Transaction monitoring is a critical component of a strong BSA/AML program, and a risk-based approach can help financial institutions make the best use of valuable resources. anti-money laundering/countering the financing of terrorism (AML/CFT) teams manage many responsibilities, including currency transaction reports, enhanced due diligence reviews, board reporting, and suspicious activity monitoring.
Suspicious activity monitoring is a cornerstone of a strong AML/CFT reporting system. Banks and credit unions should use their risk assessments to guide monitoring priorities and the resources devoted to them.
Transaction monitoring: a BSA/AML cornerstone
In an economic and regulatory environment where compliance resources and budgets are stretched thin, financial institutions must carefully evaluate their priorities when it comes to their BSA/AML program. Currency transaction reports, enhanced due diligence reviews, board reporting, and suspicious activity monitoring are just a few of a BSA team’s responsibilities. All requirements of a risk-based BSA program are crucial to the safety and soundness of your institution, so what should banks and credit unions prioritize when resources are strained?
Suspicious activity monitoring is the cornerstone of a strong BSA/AML reporting system. As stated by the Federal Financial Institutions Examination Council (FFIEC), transaction monitoring and reporting are critical to the United States’ ability to combat financial crime. Suspicious activity reports (SARs) assist law enforcement in deterring illegal activity, but financial institutions may wonder whether they are expected to detect and examine every unusual transaction that comes through their doors.
The Financial Crimes Enforcement Network (FinCEN) and federal bank examiners understand that financial institutions can't detect all suspicious transactions, but solid policies, procedures, and processes must be in place to monitor higher-risk products, services, and customers’ entities, and geographies. This means that financial institutions’ suspicious activity monitoring systems must be risk-based and efficient.
Regulatory guidance supports institution-specific monitoring
The risk-based focus has long appeared in the FFIEC BSA/AML Examination Manual. In July 2019, federal banking agencies and FinCEN issued a joint statement on risk-focused BSA/AML supervision. It explains how examiners tailor their review of a bank’s BSA/AML program to its risk profile and other relevant factors.
Within transaction monitoring, the institution should:
- Optimize scenarios with a focus on its risks.
- Apply tighter parameters to higher-risk typologies, as appropriate.
- Document accepted risks in policies and procedures.
- Use monitoring to help validate its understanding of risk.
A 2022 interagency statement on the risk-based approach to customer relationships and customer due diligence emphasizes that no customer type presents one uniform level of risk. A bank should assess each relationship using its relevant facts and circumstances, and conduct ongoing monitoring to identify and report suspicious transactions.
Financial institutions have unique risks based on factors such as their size, customer profiles, products, services, and geographic locations. Suspicious activity monitoring is not one-size-fits-all. An institution’s risk assessment should help identify where risks lie and where additional resources, including software, may be useful.
An AML department also needs adequate staff to carry out its work. In 2018, FinCEN announced a $185 million civil money penalty against U.S. Bank for BSA violations that included inadequate transaction monitoring and alert caps. The FinCEN announcement describes why limiting alerts to manage workload can leave suspicious activity unidentified. If staffing is a concern, banks and credit unions can consider short- or long-term staffing relief.
How does AI reduce false positives in AML transaction monitoring?
AI, including machine learning, can help reduce false positives by analyzing transaction activity in context. Rules-based scenarios evaluate activity against defined conditions and thresholds. Behavior-based analysis can compare transactions with a customer’s historical or expected activity, or with peer patterns. Used together, these approaches can help an institution identify activity that deviates from expected patterns instead of relying only on thresholds that may be too broad for its customer mix.
This can help investigators prioritize alerts with indicators that are more relevant to the institution’s identified risks. For example, activity that meets a general rule but is consistent with a customer’s expected behavior may warrant a different level of attention than activity that departs from that pattern. AI can assist with identifying or prioritizing alerts, but an alert still requires review; AI does not determine on its own whether activity is suspicious or whether a SAR should be filed.
Institutions should assess whether monitoring continues to identify unusual activity and supports investigation and reporting. FinCEN and the federal banking agencies recognize that innovative approaches, including AI-based transaction monitoring, can be tested alongside existing AML/CFT processes. They do not require a particular technology, and institutions must continue to maintain effective programs commensurate with their risk profiles.
Technology should reflect the institution’s risks
System optimization, or parameter tuning, is critical for AML software to remain risk-based. The FFIEC BSA/AML Examination Manual says monitoring systems may include employee identification or referrals, transaction-based manual systems, automated surveillance systems, or a combination of methods. The sophistication of a monitoring system should reflect the bank’s risk profile.
Financial institutions may use several methods to identify unusual activity, including:
- Employee identification, particularly by front-line staff
- Law enforcement requests, such as grand jury subpoenas and National Security Letters
- Information-sharing requests under Section 314(b)
- Manual review of internal reports for unusual transaction activity
- Automated AML system monitoring
The federal banking agencies and FinCEN recognize that innovation can enhance transaction monitoring and help banks use BSA/AML resources effectively. Their joint statement on innovative efforts note that banks may test and validate new approaches alongside existing processes. After assessing risk, AML/CFT Officers should develop procedures and tune programs to address higher-risk products, services, customers, and geographies. Decisions about accepted risk should be made with board and executive management involvement, then documented and supported by the risk assessment.
When preparing for an examination, AML professionals should have supporting documentation for their risk-based decisions. Whether using AI, software, manual procedures, or a hybrid approach, monitoring should help prioritize areas of risk, use resources wisely, and mitigate financial crime.
Keep transaction monitoring aligned with risk
Risk-based transaction monitoring helps banks and credit unions focus resources on the risks identified in their BSA/AML risk assessment. Whether an institution uses manual processes, automated systems, or both, its monitoring approach should support the identification, investigation, and reporting of suspicious activity. Reviewing and documenting monitoring decisions helps keep the program aligned with the institution’s risk profile.
Editor's note: This blog was originally published on September 2022 and has since been updated for current best practices and accuracy.
