Best Practices to secure Monitor Customer Transactions for BSA AML Risk

At the center of a financial institution’s BSA AML compliance program lies the monitoring of customer transactions. Effective transaction monitoring should be designed to identify suspicious activities.  And might be predicate offenses to money laundering or supporter activities for terrorist financing. Because of the magnitude of transactions that a typical financial institution processes every day, identifying unusual or worrying activity can be tricky. Banks, payment providers, and other regulated entities should implement best practices with regard to transaction monitoring.

In this article, we will discuss some of the top practices that financial institutions can adopt.

Risk-Based Transaction Monitoring Rules and Thresholds

This includes guidance for best-in-class screening for high-risk names, locations, and activity patterns. Following an effective transaction monitoring program can enable a financial institution to be compliant with BSA AML regulations while guarding against financial crime.

Develop Risk-Based Transaction Monitoring Profiles

Financial institutions must develop risk-based transaction monitoring profiles as a means to monitor customer activity and manage their BSA AML risk. Profiling for attributes like geographic location, expected transaction volumes, and types allows a bank to apply more targeted monitoring rules. 

For example, a small business owner from a high-risk country who wires funds outside the country likely deserves more scrutiny than an employed individual cashing payroll checks. Correct profiling allows the placement of 50–75% of monitor customers under streamlined monitoring as per BSA/AML regulations, lowering the number of alerts while still staying compliant.

Appropriate Thresholds for Alerts and Exceptions

Setting the specific thresholds that will trigger an alert when breached is something that the financial institution must define as part of the transaction monitoring rule setup process. Too low a threshold may generate an infeasible number of false alerts, while too high may miss actual suspicious activity. 

Such thresholds need to be risk-based to satisfy BSA/AML regulations. The top 5-10% of the average transaction amounts for the peer group of a monitor customer is the most effective threshold. Making such thresholds adjustable over time based on customer behavior can make this improvement in efficiency possible.

Monitoring Funds Transfers and Wire Activity

Fund transfers and wiring of funds are amongst the most common mechanisms through which money-laundering operations manage to get illicit funds from one account to another and from one jurisdiction to another. BSA/AML regulations place a great demand on the monitoring of wire and electronic transfer activity. 

Granular guidance, like monitoring volumes that exceed $3,000 per transaction or $5,000 per day, can help to deal with 80-90% of wire-based money laundering. High-risk transfers should be subject to thorough beneficiary reviews when included in a complete transfer BSA AML program.

Screening for High-Risk Names and Geographic Locations

Screening monitor customer databases for any possible watch list hits could be a flag for suspicious parties. This includes comparing monitor customer names/addresses to the OFAC list on a daily, near real-time basis, as required by regulation. According to many BSA AML analysts, about 30-40% of financial crime caught annually traces back to high-risk individuals. 

An institution will also pay more attention to enhanced due diligence when establishing relationships with some 150 countries and territories that have been identified as high-risk countries for money laundering, as has been identified in the respective institution’s risk assessment.

Leveraging Analytics to Detect Complex Schemes and Patterns

Advanced analytics have indeed developed into one of the most disruptive tools for removing very complex transaction patterns that humans working in isolation could never identify in a million years. According to most experts, 70% of extensive BSA AML risk assessments now highly recommend analytic solutions. 

Technologies such as network analysis and machine learning enable the analysis of years of monitor customer data and billions of records per month to map the relationships between entities and trace funds across multiple accounts in a way no manual review could ever do. This allows financial institutions to detect scheme tactics, such as “smurfing,” that still evade traditional rules.

Performing Ongoing Customer Due Diligence

Regulators emphasize the requirement to perform ongoing due diligence on all monitor customer accounts, not high-risk monitor customer accounts. Technology has made these processes scalable and efficient by gathering updated personal information that is available from public sources and verifying the consistency of account activity, occupation, and other details about the client. 

Ongoing monitoring of changes impacts most programs in about 25-33% of accounts per year. Once red flags are noticed, additional steps need to take place. Records of due diligence also provide an excellent basis for timely BSA/AML reporting in case the need ever arises.

Benefits of Effective Transaction Monitoring for BSA/AML Compliance

Most BSA AML policy analysts agree that financial institutions can manage risk better and put the most resources where it counts. When the right tools and protocols are being utilized, about 10-15 percent of accounts usually require heightened scrutiny, compared to reviewing all the activity. This fact alone can cut compliance costs by about 30-50% across most organizations. Robust monitoring shows regulators that due diligence is being exercised to uncover criminal behavior. Financial institutions must pay attention to the risks and regulatory BSA AML requirements around transaction monitoring.