A guide to choosing AML solutions for banks and fintech
If you are a bank or financial institution, it is important to be aware that cases of online money laundering are increasing.
However, with the help of appropriate transaction monitoring software, banks and financial institutions can help prevent fraud and stay compliant with AML regulations.
Let’s look at the basics of transaction monitoring as well as important features to look for.
The new face of money laundering
according to UNODC, Money laundering losses amount to 2-5% of the world’s GDP.
It is also becoming an increasingly online hunt for criminals, picking up new trends such as the increased popularity of cryptocurrencies and blockchain – a report by Chain analysis found that cryptocurrency laundering increased by 30% in 2021. This is possibly due to increased anonymity in cryptocurrency transaction processes.
Naturally, these developments make it harder and harder for banks and financial institutions to catch money launderers, which means they need the latest technology to keep up with these increased risks. It’s not just banks and financial institutions, e-commerce sites are also seeing an increase in fraudsters targeting their businesses as well as their customers.
Fortunately, with the help of modern AML technology, you can more easily catch money launderers online. Transaction monitoring software specifically helps banks and financial institutions detect suspicious transactions and meet their legal obligations.
Read on to find out why AML compliance is important, how transaction monitoring software works as an anti-money laundering solution, and how to make the most of the features on the market.
Transaction monitoring vs AML
To develop a good understanding of the differences between transaction monitoring and AML, it is first important to know that AML stands for Anti Money Laundering.
Although related, there are some important differences between the two terms to look for. Transaction monitoring is part of AML, but AML goes beyond this to include measures such as identity verification of each customer upon onboarding, such as keeping certain information about them updated at regular intervals.
How does transaction monitoring software work?
During any financial transaction – deposit, withdrawal, payment and so on – a customer creates data on the bank’s or financial organisation’s system. This is even the case when they shop offline, in person, as the transactions are still subject to these regulations.
Behind the scenes, in the bank’s digital infrastructure, transaction monitoring software feeds this data through risk rules. These risk rules are based on the flagging of suspicious actions such as the following:
- suspicious account activity and the nature of the transaction
- high value transactions (the threshold is different for each country)
- High value cross-border transactions
- cash withdrawals and deposits for a large sum
- the source of incoming and outgoing funds is unknown
By separating this information from normal customer behavior, the transaction monitoring software puts the data from these suspicious transactions, withdrawals and deposits into what is known as a SAR file or suspicious activity report. The file is designed in such a way that financial analysts and regulators can review it.
There are online systems that allow you to submit a SAR if you need to, and transaction monitoring software options on the market that do this automatically for you.
So how do you know when you need to file a SAR? If the customer’s transaction does not match the customer’s usual behavior or their stated purpose, this is cause for suspicion. An example of this could be a customer stating that the purpose of a bank transfer is to buy a house, but in contrast, the money remains untouched in their account for a suspiciously long time.
Even when the transaction matches a customer’s usual behavior, you should still also check whether your customer has been involved in any sanctions lists, politically exposed persons (PEP) lists and other blacklist mandates.
When customer behavior appears as usual, you can assess whether they have made a high-value transaction or withdrawn a large amount of money. If there is a reasonable explanation, such as moving house or going on holiday, this is usually not a cause for concern.
Most financial organizations have defined workflows to collect evidence from their customers about the source of funds, for example when the software flags such cases. They either use workflow software for this, as explained in a guide to automation Integrate or integrate the process into their AML/transaction monitoring platform. If there is no reasonable explanation, this is flagged as a potential case of money laundering and usually results in a SAR.
As you can see, it’s a process of elimination, which helps you find the best possible story to explain a suspicious transaction. After all, a number of transactions may look suspicious to a bank, but to legitimate customers there are logical explanations that often have to do with, for example, changed life circumstances.
Transaction monitoring software usually reports suspicious behavior immediately, meaning that if you have software, you don’t need to manually check every single customer transaction, deposit or withdrawal to see if it’s a case of money laundering. A manual strategy is completely unrealistic – even for challenger banks and neobanks, which tend to be smaller in scale.
Ultimately, transaction monitoring is broad in scope, covering all aspects of a customer’s credit behavior, transaction activity, currency exchange or wire transfer activity. However, as elaborated in an explanation of transaction monitoring on SEASON website, transaction monitoring software solutions tend to also address other AML requirements, such as identity verification and KYC – and beyond, sometimes including customer monitoring and onboarding controls, transaction speed monitoring and so on, all of which are fraud prevention measures.
