Ensuring Effective Risk-Based Transaction Monitoring To Fight Money Laundering

Money laundering is like a plague consuming Fintech institutions with detrimental effects on customer experience. With digital developments, fraudsters are simultaneously evolving too. Their methods of bypassing security systems and concealing their illegal money trails are getting harder to detect. Therefore, the need for stringent AML controls and regulations is a need, especially for banks. 

Surprisingly, data shows that every year almost 5% of GDP is laundered globally which makes it almost $800 billion! (UN – Office On Drugs And Crime)

That is why risk-based transaction monitoring is exhaustively pushed on companies in their verification and onboarding processes by authorities like European Union and FATF. 

Read below and understand how AML screening is tackling money laundering!

Money Laundering – Rising Threat 

Money laundering is basically organized into three steps. These are

Placement (It is placing the illegal money by hiding the original source and showing it as legitimate to banks)

Layering (Process of changing assets and transactions in a way that the money trail is concealed and the illegal sources are kept hidden) 

Integration (It is the last step in which black money is mixed with white money and it is safely integrated into financial institutions without leaving any suspicious marks) 

With the popularity of cryptocurrency, it has become a much more serious issue. Because now people can easily launder money through crypto as it is independent from the government.

As can be seen when Chain analysis tracked $2.8 billion laundered through Bitcoin in 2019! 

What is a Risk-Based Approach?

A risk-based approach is a common word you might’ve read with AML or KYC-related content. It is a set of regulations based on the risk level of profiles. The risk assessment checks and filters low-risk customers from suspicious clients. This allows companies to detect illegal activities and monitor profiles more keenly. The CDD (Customer Due Diligence) methodology is then decided according to the risk perception. 

Applying Monitoring of Transactions in KYC.

Is monitoring of transactions in KYC?


KYC (Know Your Customer) is a set of steps that confirms and establishes an identity of an individual. Being KYC compliant is a massive part of onboarding and opening accounts. It is divided into simple and enhanced verification checks depending on the risk level of a customer or investor. 

Therefore, keeping a track of transactions, their spending behaviors, source of wealth, and location of funds transfer is a part of KYC. It helps businesses fight against identity theft, cybercrime, and money laundering. 

Detecting Suspicious Transaction Monitoring As AML Strategy 

As complex layering attempts are turning out to be successful, companies are rigorously investigating their customers at a deeper level. It is a bottleneck issue threatening the growth of Fintech. One of the vital parts of a successful AML strategy is a company’s detection system

It should be:

  • Responsive 
  • Accurate 
  • Immediate Alerts 
  • Analytical 

To catch suspicious transactions monitoring system, it is integral for businesses to have standard procedures and requirements. Eventually, this will allow the software to alert the system consistently. 

Establishing Customer Risk Profile In Transaction Screening 

A customer risk profile is established through a series of steps to make future transaction screening more effective. These are:

1- Identity Proofing is the first step in establishing an identity.

2- Data is collected and validated against local and global databases

3- Documents are verified as original 

4- Sources of income are cross-checked (checking employee information mentioned in an existing company)

5- Does the customer belong to any sanction list?

6- Is that client a PEP? Politically Exposed Person 

7- Understanding the purpose and intentions behind opening an account 

8- Evaluating their spending behaviors 

9- Monitoring the trail of money 

10- Keeping a track of activities after onboarding to make sure their activities don’t change in the future. 

What is The Payment Screening Process? 

A basic payment screening process might look like this, although note that procedures may vary from country to country depending on the AML/KYC regulations.

  • Data is gathered through bank statements 
  • Transaction report is made with details about the spending behavior of a client
  • The money trail is investigated with the legitimacy of sources of income  
  • The customer’s Beneficiaries list is made. 

Maintaining The real-time transaction reporting system 

Developing a risk-based reporting module for companies is a significant step towards being AML compliant. 

The real-time transaction reporting system should be extensive and accurate. This allows KYC verifiers to check and detect any suspicious activity or transaction made by any client. Furthermore, keeping data on all the transactions helps gather pieces of evidence against any unforeseen criminal activity. 

Key Takeaways 

  • Risk-based transaction monitoring is an important identity assessment approach to detect any cases of money laundering.
  • Money laundering is on the rise as complex layering is getting backed up with technological advancements. 
  • An identity is established and confirmed as safe after a series of verification steps.
  • To be AML compliant businesses are required to screen transactions effectively. 
  • To keep fraudsters at bay, a proficient reporting module should be crafted.

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