RapidAML Team
2024-07-02
Transaction refers to any business or commercial activity that includes the exchange of goods, services, and financial or virtual assets with the aim of making financial gain in return. Depending upon the nature of the business relationship, transactions could be one-time events or ongoing in nature.
Transaction monitoring means the continuous supervision of business transactions to fulfil various purposes, such as identifying any unusual transaction pattern and complying with regulatory requirements.
In simple words, transaction monitoring involves the supervision of transactions, which helps identify if any suspicious activities or transactions are being carried out. The monitoring of transactions to identify suspicious activities or transactions is essential to ensure compliance with the Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) laws and regulations in the UAE.
The Designated Non-Financial Businesses and Professions (DNFBPs) operating in the UAE need to monitor transactions with their customers, including suppliers, business partners, intermediaries, and third parties with which the business is involved.
An ideal transaction monitoring system is built upon the foundational blocks of:
Transaction Monitoring, from an AML compliance perspective, focuses on continuous supervision of the transactions to identify or spot any unusual patterns associated with them. The unusual pattern highlights the mismatch between the customer profile and the nature and volume of transactions they carry out.
Transaction monitoring helps in fighting financial crime, particularly those related to money laundering, financing terrorism, and proliferation financing (ML/FT and PF), as it enables businesses to detect suspicious patterns and report suspicious activity or transactions to the authorities. This aids businesses in curbing the spread of ML/FT and PF within their businesses.
The following are some of the ways through which DNFBPs fight these crimes by relying on transaction monitoring:
1.Recognising Suspicious Patterns:
Transaction monitoring systems usually have the great capacity to instantly evaluate and assess high-volume data pools, which enables them to spot suspicious or unusual transaction patterns that indicate the presence of possible criminal intent behind the transaction or series of transactions. The algorithms of many transaction monitoring tools are equipped with advanced machine-learning techniques that assist in identifying suspicious patterns or the nature of transactions.
2.Identifying High-Risk Transactions:
Transaction monitoring serves an important role in drawing attention to dealings or transactions that can be categorised as high risk due to the nature of the transaction. Such as transactions involving only cash payments in small denominations, changes in customer risk rating due to them being detected or declared as a politically exposed person (PEP) or being associated with a PEP, or the name of the customer appearing in any of the sanctions or designated persons list. The alert generated by transaction monitoring systems helps businesses to update the risk rating assigned to their customers and mitigate risks associated with such customers by taking additional measures such as Enhanced Due Diligence (EDD).
3.Identifying Stages and Methods of Money Laundering:
Transaction monitoring helps identify various methods used by criminals to disguise laundered money by structuring, layering, smurfing, rotating funds through shell companies, and involvement of complex business structures where the web of complex inter-se transactions is deliberately created to avoid detection of criminal intent behind such transactions.
4.Identifying Fraudulent Activity:
Transaction monitoring is one of the important ways financial crimes are detected, and these crimes include money laundering, terrorism financing, insider fraud, credit card fraud, ID theft, and so on. The DNFBPs can take preventive approaches by implementing adequate transaction monitoring practices.
DNFBPs operating in the UAE are required to register themselves on the UAE’s Financial Intelligence Unit (FIU), known as the goAML portal. Registration on the goAML portal is mandatory for DNFBPs to ensure AML compliance, and it acts as a medium for filing suspicious activity or suspicious transaction reports.
Once the customer-facing employee or transaction analyst of a DNFBP comes across potentially suspicious activity or transaction as a result of conducting a transaction monitoring process, they are required to file an internal Suspicious Activity Report (SAR) or the Suspicious Transaction Report (STR) report to the AML Compliance Officer. The AML compliance officer shall assess and investigate the reported transaction or transactions and file SAR/STR on the goAML portal.
Further, the DNFBPs are required to ensure that regulatory requirements of maintaining records of transaction monitoring details and processes can be made readily available to the authorities as and when sought by them.
DNFBPs are vulnerable to ML/TF risks as criminals can use them as vehicles for the purpose of laundering illicit money or financing terrorists through a wide range of activities in which DNFBPs routinely engage themselves.
1.Lack of Regulatory Knowledge and Transparency:
Locally operating and small or medium-sized DNFBPs often lack the needed oversight or transparency, including knowledge of AML compliance. This lack of regulatory oversight and transparency in conducting business activities provides a direct loophole for criminals looking for ways to launder money by bypassing regulatory restrictions and misusing DNFBPs to conceal the true origin of illegal funds.
2.Complicated Ownership Arrangements:
DNFBPs providing services such as trust management, power of attorney services, nominee agreements, and company formation are prone to being misused by criminals to conduct ML/FT or PF and might unintentionally contribute to such activities if they are not watchful or vigilant about who they are dealing with.
3.High-Value Transactions:
The very nature of DNFBPs, such as real estate or precious metals and stones, routinely deal with high-value transactions, making it possible for criminals to launder high amounts of illicit proceeds without raising suspicion in the eyes of DNFBPs dealing with such transactions.
4.Global Nature of Business and Varying Regulations:
DNFBPS might encounter compliance issues such as jurisdictional uncertainties in identifying and reporting suspicious transactions due to territorial variations of the regulations and ML/FT and PF concerns that arise in cross-border transactions.
5.Professional Privilege and Secrecy:
Certain DNFBPs, such as lawyers, are bound to professional privilege and confidentiality legislation that may cause ethical considerations or legal problems when reporting suspicious conduct to the authorities when performing their duties. Consequently, the criminals may use the DNFBPs for their shady endeavours, relying on the discretionary power and anonymity of those segments, which makes it difficult, if not impossible, to track down the perpetrators.
