Fraudsters and money launderers are constantly evolving their tactics. In order for the financial community to stay ahead it is vital that it regularly evaluates the methods it uses to detect and stop crime. To that end, SWIFT Institute commissioned a report assessing the current state of transaction monitoring to better understand its strengths, weaknesses and how it could be improved.

Authored by Matthew R. Redhead, Associate Fellow at the Royal United Services Institute (RUSI), the report analyses the scale of investment in transaction monitoring, the balance between costs and benefits and the overall effectiveness of the suspicious transaction-reporting regime. Global money laundering is estimated annually around US$800bn to US$2 trillion. Estimates suggest that less than 1% of the Proceeds of Crime are retrieved by authorities.

The report unpacks the difficult position that financial crime teams often find themselves in - caught between internal pressures to manage costs, and regulators’ requirements that they maintain broad coverage of relevant risks. It also addresses the widespread desire across the AML/CFT ecosystem to reduce waste and improve the delivery of actionable and relevant financial intelligence.  

Key findings 

Transaction monitoring and reporting frameworks, as they have evolved over the last three decades, are now in serious difficulties. High volumes of wasted alerts, wasted investigative effort, and little demonstration of value-add to the broader fight against financial crime, combined with escalating costs and regulatory censure – largely disconnected from intelligence outcomes – bring the issue of transaction monitoring reform ‘front and centre’ for financial institutions and the wider AML ecosystem. 

Given this reality, there is a widespread desire across the AML and Counter Terrorist Financing (CFT) ecosystem to reduce waste and improve the delivery of actionable and relevant financial intelligence. Financial institutions are undertaking a range of initiatives to support these goals, including platform optimisation, new tech solutions in the fields of automation and machine learning, risk-focused initiatives and the use of network analysis techniques. 

Of the options available within the current AML ecosystem, Financial Intelligence Sharing Partnerships (FISPs) are the best channel through which not only investigators, but transaction monitoring platform specialists, can work together to sharpen platform configuration on matters that might be deemed suspicious, as well as target monitoring on those areas which would add the most value to Law Enforcement Agency (LEA) investigations.

Ongoing reforms, institution-by-institution as most are, are only likely to lead to incremental improvements, with uneven impacts across financial institutions. They will not overcome the fundamental disadvantages financial institutions face in seeking to identify criminal behaviour, even with the support of FISPs. 

Systemic monitoring is likely to be more effective for detecting and possibly intercepting suspicious activity at a network level. A public sector model would likely provide more direct benefits in terms of financial intelligence delivery, while also minimising the legal problems that come with privately managed joint initiatives. 

Each jurisdiction is likely to have different problems of implementation, suggesting that individual approaches need to be explored. One size will not fit all. 

The report goes on to explore industry initiatives for innovation and reform, assessing existing pain points and potential alternatives. It outlines 10 recommendations for improving the existing transaction monitoring system - changing what financial institutions look for when monitoring suspicious behaviour, embracing better machine learning technology, and harnessing the power of national regulators to effect a far greater change than individual organisations can achieve alone.