Who Needs to Know?

Each time a monitoring system alerts a compliance team of potentially problematic activity, an investigation into that user must be undertaken by the team. When transaction monitoring systems are operating inefficiently they generate a deluge of false alerts. Even before we start looking at a client’s personal information, we have just created a piece of new sensitive data. That we are carrying out an investigation on someone could imply that that person is behaving badly. Even if we don’t leak any of their information, we must keep this secret.

With more alerts comes a higher workload for each analyst. Analysts can get stretched thin, stressed out, and may be more likely to do things that risk broader information exposure. With more work for the team, sensitive work can be divided between multiple people. This exposes the investigation to more people in the bank. Through all of this, client information is accessed, shared, transferred, and incorporated into extra documentation.

Teams who are under pressure may also be forced to pull in people for help. At a smaller company, a risk manager might have to grab someone from a client support or business operations role to help out. At a large company, company leadership might outsource some work to save on costs while providing much-needed relief. Both of these actions would expose private information to people who probably shouldn’t see it.

All of these things expose information in a dangerous way; these activities increase the impact and likelihood of a breach. Clients put their trust in their bank to handle their data with discretion and care, and a poor monitoring solution subverts that goal.

Defensive SARs

When our teams are under large amounts of stress, it may take longer to get to alerts. Some investigations may not begin until our mandated timeline to disposition a case has nearly arrived. With this pressure, analysts may not investigate properly and, under pressure to eliminate backlogs, file defensive SARs.

Compliance teams are rarely chastised for SARs filed. They are much more likely to have issues if they miss something big. If an analyst is running up against a deadline, to defend against an auditor docking them for missing something, they may file a SAR and use the mandated follow-up period to give them a bit more time to figure out what’s going on.

Once a SAR is filed, public sector analysts and agents pull information from SARs by searching for industry-specific risk terms, suspect information, or the agent’s contact information. Sometimes, law enforcement agents will print stacks of paper and read through SAR filings. By filing defensive SARs and adding to this massive backlog, we’re wasting investigators’ time. We’re also exposing our clients to extra unnecessary government scrutiny.

Private institutions should send only necessary information to law enforcement and intelligence professionals. The more targeted the reports, the more the government can focus its efforts on truly suspicious activity. Inundating them with useless information helps criminals evade detection. It is reasonably well known in the industry that the historical false-positive rate for many transaction monitoring systems is abysmal. Compliance teams often sift through dozens of alerts before they find a single instance of suspicious activity. What is less considered is the percentage of SARs that generate a follow-up from law enforcement back to a financial institution. Follow-up rates of less than 5% are commonplace. Our external stakeholders deserve better; if we can filter out more unnecessary filings, our partners in law enforcement can follow up on truly criminal behavior more quickly.

Additional Risk Detection

Better transaction monitoring systems can help protect a financial institution from more than just fraud and money laundering risks. A suitably designed monitoring system may also address product abuse and customer protection risks.

New products that offer generous sign-up rewards or points are frequently subject to churning and abuse. In a points churning scheme, a customer may sign up, makes purchases, return the items, and keep the points to spend at a later date. While this may not necessitate a SAR filing, identifying these risks may help your business understand the costs behind certain promotions or rewards programs.

In addition to protecting our business, we may also work to protect our clients more. A lack of financial education or a poor understanding of financial risk can expose consumers and institutions to unnecessary threats. During the price spike in bitcoin in late 2017 customers used their credit cards to enter long positions. Not only did these customers take leveraged positions with their cards, but they also received funds from friends and family to help increase their lines of credit. When the price of bitcoin fell by 50% two months later, these clients lost huge amounts of money. The banks ceased to allow credit card purchases at crypto exchanges, but for many, this remedy came too late; they had already lost a significant chunk of their investment. Some simple rules to detect unregistered broker-dealer activity or excess credit card purchases at exchanges would have helped forecast and prevent these product and consumer risks.

When correctly set up and adequately maintained, a transaction monitoring system does much more than improve false-positive rates and alleviate the burden on risk teams. It limits the exposure of customers’ personal information, empowers stakeholders to focus on prosecutable crimes, and protects customers and institutions from consumer and product risk. Transaction monitoring systems can impact more than just the teams that use them. Our better understanding of the full impact of improving our system can lead to a more efficient and impactful allocation of resources and help us build trust with our clients and our partners in law enforcement.