Six good practices for Transaction Monitoring

“Proper transaction monitoring is an effective way for financial institutions to counter the risks of money laundering and terrorist financing.”
Good practices transaction-monitoring-process Dutch Central Bank

The terror attacks of the last few years have placed further emphasis on AML measures and prevention of terrorist financing, with regulators responding with increased supervision and more rules to follow. Integral to remaining compliant, and being able to provide proof of that compliance, is the monitoring of financial transactions.

Earlier this year, the Dutch Central Bank announced it would be undertaking a thematic study into transaction monitoring within financial institutions, payment service providers and trust offices.

In a preliminary statement a few months later they reported “Our initial findings suggest that they are doing too little to manage the risks of becoming involved in terrorist financing. Also, the process used to monitor transactions is often inadequate for detecting those risks. We believe this is disturbing.”

Recommendations for financial institutions

At the end of last month, they published their initial findings in relation to the trust sector, defining six good practices based on their observations. We were of course not surprised by the issues they highlight, or by the recommendations they make, the latter of which we had already implemented into our transaction monitoring solution from the beginning.

1. Good transaction monitoring is linked to proper risk analysis at client level

In other words, adequate KYC procedures must be put in place. The information gathered at this point can also be used to form the basis of the items that need to be monitored.

We’ve integrated our KYC and transaction monitoring tools meaning that the information collected at client on-boarding can be used to inform the parameters of the transaction profile. Saving time, increasing efficiency and stopping the potential loss of important information if you were to operate two separate systems.

2. Use of transaction profiles

These should be kept up to date (and dated), all account details and beneficiaries noted, payment amounts and their frequency established. Profiles should be clear and easy to understand, with relevant supporting documents provided and the profile saved as part of the client acceptance file.

The transaction profiles we use are comprehensive, allowing users to define key parameters such as regularity of payments, the minimum or maximum amount. These profiles can be set on office, object company or even counterparty level. We also allow for additional information such as Corruption Perception Index (CPI) or Basel AML number to be included in the transaction profile.

This information provides a useful indication of potential AML risks by identifying transactions which come from countries where the legal system is weaker and the perception of bribery and corruption is substantial.

3. Insight into bank accounts should given to the trust office via ‘online viewing rights’

For good transaction monitoring it is essential that the trust office has (preferably digital) access to all bank accounts of the target company, whether it authorises payments to the bank accounts or not.

Transactions can be reviewed prior to implementation (real-time monitoring) or afterwards, when the contract has already been signed and / or the transaction has already been executed (post-event monitoring). The frequency that bank statements are obtained and monitored should be appropriate for the risk profile of the client.

Transaction Monitoring by ComplianceWise allows streamlining of this process by providing oversight of relevant bank accounts, daily automated reconciliation of statements and integration with the SWIFT bank messaging system with whom we have a worldwide partnership.

4. Monitoring of rights and obligations entered into by a target company is carried out via a specifically designed procedure

For instance, the rights and obligations of the object company can be captured and analysed in detail within a form particularly designed for this purpose. An internal or external legal expert may also be called upon to make a judgement. All relevant underlying documentation should be attached to the form.

Transaction Monitoring by ComplianceWise provides “predefined workflows including obligated steps” that allow institutions to identify unusual transactions properly and in good time. Additionally it provides the possibility to upload and store all relevant documentation within the system, allowing easy access to any information needed for monitoring relevant rights and obligations.

5. Adequate documentation of all monitoring and related activities should be available

A good record should be able to show which transactions are selected and why, what aspects of the transactions and supporting documents have been reviewed, whether a compliance officer has been involved, and finally, what decision was ultimately made and on what grounds.

We make maintaining a comprehensive audit trail simple thanks to the complete automation and integration of workflow. At every stage, roles, responsibilities and authority levels are assigned, with every decision or remark recorded.

6. Reassessment of previous and related transactions if a suspicious transaction is identified

Should an unusual transaction be flagged up, it makes sense to go back and review previous and related transactions once more. Such a review can provide insight into possible unusual transaction patterns and allow the risk and transaction profile of the client to be reviewed before further activity can resume. As a part of the 4th AML Directive, it’s even recommended that organisations periodically test the effectiveness of their transaction monitoring process with a view to carrying out trend analyses, so full access to past data is crucial.

The ability of Transaction Monitoring by ComplianceWise to collect and store information makes it possible to generate a clear transaction history, which allows for easy identification and retrospective monitoring of any relevant transactions.

What’s next?

The DNB is due to publish the full results of its investigation by the end of the year.

We’re in no doubt that the focus on transaction monitoring will not be a passing phase and we can expect to see at the very least further recommendations, but probably an inevitable further tightening of rules in this area. Which of course means that there’s not really any excuse for anyone operating within the regulated financial sector not to establish strong transaction monitoring procedures.

Why not see how Transaction Monitoring by ComplianceWise can help you easily take control of your compliance obligations. Not only can we help to reduce the risk of non-compliance costs, but our solution also offers an opportunity to gain valuable business insights that can be used to support management decisions and support strategic planning.