What rules must I follow?
Failure to comply with AML legislation can have harmful consequences.
These include fines, business interruption and potential damage to your reputation as an institution. For repeat offenders, extreme cases can even result in the removal of the organization’s banking license.
Different countries have different thresholds for when it is appropriate to flag and scrutinize a transaction. For example, the US has a transaction limit of $3,000.
AML is a set of requirements that banks and financial institutions must comply with. Banks and financial institutions must therefore have AML strategies in place to ensure that they achieve this successfully.
How to choose transaction monitoring software
Now that you have an understanding of what transaction monitoring software is as part of your AML approach, you can look at choosing the best transaction monitoring software for your bank or financial institution’s needs.
There are many benefits to doing so, such as increased efficiency in detecting money laundering and peace of mind. This software can also help you rank the suspiciousness of user behavior, allowing for some degree of prioritization. When it comes to high-risk operations and regulatory environments, transaction monitoring software can be adjusted to more stringent regulations.
Despite its effectiveness and direct necessity, a transaction monitoring option can still be costly. It can also take up a lot of your valuable business time and often requires a full risk management team even if the software helps you process more data than usual. You may be looking at outsourcing this solution to a third party or deploying a specialized on-premise solution – which needs to be managed primarily by your own team. Remember that in addition to the AML solution, the fraud/risk team that operates and maintains this software may also be on-site or off-site.
Regardless of your solution, every bank is likely trying to increase efficiency while remaining complicit in AML requirements.
In reality, there is no single software solution for transaction monitoring, especially as organizations have multiple pain points and mandates to address. But fortunately, there are many options out there.
- Organizations are advised to start the process with their legal and compliance consultant to map the legal landscape applicable to their activities.
- Next, you may want to continue listing your adjacent and additional risk prevention needs as an organization—meaning the features that transaction monitoring software sometimes has that you may be interested in.
- From there, you can consider whether it should be in-house or outsourced software, the size of the fraud analyst team, the level of automation you want, and your overall risk tolerance, and you’ll be able to create a shortlist to investigate further.
- Research your chosen software, including getting offers and hands-on demos, when available.
Important tips for transaction monitoring software
In terms of key features, we suggest you look at how flexible the product is (in terms of regulation), a user experience that is seamless with a user interface that is functional and easy to navigate.
- In terms of flexibility, the more your transaction monitoring software can create advanced statistical models that enable easier detection of obscure money laundering methods, the better.
- Pre-configured rules are also very useful to have as it means you don’t have to have an engineer to set up new rules, which can often be the case as your business requirements change.
- Software that allows for flexibility when it comes to the growth of your business can be useful as it will be able to handle an increased transaction volume.
- Ease of use is also something you should probably consider. Is the software intuitive and easy to use, while providing sufficient functionality for your internal team? Does it also negatively impact your customer journey compared to other compatible software?
- Keep an eye on customizable rulesets and scoring methods – this makes the tool you deploy adaptable to different regulations as they change or as you expand to other locales. If there are any criminal or regulatory changes, the AML compliance team can set new parameters.
- Data transparency and granularity are also key. Some transaction monitoring software allows your team to manually rate customer activity against criteria created for high-risk activity. This is particularly useful if you want to bring in your own team of experts to assess human activity. Human judgment can play a useful role in detecting money laundering, especially if the automatic transaction monitoring software processes have not fully caught new money laundering methods.
In 2022, effective AML software has never been more in demand, largely due to the exponential growth of challenger banks and fintech startups.
Per Statistics38% of personal loans in the US are made by fintechs rather than legacy institutions, while fintech revenues are projected to reach $190 billion by 2024. But money laundering is just as growing.
When it comes to transaction monitoring, there is no one size fits all. Use the tips above to choose the right software for your organization.
About the author
Gergo Varga has been fighting online fraud since 2009 in various companies – even founding his own anti-fraud startup. He is the author of the Fraud Prevention Guide for Dummies – SEON special edition. Currently working as an evangelist at SEON, he uses his industry knowledge to keep marketing sharp, communicating between the various departments to understand what is happening on the front lines of fraud detection. He lives in Budapest, Hungary and is an avid reader of philosophy and history.
