Transaction monitoring, is it a necessity?

21 July 2016

The requirement to monitor transactions is not new. Even since the first AML directive was introduced in 1991 have financial institutions been given the responsibility of reporting suspicious transactions. And in every new incarnation of the rules not only has the obligation on them to monitor transactions only become greater, but the kinds of institutions subject to the legislation has also broadened. Since 2006, trust offices, legal professionals and estate agents, among others, have also been included in the scope.


What’s new?

The introduction of the 4th AML Directive brings with it the most far-reaching AML legislation in Europe in several years, including a more prescriptive, risk-based approach to customer due diligence and transaction monitoring, including recommendations such as:

– Continuous monitoring of customers’ accounts, activities and transactions
– Use of an efficient system to detect unusual patterns of transactions
– A monitoring system that has a clear and extensive list of business rules which are revised at defined times and when the law changes
– Creation of a risk profile for every customer which is linked to how they are monitored

With this in mind it is clear that organisations affected by the directive simply cannot afford not to implement an effective transaction monitoring system. And as far as the regulator is concerned, compliance is non-negotiable.


Non-compliance can be expensive, and potentially damaging

Even though the requirement to monitor and report on transactions is not something new, many organisations are still failing to meet their obligations. But at what cost?

Economic risk: As the rules get tighter, regulators are increasingly likely to hand out fines to those found to be in breach. And the amounts are also increasing, with fines imposed for non-compliance now routinely in billions rather than millions. Academic research by the London School of Economics found that in the last five years alone, fines and damages paid and estimated for misconduct in 10 leading banks had amounted to £157 billion worldwide. However, this has still not been the deterrent hoped for and so regulators are increasingly finding more creative ways to try and effect good behaviour. For instance, curtailment of particular business lines or inflicting increased capital, liquidity or solvency requirements on individual companies found to be non-compliant. All of which can indirectly affect the bottom line and impact share value.

Reputational risk: The threat of fines or other actions can be powerful, but perhaps even more of an incentive is the avoidance of reputational damage. In a world where the media can take a leading role in uncovering, and widely publicising, compliance failings – take this year’s ‘Panama Papers’ revelations as an example – the reputational fall out can be harder to quantify, and far more difficult to recover from.

Personal risk: Individuals within a firm, whether a managing director or chief compliance officer are increasingly becoming the focal point for regulatory investigation and enforcement. In the UK for example, a criminal offence of “reckless mismanagement” has been introduced which has already led to fines and imprisonment. But there are also plenty of reasons, beyond the threat of fines or scandal, why implementing a transaction monitoring process should be top of the priority list.

By taking control of the transaction monitoring process, and implementing the right system you not only ensure compliancy, but also open up many possibilities to improve your business. For instance:

– Gaining control over activities – when all transactions are properly tracked and recorded you are able to easily access a full overview of what’s happening across your organisation
– Insights to inform strategy – the data collected can also provide strategic insights into where business is going well, and where there’s potentially more to gain
– Consistency of approach – using one monitoring system for your complete global footprint provides efficiency and makes it easier to roll out a unified compliance program across your organisation
– Increased efficiency – moving from a manual to an automated process not only reduces the possibility of human error but also frees up additional time for your workforce
So actually, monitoring transactions effectively can offer huge benefits – if it’s done right…


Okay, so what does good transaction monitoring look like?

Automation of compliance processes is not new, and the market is seemingly awash with different kinds of transaction monitoring systems. So what should you be looking for in order to not only be compliant, but be able to reap all of the additional benefits an effective system can bring?

Choose a system that not only helps you to meet the demands of regulators by allowing key data collection and storage to respond to information requests and analytic requirements, but also make use of this information to inform strategy and improve the efficiency of your day-to-day activities. Keep in mind that a worthwhile system will be able offer these benefits via an intuitive and user-friendly interface that connects easily to your existing enterprise system.

And lastly: one thing is certain, regulation will keep changing, keep tightening and before long a ‘just enough’ measure will be anything but. So any transaction monitoring system should be robust to keep you compliant today, yet flexible enough to adapt to future changes in regulatory requirements.


Closing thoughts

The obligations imposed by the lasted AML regulation present a real opportunity to do business better.  While it could be tempting to merely run a gap analysis on your current approach and back fill what is missing, this will not ensure your organisation remains compliant as legislation changes. Instead choose a transaction monitoring solution that not only fully closes the gap but also offers opportunities to carry your business into the future.

Vincent Glazenburg


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