The solutions for challenges with
transaction monitoring

The know-your-customer-principle, also referred to as Know Your Customer or KYC, is a basic condition for any financial institution. In fact, it’s even embedded in laws and regulations. Simply put, this principle doesn’t only ensure that financial institutions can monitor new customers with increased sharpness and screen them for each acceptance, but also extends to the continuous monitoring of existing customers and that this information is stored uniformly and is available at any time. Hereby, the element transaction monitoring has developed into an essential process: safeguarding the (transaction) behavior of customers and tracing potential money laundering transactions are of high priority. Nevertheless, the transaction monitoring process poses many challenges. Yet, where challenges exist, solutions emerge.

In this article we share our vision on the challenges within transaction monitoring and the solution that makes this process much easier for any financial institution.

The challenges within transaction monitoring

Customer data in separate silos

Financial institutions with a relatively long history often deal with separate silos of customer data. These are systems and files that contain contract data, personal data, and transaction data as well as process data for customer follow-up. Many of these silos work with separate applications wherein specialists operate. And it’s exactly this aspect that makes it complicated to determine a complete view of a customer: the data are rarely gathered accurately at one location.

The segmented method of analysts

Financial institutions regularly rely on hundreds of in-house KYC, CDD and AML analysts. They have access to the systems that store customer data and see the transactions made by customers. While switching between screens and systems, they determine whether customers could be of potential risk. This method, and particularly the constant alternation between systems and the lack of overview, lead to a lot of false positives: unjustified matches between customers and transactions of potential risk.

Did you know that the FIU Netherlands annual review 2020 showed that in that year more than 722.000 unusual transactions were reported, of which less than 15% were declared suspicious? In fact, the government service expects that the amount for 2021 to be much higher, as written in the article that Dutch news channel ‘Nieuwsuur’ published in November 2021: “Een miljoen ‘ongebruikelijke’ transacties, maar weinig aanhoudingen.”

Also in Belgium, a lot of suspicious transactions have been reported by the CFI: the Belgian system that targets money laundering and financing of terrorism. The CIF activity report 2020 shows that 28.649 reports were made that year, including 17.678 (55,93%) for credit institutions. The total amount of the reports for fiscal fraud adds up to 750 million euros. In 2019, this was a ‘mere’ 387 million.

Screening customer behavior

In determining possible customer risk, a deciding role lies in customer behavior. In that respect, a customer screening is more than just comparing the information to PEP lists, CTF lists and the lists of sanctioned countries. It also involves actual customer behavior. For example in relation to customers with a similar profile, a so-called peer group, and behavioral changes compared to the past, known as anomaly detection.

Combining actual behavior, list matching and comparing recent behavior with past behavior prove to be difficult when a variety of systems is used for different parts of (customer) data.

The solution that makes (the) transaction monitoring (process) easier

The importance of a clear audit trail

The legislative authority that financial institutions deal with is limited to transmitting laws and regulations. How these institutions eventually structure their internal processes is not up to the government. In short: the government provides the framework, but each institution shapes its own KYC, CDD and AML processes. And this must be done in such a way that when check takes place, or in the worst case a detection of money laundering, it’s followed by a conclusive audit trail. Hereby, a financial institution can show that all the necessary means of correct control have been applied to (specific) customers.

Virtually every financial institution already has a system that marks suspicious transactions for further action. Even though this is a step in the right direction, it’s not guaranteed that these so-called alerts are being handled smoothly. Practice shows that alerts often flow to different departments, each handling them in their own way. The results? The outcomes end up in various parts of the organization and there’s no complete view of each customer and their transactions.

Since the audit trail is so important, it’s more effective to work with a single solution where all customer and transaction data merge. This provides the possibility to assess each case and save the outcomes in one central place. This ensures that the information can be requested by anyone at any time, including the date-timestamp. This prevents customers from being unjustifiably posed as an alert time and again. It’s also essential for making the right judgment at the right moment, for example when an alert is temporarily muted but should be on the radar again.

An integral platform makes the difference

From our perspective, the structuring of an efficient KYC process asks for a more holistic approach originating from a unique customer view. In other words, an integral platform is necessary. A platform capable of building a complete and unique customer view, applying remediation, defining risk customers, and providing tools for analysts and others. The 360-degree customer view applications and platform used in marketing can teach us a lot about building and applying a unique customer view.

There’s no doubt that zooming in on data streams and further automating the transaction monitoring process are required for any financial institution. In order to stay compliant, these are absolute necessities as they benefit customer service and they make the often high costs of KYC obligations controllable again. And most importantly: it ensures a solid, future-proof KYC strategy.