Transaction monitoring is a crucial component of the obligations arising from the Anti-Money Laundering and Counter-Terrorism Financing Act (Wwft). Financial institutions, as well as various other sectors covered by the Wwft, must take detailed measures to detect and report unusual transactions. The goal of transaction monitoring is to identify high-risk activities early on and to prevent the institution from becoming involved in money laundering or the financing of terrorism.
But what exactly does transaction monitoring entail, and how can your organization ensure compliance with these obligations? In this article, we explain the basic principles and provide an overview of the key business rules.
What is transaction monitoring?
Transaction monitoring involves financial institutions actively overseeing the payment traffic of their customers. The goal is to recognize unusual activities, such as abnormally large transactions, transactions to or from high-risk countries, or deviations from a customer’s expected payment behavior. For businesses such as lenders, factoring companies, and crowdfunding platforms, where payments usually occur via bank transfers or direct debits, transaction monitoring is essential to comply with Wwft regulations.
To begin with, it is crucial to establish a transaction profile. By creating a transaction profile, a baseline is established for what is considered ‘normal’ behavior. Deviations from this profile may trigger further investigation or action, such as reporting a transaction to the Financial Intelligence Unit (FIU).
What are the requirements for transaction monitoring?
Transaction monitoring requires a risk-based approach, where the specific characteristics of the customer, the product, and the region are taken into account. Financial institutions must set up business rules that correspond to the risk profiles of their customers. These rules help in identifying unusual transaction behavior.
Business Rules for Transaction Monitoring
The following business rules form the foundation of an effective transaction monitoring system:
- Customer Risk Profile:
- Low Risk: Customers with a low or normal risk profile, with one monthly payment.
- Medium Risk: Stricter monitoring for customers who perform more than three transactions per month or make transactions to high-risk countries.
- High Risk: PEPs (Politically Exposed Persons) or customers with activities in high-risk regions require enhanced monitoring, where all transactions above a certain threshold (e.g., €10,000) are flagged.
- Types of Transactions:
- Bank transfers and direct debits: The use of SEPA bank transfers within the EU is considered standard. Deviations, such as cash payments or international transfers, are regarded as noteworthy and require further scrutiny.
- International Payments: Payments to countries outside the EU, particularly to offshore or high-risk countries, are automatically flagged for investigation.
- Geographic Factors:
- Low-Risk Regions: Transactions within the EU are generally considered low risk.
- High-Risk Regions: Transactions from or to offshore countries or countries on the sanctions list are automatically flagged and investigated. Stricter thresholds are applied, with transactions above a certain amount (e.g., €2,000) subject to additional checks. For countries subject to sanctions, all transactions, regardless of the amount, are immediately reviewed.
Implementing Transaction Monitoring in Your Operations
Implementing transaction monitoring requires adjustments to both operational and technical processes. This includes policy development, where employees must be trained to recognize suspicious transactions and understand how to apply monitoring rules.
In addition to staff training, the IT system must be adapted to automatically monitor transactions based on the established business rules. This may involve introducing new questionnaires during the onboarding phase and using tables to facilitate transaction checks.
Manual Monitoring
Although many transactions are monitored automatically, manual monitoring is also possible. This occurs, for example, when an automatic alert is triggered by an unexpectedly large payment or a transaction to a high-risk area. Manual monitoring involves a detailed review of the transaction, checking account statements, and communicating with the customer to rule out unusual activity.
Conclusion
Transaction monitoring is an indispensable part of the Wwft and requires a thoughtful approach. By setting clear business rules and implementing an effective monitoring system, financial institutions can detect suspicious activities early and fulfill their legal obligations.
Is your organization’s transaction monitoring in order? Ensure that you have implemented the right systems and processes to quickly detect and report suspicious activities. This not only prevents legal issues but also helps maintain the integrity of your business.
At ACG International we understand that recent developments in transaction monitoring and AML regulations can raise questions and concerns. Our team of experts is ready to help your company comply with the latest Wwft requirements, with minimal impact on your daily operations.
Whether you have questions about transaction monitoring, face compliance challenges, or need support in discussions with banks or other financial institutions, we offer expert advice and practical solutions tailored to your specific situation. Feel free to contact one of our experts.
