Why financial institutions are moving away from transaction monitoring

By Ross Aubrey, global head of financial markets, Quantexa

November 19, 2019

The past few years have borne witness to scandal after scandal, as Europe has struggled with a torrent of financial crime – specifically money laundering. Although it’s impossible to accurately estimate the true scale of the issue, research undertaken  by Europol suggests that laundered money could account for anywhere between 0.7 and 1.28 percent of the EU’s annual GDP (£98bn – £178bn) 

Acknowledging the problem, regulators have increased the responsibility of firms to monitor their customer activity. This has been done to find, and hopefully prevent illicit money entering the financial system. The sanctions for lax controls are heavy, with Moody’s reporting that EU banks paid over £12bn in fines between 2012 and 2018. Despite this, very little (1.1 percent) of the criminal assets in circulation end up being seized.

Clearly, a new approach is needed, but why have the current methods been so unsuccessful, and how are firms adapting to the challenge?

Why approaches to fighting financial crime have been historically ineffective

Some of the blame can be attributed to the knowledge deficit of some financial services professionals. For example, many organisations are unable to effectively identify their risk exposure, and this leads to ill-fitting or inappropriate money laundering controls being designed and implemented.

However, the main issue is the industries’ reliance on ‘traditional’ transaction monitoring systems (TMS). TMS’s work by automatically screening customer activity against a set of rules to search for criminal activity. Should an action break a rule, then the TMS will generate an alert, flagging the transaction for investigation by a human compliance officer.

The biggest problem is the high levels of ‘false positives’ created by the systems – with some running at false positive generation rates as high as 99 percent. This reduces the efficiency of AML efforts, as it results in a backlog of cases to investigate and reduces the capacity of a compliance officer to spend time inspecting alerts that need it.  Furthermore, the large quantity of false positives may result in increased investigator fatigue and human error, leading to real illegitimate activity being hidden. The formulaic way that TMS’s work also often don’t determine critical areas of risk and specific typologies of money laundering rooted in complex customer networks.

How contextual monitoring is changing the picture

To create effectual AML processes, firms must move towards a contextual monitoring approach. Companies will need to consider their money laundering risks in a holistic manner for all of their separate units. Compliance teams must take a risk-based approach when designing their AML controls. This should be based on their business risk, which itself is made up of product risk, customer risk, geographic footprint and other inherent risks.

It’s also important for firms to leverage both internal and external data sources, as well as innovative technologies such as entity resolution and network analytics to provide the context behind their customers activity and reduce some of the manual burden of the investigative process. Combining this with the transactional internal data held by an institution will result in more meaningful alerts and more effective AML controls.

Entity resolution collates the entire body of data held about a subject into one place. The consumer of today will use a variety of platforms and channels to make transactions, and this data could be held across separate divisions, in many different siloed databases and systems which will not interact with each other. As a result, it’s possible for a single entity to become several. Beyond just producing false positives, it also makes it difficult to track the flow of illicit money. By using entity resolution, it’s easier for investigators to view who the ultimate beneficiary of a transaction is, helping to stop money laundering.

Network analytics then examines the connections between these entities. For an investigator, this then highlights the pathways that can be used to launder funds and be used to better track the flow of money.

The road ahead

Europe’s financial sectors has suffered at the hands of criminals for some time now. However, this hasn’t happened for a lack of effort on their part, with billions being spent in an ill-fated attempt to stop it. However, by leveraging innovative technology and smarter approaches we can change this, to better stem the tide of illicit funds in the continent.



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