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Transaction Monitoring in AML | A Constant Battle

Financial institutions are on the frontline in the battle to combat financial crimes, such as fraud and money laundering. These criminal activities impose massive costs on the global economy. In fact, the United Nations estimated that laundered money in one year amounts to approximately 2- 5% of global GDP.

Although FinTechs around the world are increasing financial investment and expanding compliance teams they are still caught up in a cat and mouse game where financial crime is still finding holes in the system, resulting in hefty charges for companies.

Just to name a few examples; ING got fined with  $900 million in 2018, recent news revealed that ABN AMRO is set to pay $575M in a money laundering settlement and even German Neobank N26 is in hot water with German regulators for having “inadequate anti money laundering measures”. - in short: hot topic with hefty consequences for those lacking.

The Pressure on National Regulators to Combat Money Laundering

As payments continues to grow globally, so does the pressure on governments to build structures to counter money laundering. With every new revelation, regulators gain a better understanding of the common practices used by financial criminals and, find themselves in need of expanding existing regulations.

EU’s Role Towards Improving Anti Money Laundering

Which is exactly why Europe regularly updates its anti money laundering directives, which are intended to counter money laundering or terrorist financing and establish consistent regulations across Europe. 

The latest Anti money laundering directive imposed by the EU is the AMLD6, which is the 6th anti-money laundering directive which came into effect in December 2020 with a set deadline for its implementation and full development last June 3rd 2021.

Given the strict nature of these directives, and the regular updates, companies can get overwhelmed by the toughness of the task and often can not comply with requirements. 

The 6th Anti Money Laundering Directive
The 6th Anti Money Laundering Directive

Limitations of the Risk-Based Approach Transaction Monitoring

One of the most common practices in anti money laundering is transaction monitoring, which allows financial institutions to monitor customer transactions on a daily basis to assess risk. When it comes to transaction monitoring, a widely used method is the risk-based approach. That approach requires financial institutions to employ intensive measures to manage risk for clients or scenarios that are deemed high-risk. For lower-risk clients or scenarios where there is no suspicion of money laundering, simplified measures may be permitted.

While highly popular because of its flexibility, this method has its limitations. Implementing this requires well trained professionals that have a holistic understanding of the business and the market. Aside from that, it is not a fool-proof way of detecting fraudulent activity. 

The Use of AI in AML Transaction Monitoring

The approach to money laundering detection and prevention clearly needs a change – and technology, like artificial intelligence (AI) and machine learning (ML) may provide part of the solution. Sentinels; a Dutch AI-powered transaction monitoring startup is an example of such solution provider, who actually just raised €5.7M in seed funding earlier this month.

By implementing AI and machine learning, businesses can improve their transaction monitoring and make the process significantly faster.

The following are just a few advantages of utilizing AI:

  1. It provides risk-prioritized alerts as opposed to masses of rule-based ones
  2. It ensures a low rate of false flags because of its machine learning capabilities
  3. Not to mention the positive impact on staff morale, since it takes care of the systematic tasks and allows staff to pursue more satisfying investigative work

The Explosive Growth of KYC Solutions and Transaction Monitoring

The combination of strict AML regulations and the competitive nature of the fintech landscape, has and will continue to fuel the demand for automated anti money laundering solutions. In fact, the market size of anti money laundering solutions is expected to reach $3.7 billion by 2026. So it goes without saying that the market for AML is a very lucrative market for KYC solutions and the emerging RegTechs.

Anti-money Laundering Market Size 2020-2026
Anti-money Laundering Market Size 2020-2026

The Main Takeaways

The dimensions of AML, AI and transaction monitoring are countless, and cannot be covered in one video. But if we would sum it up, there is a clear correlation between the growth of the payments industry and the growth of AML and KYC solutions. Additionally, there is certainly a promising future for anti money laundering tools, especially given the growing understanding of the uses and benefits of AI. That being said, we still have a long way to go before finding a cost and time effective method, but the emerging regtechs might be key to speeding that up

Will there ever be a fool proof way to combat money laundering? Or will regulators need to be constantly updating and extending their requirements?

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