Speaker 1: Hello and welcome to another KYC Lookup video where we bring you AML related content to help you enhance your knowledge in the fight against money laundering. Today we are going to explain what is transaction monitoring, when to perform it, and why is it required. But before diving into today's video, be sure to subscribe so you don't miss out on any future videos. Oh, and don't forget to leave us a comment with any suggested topics you would like us to cover in the future. We also have a special announcement to make, so be sure to watch until the end to find out what it is. So on to today's video. What is transaction monitoring? All banks and other financial institutions should have some form of transaction monitoring in place in order to monitor for any suspicious transactions to or from existing customers. Therefore, transaction monitoring is the process of financial institutions performing ongoing monitoring on transactions on its customers, whether it's in retail or institutional client. An effective transaction monitoring process will assist to identify, detect and prevent criminal activity going through the financial institution. Why is transaction monitoring required? Individuals are becoming more and more sophisticated in their methods to disguise and conceal the origins of their proceeds of crime. At the same time, regulators are becoming more and more demanding of institutions they are supervising over how they identify, prevent, monitor and disclose their suspicions when they are exploited for laundering criminal funds. How does the transaction monitoring process work? The process of transaction monitoring works by constantly reviewing the customer's transaction data from what was expected from the time of initial onboarding, versus what its actual number. In simple terms, when an institutional client opens a trading account with a financial institution, they would say, I would trade $20 million a year via 20 transactions. That's approximately $1 million per transaction, or $1.6 million a month. At this point, you have determined the volume, which is 20 million, and the frequency, which is 20 transactions, and the average amount per month, 1.6. That expected activity of the customer is now hard-coded into the transaction monitoring tools used by the financial institution to monitor the customer. Once the financial institution have hard-coded the relevant data for the customer, it starts to monitor the saved data against the transaction the customer starts to make. Financial institutions should apply a risk-based approach on their transaction monitoring, as it will give enough room for the amounts, for example, 10% difference, when comparing the data saved against the transactions. If the case that the 10% threshold is breached, the transaction is flagged as a red flag, and the transaction monitoring analyst would require to review manually to determine if it's indeed suspicious, and will therefore require further escalation, or it can be determined to be OK. Is the transaction monitoring process always automated? Although the system used will help to automate most parts of the process, and reduce the number of false positives, the simple answer is no. Any transaction monitoring programme will still require human interaction by an analyst or team to make sure that the process is working effectively. What needs to be considered at the time of implementing a transaction monitoring process? As with any new process being implemented, it requires a number of elements to be considered in order for it to work effectively, and most importantly, to fulfil the regulatory requirement to meet the business need. Some of the elements to be considered are choosing the right vendor, defining the specific risk perimeters, training employees to analyse data and identify red flags, clear escalation process to the AML Compliance Officer or MLRO, comprehensive management information, independent quality assurance, and ongoing maintenance of the system. What happens if financial institutions don't have an effective transaction monitoring programme? Transaction monitoring has become a vital piece of the AML CFT programme at any financial institution, and not having a process that works shouldn't be taken lightly, considering the focus by different regulators around the world. Whether it's outsourced to a third-party vendor or kept in-house, not having an effective transaction monitoring process in place completely opens the door for criminals to use the financial institution for criminal activity, which not only will be seen as facilitating such activity in the eyes of the regulators, but it will also result in a big fine or penalty. Most importantly, the reputation of the financial institution will be left in tatters. Well there you have it, a basic introduction to what is transaction monitoring, how it works and the elements to be considered at the time of implementing a transaction monitoring process. Please tell us in the comments section what is your interpretation of the transaction monitoring and what other elements should be considered. Now for the special announcement mentioned at the start of the video. We are now launching our very own courses for you to take a more in-depth look at a variety of subjects, such as Introduction to AML, Beneficial Ownership and Customer Risk Rating for example, so make sure you visit our website for further details. And let us help you connect the dots in KYC. Thank you for watching the video, and if you made it this far, don't forget to like and subscribe to watch more amazing videos.