The Role of Transaction Monitoring in Combating Money Laundering

What is the relationship between suspicious transactions and Anti-Money Laundering (AML)?

A suspicious transaction in Financial Institutions (FIs), particularly in the context of money laundering, refers to any financial activity that appears unusual, uncharacteristic, or out of line with the bank’s typical transactions.

These transactions often exhibit patterns or characteristics that raise concerns, such as large or rapid movements of funds, complex or opaque structures, transactions involving high-risk countries, or those that lack a clear economic or legal purpose.

There are many ways to describe suspicious transactions in banking. Securities Commission of Malaysia has listed and provided examples of ways in which money may be laundered.

AML regulations require FIs to implement measures to detect and report suspicious transactions promptly. Reporting these transactions to regulatory authorities is crucial to investigate potential criminal activities and take appropriate legal actions.

Thus, the concept of suspicious transactions is directly intertwined with AML efforts. It serves as a frontline defense mechanism in detecting and disrupting money laundering activities, ensuring the integrity of the financial system, and upholding regulatory compliance standards globally.

Legal Framework for Suspicious Transaction

In Malaysia, FIs need to comply with the relevant authorities, laws, and guidelines set for them to prevent money laundering. The Central Bank of Malaysia is the competent authority of AML, and it has the power to take legal action against anyone who breaks the rules.

Hence, the Financial Intelligence and Enforcement Department (FIED) of the Central Bank, requires FIs and other regulated entities to submit a Suspicious Transaction Report (STR).

A STR is a fundamental element of AML measures. It is a document that FIs and other regulated entities are required to submit when they detect transactions that appear unusual, suspicious, or potentially linked to illegal activities such as money laundering or terrorism financing. The STR includes details about the transaction, the parties involved, and the reasons why the activity is considered suspicious.

How and When FIs should submit their STR report?

Banks should submit a STR when they cannot complete due diligence on a new or existing customer who is unreasonably evasive or uncooperative. This decision should be based on normal commercial criteria and internal policies.

The appointed compliance officer, the senior management level who has knowledge and expertise in compliance will be responsible for the STR submission and channeling all internal STR to FIED.

When receiving any internal STR, the compliance officer will have to evaluate the grounds for suspicion and if confirmed, promptly submit the STR to FIED. The STR is to be submitted within the next working day. If the compliance officer determines there are no reasonable grounds for suspicion, they must record the decision.

Why STR is important for FIs?

Protecting the Financial System:

STRs play a vital role in protecting the overall financial system from being exploited for illicit purposes. Identifying and reporting suspicious activities helps to maintain the integrity and stability of financial markets.

Data Analytics and Pattern Recognition:

Filing STRs contributes to a larger database of suspicious activities, which can be analysed for patterns and trends. This information allows FIs and regulators to combat evolving financial crime tactics more effectively.

Customer Screening and Profiling:

Regularly filing STRs allows FIs to update and refine their customer profiles and screening processes. This helps in better understanding customer behaviours and identifying anomalies that warrant further investigation.

Compliance with Regulations:

Filing STRs is a legal requirement for FIs under AML laws and regulations. Complying with AML laws, helps FIs to avoid penalties and legal consequences and they are able to achieve a high compliance rate within the AMLA framework. It demonstrates an FI’s commitment to ethical practices and compliance.

Issues faced by FIs in effectively monitoring suspicious transactions

Regulatory complexity in Malaysia, particularly regarding AML regulations, presents a significant challenge for FIs. These regulations are continuously evolving to keep up with changing financial crime trends and international standards set by regulatory authorities.

Let’s use a small FI in this scenario.

Small FIs must navigate a complex web of AML regulations issued by the Central Bank of Malaysia as well as guidelines from other regulatory bodies such as the Malaysian Anti-Corruption Commission (MACC) and Securities Commission Malaysia (SC).

Each regulator has different reporting requirements, thresholds, and interpretations of what constitutes suspicious activity. They may struggle to interpret and comply with differing reporting requirements. This can lead to confusion and inefficiencies in compliance efforts.

Meeting the compliance obligations of multiple regulators requires dedicated resources, including staff, technology, and financial investments. Small FIs often have limited budgets and personnel compared to larger institutions, making it challenging to allocate resources effectively across various regulatory requirements.

Small FIs must also consider global compliance expectations. This includes understanding cross-border transactions and adapting to evolving global regulatory requirements and risks. It can be daunting for institutions with limited international exposure. This limitation can hinder their ability to accurately assess the risks, may struggle to identify and prioritize higher-risk transactions or customers effectively.

Use A Regulatory Technology Provider to effectively deal with suspicious transactions

Banks need to upgrade their system and technology for an effective monitoring process. Advanced technology helps banks to analyse and identify unusual transaction activity and business relationships as well as to file STR to diminish the risk.

Therefore, utilizing a regulatory technology provider offers financial institutions an efficient and comprehensive solution for handling suspicious transactions and ensuring compliance with anti-money laundering (AML) regulations. It leverages advanced technologies such as artificial intelligence, machine learning, and big data analytics to enhance the detection, monitoring, and reporting of potentially illicit activities.

To know more about AML solutions, email us at marketing@trisilco.com