Money laundering and terrorist financing are a serious threat to our society. Legislation and regulations require financial institutions such as banks to monitor their customers’ transactions. However, the gap between regulations and practice is considerable. How can transaction monitoring be optimized?
Hundreds of thousands of reports
What are we actually talking about when we talk about financial transactions where there is a suspicion of money laundering or terrorist financing? In 2020, the Financial Intelligence Unit, the body that receives reports of suspicious transactions, reported 700,000 irregular transactions. 250,000 of these were from banks. Europol reported in that year that 10% of these cases were investigated further. About 30 cases went to court, allowing 1-2% of suspicious money flows to be detected. In short, in practice, transaction monitoring is not yet that simple.
Banks are expected to keep a close eye on who their customers are and whether their transactions are legal. The Money Laundering and Counter Terrorism Financing (AML & CTF), Know Your Customer and transaction monitoring are used for this purpose. Indicators show whether the origin or destination of money flows can be considered suspicious.
Transaction monitoring: regulations versus practice
In theory, the financial transactions of banks are well monitored. Practice, however, is obstinate. First of all, millions of transactions are involved on a daily basis. Without automation it is unthinkable to filter out suspicious transactions. But it turns out to be difficult to draw up the right indicators and profiles for proper detection. In many cases, there is ‘tick the box compliance’, without any effective detection. Defining the indicators that are to filter suspicious financial transactions from the systems is the bottleneck. Banks have too few example cases to create reliable profiles. As a result, 95% of the reports are so-called false positives and therefore unusable. It takes a lot of manpower to separate the wheat from the chaff. Most large banks employ 3000 to 4000 people who focus on transaction monitoring and other forms of fraud prevention. In short, the investments in transaction monitoring are huge in relation to the results.
Board or experts
An important question in the dialogue on improving transaction monitoring is where the responsibility lies: with managers or with IT experts? Because the policy in this area touches on financial inclusiveness, a managerial responsibility seems more obvious.
How can transactional monitoring be improved?
The question is where the opportunities lie to optimize the detection of suspicious financial transactions. Perhaps it could be a chain-wide activity, where the emphasis is currently on legislators, supervisors, and banks. In addition, a more predicative approach to transaction monitoring could be adopted, for example with the deployment of AI and blockchain, as applied in regulatory technology.
Regulatory compliance requires innovative technological solutions to optimize processes. Automating compliance processes reduces the pressure on compliance staff and the fight against financial crime, thus saving costs in the long run.
In addition, the risk of high fines is avoided if transaction monitoring is optimized.
Regtech also helps in the fight against terrorist financing by efficiently analyzing vast amounts of available data. For example, the due diligence procedures required by regulators, such as Know Your Customer and Customer Due Diligence (KYC/CDD), Anti Money Laundering (AML) and Counter Terrorism Financing (CTF), but also transaction monitoring and sanction screening.
Want to learn more? Check our latest report about the rise of Regtech or watch our Hyarchis Regtalks series, where A. Hoogduijn discusses the most important trends in Regtech.