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Anti-Money Laundering – A Recapitulation

Anti-Money Laundering Software is as straightforward as it sounds – It works against Money Laundering.
But, in efforts to understand Anti-Money Laundering, we need to understand money laundering first.

So, what is money laundering?

The term ‘Money Laundering’ originates from the innovative methods used by the Italian Mafia to channel the large amounts of money they acquired from illegal occupations, into financial institutions without raising a concern or being subjected to taxation.
For a brief explanation, ‘money laundering’ encapsulates the numerous ways in which people convert illegally obtained funds into legal money.

To prevent this from happening, many laws got put into place in the late 1900s to ensure that financial institutions (FIs) were safeguarded against illicit activities including, but not limited to, money laundering. The Financial Action Task Force (FATF) also makes sure that financial institutions also do not indulge in malpractices by implementing many protocols that FIs needed to follow.

With the addition of these security protocols and compliances, the paperwork that FIs generated suddenly grew manifold. Keeping up with all the new rules and laws was also proving difficult for bank officials. This is why Anti-Money Laundering software came into existence.

Anti-Money Laundering (AML) Software helps banks and other legal/ financial organizations collate, sort and manage customer data and transaction history to identify problematic clients and simultaneously helps them oblige to regulatory compliances.

To gain a deeper understanding of AML software, let’s look into the 4 basic types of AML software –

1) Transaction Monitoring systems – They help monitor and identify suspicious transactions based on transaction patterns and long-term user behaviour. These transactions would include abnormal behaviour, large sum transactions, and multiple consecutive transactions. These systems also put together Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs) that help identify long-term customer behaviour.

2) Currency Transaction Reporting systems – These specifically deal with keeping a record of large cash transactions. The sum varies from region to region. Some systems also have real-time tracking and allow FIs to verify customer identity before allowing large cash transactions.

3) Customer Identity Management systems – Customer Identity Management is an important part of KYC (Know Your Customer). It helps financial institutions identify potentially dangerous customers by checking various databases for fraudulent activity, identity theft, blacklisted persons, and other suspicious behavior. Most countries maintain an elaborate list of suspicious identities as well as PEPs (Politically Exposed Persons). These candidates are generally flagged by the customer identity management system through its name screening capabilities.

4) Compliance Management systems – As stated before, to ensure the security of FIs, many regulatory compliances have been put into place. Keeping up with these and making sure that a FI is truly compliant can be taken care of with compliance management systems. They create audit trails, keep records of proof of compliance, track employee records and training, and help handle non-compliance situations.

Some modern AML Tools utilize Artificial Intelligence (AI) to streamline the above-mentioned processes. These tools function on static and dynamic sets of rules, are capable of integrating with third-party security tools and databases, accumulating and organizing data, and can automatically screen customer profiles for potential risks.

What is AML Transaction Monitoring ?

What is AML Transaction Monitoring?

Transaction Monitoring system (TMS) is an integral part of an efficient anti money-laundering solution. Monitoring financial transactions help detect anomalies and mitigate fraud risks.

The main purpose of the AML transaction monitoring platform is to detect frauds, protect the banks from any illegal transactions or illicit transactions dealing in money laundering and terrorist financing.

Transaction Monitoring is very important in the banking sector due to new ways of fraud introduced in the market with evolved technology these days. TMS can be defined as a formal process for identifying anomalies with a method of monitoring such anomalies then raising alerts and filing SARs if required.

On a daily basis, customers’ financial transactions are monitored, assessed, and analyzed including customers’ historical financial transaction data like withdrawals, deposits, cash transfer, online transactions, investments, etc. TMS has a significant impact in reducing false positives, helps in the analysis of high-risk profiling, and improves operational efficiency.

A well-designed and structured TMS system is a crucial component of a robust AML compliance program. It helps in combating and preventing money laundering and terrorist financing activities, ensuring compliance and managing customer data.

AML Transaction Monitoring System

Let’s understand the AML-Transaction Monitoring Process:
  • Firstly, it monitors each customer’s financial transactions utilizing all contextual data spanned across all channels.
  • Secondly, it detects and raises alerts for any suspicious activities.
  • Thirdly such alerts or cases are assigned to the investigation team who review and scrutinize if these activities are genuinely unusual or not, if activities are found suspicious then such activities are escalated, and suspicious activities reports (SAR) are filed or flagged.
  • Lastly, it creates risk-scoring model management for transactions using rules, ML, and statistical algorithms.

What is SAR?

SAR is Suspicious Activity Reporting. If any alerts are triggered for anomalies, the case is reviewed by the investigation team, and if found suspicious, SAR is raised. SAR filings are based on many criteria such as client type, demographics, ownership, enterprises, and other customer factors.

To conclude, the Transaction Monitoring System is the backbone of the AML process which helps in identifying fraudulent activities and mitigating fraudulent risks.