What Is Transaction Screening in AML?

Stringent international steps against money laundering require organizations to take robust steps in detecting and reporting suspicious activities that may indicate that financial crimes are taking place through their business. Transaction monitoring refers to the process of observing customer transactions in real-time, or even retroactively, to spot red flags and identify risks in senders and beneficiaries. While this may seem straightforward, it requires screening large volumes of transactions against encoded rules and available sanctions lists. Most companies use software to ensure that they can thoroughly and accurately monitor customer transactions. 

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The Role of Transaction Monitoring in AML

Transaction monitoring has become a vital part of anti-money laundering compliance. Spotting a suspicious transaction in time could prevent thousands of pounds from being laundered through your business or even being caught up in a high-profile money laundering scandal. AML transaction monitoring involves monitoring historical and current customer interactions to build a complete picture of customer activity. In many jurisdictions, this form of monitoring is a regulatory requirement. In Europe, this was introduced as the 4th money laundering directive in 2015, but it has been expanded many times since then. 

The actual monitoring process may vary from business to business. A company will generally create a rule-based system that is triggered by specific red flags. The transaction generates an alert and is stopped in order to be reviewed by the compliance department or officer. If the review finds that the transaction merits cause for concern, it is reported to the relevant regulatory body in the form of a Suspicious Activity Report or SAR. The reporting party does not need to provide evidence that a crime has taken place to file a report; they only need to have reasonable suspicion. 

That being said, there are many local and global AML regulations that any financial institution should be aware of, especially the standards set by the Financial Action Task Force. 


The Benefits of Transaction Screening and Monitoring

Transaction screening (and ongoing monitoring) is used to detect money laundering, terrorist financing, fraud, drug trafficking, bribery, corruption, and identify theft. Regulators around the globe are clamping down on financial institutions that fail to monitor financial transactions, imposing huge penalties and, in some cases, bringing criminal charges against them. Adequate transaction monitoring is the best way to remain compliant. 


AML Transaction Monitoring Red Flags

While transaction monitoring may vary between companies, there are some common red flags that every business should be aware of:

  • Client behavior, such as asking for shortcuts, providing vague or deceptive information, known convictions or a lack of knowledge about the subject or industry they are supposedly working in;
  • Source of payments, including significant funding coming from seemingly unconnected sources, or funding that is inconsistent with their socio-economic profile, large sums of cash or large loans without economic jurisdiction;
  • The nature of the business, such as overly complicated or opaque ownership structures, transactions with high-risk countries or false or suspicious documents used to back up transactions.

There are many more red flags to consider that indicate you should make further inquiries about your customers, while several red flags indicate larger issues. 


Challenges of AML Transaction Monitoring

As essential as transaction monitoring is, it isn’t easy. Regulatory requirements keep changing, as do for example Sanctions Lists, making it difficult to stay on top of requirements. Most systems require monitoring information from various disparate sources, including watchlists, transaction lists, greylists and blacklists, which can lead to errors or technological hiccups. There is also the risk of false positives, where clients are flagged for suspicious activity or identified as being on a watchlist without merit. These false positives have to be investigated and invalidated manually, which can lead to frustration and wasted effort. Choosing the right transaction monitoring tools is critically important to manage or avoid these issues. 

Too many firms make the mistake of using a one-size-fits-all software solution that creates many false positives over time. Adopting a more granular approach to segmenting clients and transactional behavior makes it much easier to spot true red flags. Similarly, using too many rules or scenarios can lead to a duplication of efforts. The overlap makes it difficult to detect which cases really need investigating. 


Finding the Best Transaction Monitoring Tools

Manual checks simply aren’t practical or thorough enough to monitor transactions on an ongoing basis. Instead, most firms use transaction monitoring tools and software to comply with AML and CFT requirements. These tools can not only alert firms to suspicious activities but provide evidence to regulators, auditors and other stakeholders about a company’s commitment to stop financial crime and comply with the rules. These tools provide you with the ability to automate many of the time-consuming and error-prone manual processes of the past so that you can accurately and efficiently monitor transactions over time. 

sanctions.io offers the technology you need to monitor customers and check them against various Sanctions & Watchlists. The smart name matching technology reduces false positive alerts while making sure no real match ‘slips through the cracks’. Book a demo today to learn more about how sanctions.io can help you with your Sanctions & AML compliance.

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