Risk Management in Action

SESSION 8 (PART 1)

Identifying Suspicions Transactions

Bob Upton
International AML/CFT Consultant

Kiev Adriana Consultancy Consortium

May 2016
 Session Objectives

 Highlight Methods of Identifying Suspicious Activity

 Overview of Transaction Monitoring Techniques

 Describe Nature and Use of Indicators

 Summarise Need for Suspicion Reporting

Kiev, May 2016 - Adriana Consultancy Consortium

 FATF Requirements

Recommendation 20:
 Report Suspicion or Reasonable Grounds to Suspect
 Extends to Attempted Transactions
 Prompt Reporting

Recommendation 10:
 Ongoing Scrutiny of Transactions
 Ensuring that Transactions Consistent with Knowledge of the Customer

Kiev, May 2016 - Adriana Consultancy Consortium

 Identifying Suspicious Transactions

Primary Methods:

 Staff Training, Awareness and Alertness

 Transaction Monitoring

 Third Party and Other Sources

Kiev, May 2016 - Adriana Consultancy Consortium
 Staff Training, Awareness and Alertness

 Responsible for the Majority of STRs*

 Provides Assessment based on:

 Customer Interaction and Observation

 Knowledge of the Customer
 Behaviour

 Requires Correctly Focused and Effective Training

 Use of Relevant Indicators Across a Range of Activities

* Depending upon the Nature of the Business
Kiev, May 2016 - Adriana Consultancy Consortium
 Examples of Potential Indicators

Unusual Customer Behaviour (Front Line Staff):

 Unusual / Excessively Nervous Disposition
 Discusses Record Keeping or Disclosure Requirements
 Makes Large Deposit without Counting Cash
 Appears to have Hidden Agenda
 Frequently Exchanges Small Bills for Larger ones
 Cash Deposits with Counterfeit, Musty or Very Dirty Bills
 High Volume of Transactions but Low Balances
 Employs Methods to Circumvent Procedures

Kiev, May 2016 - Adriana Consultancy Consortium

 Nature of Indicators

 Provides a Basis for Further Investigation

 Not a Basis for Reporting
 Needs to be Reviewed Against:
 KYC Information
 Customer Explanations
 Transactional Behaviour
 Bank Records
 Other Accounts Held
 Previous Alerts on the Same Customer

 Supplementary Information May be Required

 Marginal Situations will Arise
Kiev, May 2016 - Adriana Consultancy Consortium
 Transaction Monitoring Systems

 Automated or Manual Systems

 Designed to Continuously Monitor Transactions

 In-House System or Purchased from External Supplier

 Varying Degrees of Sophistication

 Deployment and Testing of Rules and Scenarios

Kiev, May 2016 - Adriana Consultancy Consortium

 Transaction Monitoring Rules and Scenarios

General Requirements and Classification:

 Cash Activity and Structuring

 Monetary Instrument Activity
 Changes in Behaviour
 Rapid Movement of Funds
 Hidden Relationships
 Exclusive Recurring Relationships
 Others

Kiev, May 2016 - Adriana Consultancy Consortium

 Transaction Monitoring Alerts

 Output Largely Indiscriminate – Despite Targeting

 Rules Need to be Continuously Refined

 Productivity Needs to be Monitored

 New Rules Developed and Some Discarded

 Adequate Resources Applied to Alert Investigation

Kiev, May 2016 - Adriana Consultancy Consortium

 Alert Investigation (1)

 Applies to Both Manual and Systems Based Alerts

 Approach to Systems Based Alerts Depends upon Volume

 Based on Research, Evidence Gathering and Analysis

 Accurate and Complete Reporting

Kiev, May 2016 - Adriana Consultancy Consortium

 Alert Investigation (2) Process Flow

Initial Alert Screening

Information Gathering

Investigation

Determination

Disclosure / Non Disclosure / Enhanced Monitoring

Kiev, May 2016 - Adriana Consultancy Consortium

 Alert Investigation (3)

 Identify Nature of Activity

 Identify those Involved
 Understand Purpose of Customer’s Business
 Analyse Account Activity
 Identify Apparent Schemes
 Violations of Law or Regulation
 Obtaining Additional Information – Where Required
 Making an Initial Determination

Kiev, May 2016 - Adriana Consultancy Consortium

 Alert Investigation (4) - Timing

 Reporting – When Suspicion Formed

 Manual Alerts Given Priority
 Local Laws Apply
 Prompt Reporting – Balance Between
Risk Posed by the Transaction
v
Delays in Searching Records / Obtaining Further Information
 Maximum Investigatory Timescales (Reasonable Suspicion)
 Pre-Event Disclosure Requirements

Kiev, May 2016 - Adriana Consultancy Consortium

 Management Information

 Volume of Suspicion Reports (STRs)

 Volume of Manual Alerts v Disclosures
 Volume of Systems Based Alerts v Disclosures
 Volume and Conversion Rate of Each Rule
 Trends over Time
 Multiple Alerts and Disclosures on the Same Customer
 Results of Risk Assessment
 Requests for Further Information from SCFM
 Feedback from SCFM

Kiev, May 2016 - Adriana Consultancy Consortium

 Typologies and Indicators

Typologies:
 Analysis of Methods and Techniques
 Published by FATF and FATF Style Regional Bodies
 Includes Red Flag Indicators
Indicators:
 List of Account / Transactional Behaviours
 Issued by SCFM
 Assists Staff Training and Transaction Monitoring
 Need to Develop Your Own Indicators

Kiev, May 2016 - Adriana Consultancy Consortium

 Need for Suspicion Reporting

 Cornerstone of Fight Against Financial Crime

 Acts a Deterrent
 Supports Law Enforcement
 Provides Information which:

 May Add to Existing Investigation

 Provide the Basis for a New One
 Provides a Source of Ongoing Intelligence

 Helps Manage Risks to the Bank

 Improved Detection = Lower Risk

Kiev, May 2016 - Adriana Consultancy Consortium

 Effective Identification

 Ensure High Levels of Staff Awareness and Alertness

 Develop Relevant Indicators
 Deploy Suitable Transaction Monitoring System
 Develop and Refine Rules
 Ensure Robust Alert Investigation Process
 Develop Management Information Sources
 Continuously Enhance Effectiveness
 Support SCFM in their Role

Kiev, May 2016 - Adriana Consultancy Consortium