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Identifying unusual financial transactions
13 Jan 2020
The financial services industry is the plumbing infrastructure for globalization, connecting countries and businesses by moving capital from one country to another.  Throughout the years, this attribute has increased the potential of money laundering.

The idea of money laundering is simple in principle, the criminal who has received some form of ill-gotten gains will seek to ensure that they can use these funds without people realising that they are the result of inappropriate behaviour. To do this they will need to disguise the proceeds such that the original source is hidden and therefore the funds themselves appear to be legitimate. A common method to launder the proceeds of crime is to mingle legal and illegal funds. Businesses that by their very nature generate large quantities of cash are popular for this type of activity as they are able to absorb additional amounts of extra cash without arousing suspicions. 

One popular method used by financial institutions to mitigate the risk of being used as conduits for money laundering and funding of terrorism is by conducting transaction monitoring. Transaction monitoring is a process that reviews and analyses transactions to expose unusual or suspicious behaviour. In the past, transaction monitoring was used in the banking sector to ensure that charges were correctly applied and that overdraft limits were not exceeded, and often for business development purposes. Nowadays, transaction monitoring is not only a legal obligation, it also provides an early identification of transactions relating to money laundering and terrorism financing and adds context to the monitoring of a business relationship for customer due diligence (CDD) purposes. 

While there is no substitute for intervention by a vigilant employee, this is not always possible in today’s business environment where volumes and tight payment cut-off times mean that transactions often cannot be intercepted or scrutinized after the event. Thus, it may be conducted automatically using a support tool, where software highlights unusual activity so that staff may conduct further assessments. Transaction monitoring can be carried out at different stages but very often it is carried out both in real-time and post-event. Real time, or as it is also known, pre-transaction monitoring will focus on activity and transactions when information or instructions are received from customers, before, or as an instruction is processed. Post-event monitoring may involve end-of day, weekly, monthly or annual reviews of customer activity and transactions. Real time monitoring is more effective at reducing a relevant person’s exposure to money laundering and financing of terrorism risk. Post event may be more effective at identifying patterns of unusual customer activity or transactions.

Business relationships are not static, and the circumstances surrounding them and the customers themselves are very likely to change over time. Even customers with a stable and predictable transactions profile will have periodic transactions that are unusual for them. At times, an unusual transaction may indicate that there has been a legitimate change in the business relationship or in the customer’s relevant circumstances, and the business risk profile may need to be adjusted to ensure that all relevant factors are being taken into account. On the other-hand if, after obtaining due diligence information, the subject person deems a particular transaction to be suspicious, the financial institution’s money laundering procedures will dictate that reporting to the competent authorities is required in accordance with legal and regulatory obligations. After this stage, the financial institution would need to comply with the instructions of the relevant investigative bodies. 

This article was first published on Sunday Times of Malta on 12th January 2020 and was written by Josef Galea, Transaction Monitoring Analyst at Bank of Valletta.

Issued by Bank of Valletta p.l.c., 58, Triq San Zakkarija, Il-Belt Valletta VLT 1130.  Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking in terms of the Banking Act (Cap. 371 of the Laws of Malta).
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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).