate AI-backed mechanisms that dramatically enhance the possibilities of determining the potential risk without overburdening their compliance teams.

The emergence of end-to-end anti-money laundering regulations renders an action plan for countering monetary crimes and undergoing AML regulations without limiting the client experience.

Summing it up 

The clients possessing alarming levels of threat could negatively impact monetary infrastructures. Therefore, financial institutions are obliged to execute comprehensive risk assessments while onboarding customers. Furthermore, AML background checks the client against the international sanction lists, global watchlists, and PEPs.

Shufti Pro’s AML monitoring system aids financial firms in performing ongoing client monitoring. Based on machine learning and artificial intelligence algorithms, Shufti Pro’s AML Screening Solution assists businesses in maintaining customer risk profiles and effectively preventing financial crimes like money laundering and terrorist financing.  

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