6.Emerging Threats and Changing Techniques:
Criminals are always looking for ways to take advantage of any weakness in the financial system to commit their crimes. DNFBPs have to be vigilant and dynamic regarding emerging threats, such as the use of technology and digital assets to finance terrorists or launder money.
1.Suspicious Transaction Identification and Prevention:
Transaction monitoring helps in the identification and prevention of execution or continuation of any suspicious transactions, such as fraud, money laundering, terrorism financing, and other scams, which would lead to violation of regulations. Transaction Monitoring systems usually rely on automated programs and machine learning processes that analyse the collected transactional data and trends to report potentially suspicious transaction activity in real time. With this approach, businesses can now detect financial crimes even before they take place, thereby lowering the ML/FT and PF risks and helping investigations go through the processes swiftly.
2.Enhanced Due Diligence (EDD):
Monitoring of transactions makes the traditional Customer Due Diligence (CDD) processes work more efficiently by providing additional information about how customers behave with their money, their financial operations, and their transaction details, along with their transaction patterns and trends.
In the cases where the customer’s profile and their transactions are not in sync, the DNFBPs can put transactions on hold, seek information from the customer, re-rate the customer as high-risk, submit SAR/STR, and decide to offboard the customer.
3.Maintaining Reputation:
Businesses that implement transaction monitoring methodology and software tools successfully showcase their dedication and reliable business conduct. The ability of a business to implement and operate transaction monitoring software helps ensure ongoing compliance with AML regulations, thus building and maintaining the brand reputation.
4.Meeting Legal Requirements:
Transaction monitoring is a mandatory requirement of AML/CFT regulations. If the transaction monitoring requirement is breached or violated, the DNFBPs shall encounter heavy fines, punishments due to violation of law, and reputational loss, leading to a decline in steady business growth.
1.Adopting a Risk-Based Approach:
The first step in the successful selection and implementation of a transaction monitoring methodology or system is the risk-based strategy. The adoption of a risk-based approach involves the identification and assessment of risk factors the business is exposed to and then applying risk mitigation measures that adequately address the unique risks each business faces based on its nature of business, size, customer reach, the number and volume of transactions, and the geographies to which their customers belong to. By allocating resources to high-risk areas, DNFBPs can effectively counter ML, TF, and PF.
2.Recognising Red Flags:
The DNFBPs need to include in their AML policies and procedures the list of ML/FT and PF red flags to which their business is prone. The DNFBPs should also ensure that their personnel are made aware of such ML/FT and PF red flags by conducting regular AML training. The DNFBPs should also ensure that their policies and procedures are updated regularly and that their list of red flags is updated frequently to include emerging red flags relevant to their business. This knowledge of red flags, particularly those concerning suspicious activities and transactions, shall help personnel identify potentially risky or suspicious transactions while implementing a transaction monitoring system in the DNFBP. To name a few red flag categories are:
3.Creating Policies and Procedures for Transaction Monitoring:
The foremost requirement to achieve accurate transaction monitoring results is to formulate AML/CFT policies and procedures that chart out the internal process by which the DNFBPs shall conduct transaction monitoring. The procedures must define the Transaction Monitoring (TM) rules:
It is important to instil strong internal rules for transaction monitoring purposes, which help to keep the transaction monitoring mechanism consistent, compliant, and effective.
The objectives of transaction monitoring should be clearly outlined in the AML/CFT policies, along with the procedures for managing suspicious transactions, the roles and responsibilities of personnel, and how this information gets documented and reported to the right authorities.
4.Implementing a Transaction Monitoring Software:
Transaction monitoring software is a useful tool to improve and expedite investigation into abnormal transaction patterns by automating a range of data collection, processing, and alert creation processes. It is important for DNFBPs to ensure that the monitoring software relied upon is in accordance with the risk profile, the operational specifications, and the laws and regulations in the UAE.
Accordingly, the Transaction Monitoring System must be configured to match the DNFBP’s individual risk profile to lower the chance of false positives in transaction monitoring results, focus attention and resources on actual ML/FT and PF threats and clarify rules and scenarios to the company.
5.Staff Training:
Comprehensive employee training is crucial to enhance the personnel’s awareness of their individual roles and responsibilities concerning the implementation of the AML/CFT policies and procedures.
The transaction monitoring analyst and customer-facing employees need to be made aware of the current and emerging ML/FT and PF typologies so that they can identify any abnormal or unusual patterns in customer behaviour and report to the AML Compliance Officer or Money Laundering Reporting Officer (MLRO), who can ensure filing of SAR/STR on the goAML portal.
The AML/CFT training must also be designed for and imparted to the AML Compliance Officer or MLRO and the Senior Management, educating them of their individual roles and responsibilities; such training content would be unique to each designation in the organisation and logs, records, and details of such AML/CFT training should be catalogued and recorded for inspection by the authorities, as and when required.
Conclusion
Transaction Monitoring is a critical AML/CFT obligation that DNFBPs operating in the UAE need to adhere to. It helps DNFBPs implement stringent AML/CFT control by spotting discrepancies in transactions, which need to be analysed for potential ML/FT or PF risk. DNFBPs must implement transaction monitoring software to counter the threats of money laundering, terrorist financing, and proliferation financing.
Purva is a Certified Anti-Money Laundering Specialist (CAMS) and a Lawyer with 5+ years of experience.
She has substantial knowledge of Anti-Money Laundering Laws, Rules, Regulations, and AML Compliance Processes. Purva has been instrumental in drafting RegTech processes, corporate policymaking, and fulfilling various legal research and drafting requirements arising from AML laws and regulatory technology.
