Transaction Monitoring Program – A Missing Piece in The Puzzle

Posted On: 27 September, 2019 Xiaoshu Liu

Reporting entities are increasingly more aware of their obligations to identify and verify their customers before providing them with any services. This process has also been made easier by the electronic verification solutions.

In comparison, however, a reporting entity’s ongoing Anti-Money Laundering and Counter-Terrorism Financing (‘AML/CTF’) obligations do not appear to have received sufficient attention. This article aims to shed some light on one of the ongoing obligations – the transaction monitoring program, which is often under-implemented and misunderstood.

The What

A transaction monitoring program is a component of the ongoing customer due diligence (‘OCDD’) processes that a reporting entity must establish and maintain. (The other two components are Know Your Customer (‘KYC’) information and enhanced customer due diligence (‘ECDD’). It requires a reporting entity to take active steps to monitor the transactions and activities of its customers.

The Why

The fundamental purpose of a Transaction Monitoring program is to enable a reporting entity to determine whether it should submit any Suspicious Matter Reports (‘SMRs’) to AUSTRAC under s 41 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the ‘AML/CTF Act’).

Section 41 itself is 3 pages long, but the gist of it is that if a reporting entity “suspects on reasonable ground” that one or more of the scenarios in the provision may apply to a prospective customer, a customer or an agent of a customer, the reporting entity must submit an SMR within 3 business days unless the matter is related to terrorism financing in which case you have 24 hours only. These scenarios include, for instance, where a person may not be who they claim to be, they may have committed an offence under the law of the Commonwealth, a State or Territory, and so on.

Suspicious matters reporting is one of the most important reporting obligations in the entire AML/CTF regime. This helps AUSTRAC produce actionable intelligence, which is often shared with its sister agencies to disrupt criminal activities both in Australia and overseas.

The How

The Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 No. 1 (Cth) (the ‘AML/CTF Rules’) does not prescribe any minimum level of monitoring, which is consistent with the overall risk-based theme of the AML/CTF Act and the Rules. What it means is that you run your business, and you know better than anyone about your services, ML/TF exposures, and available resources. Hence, you are in the best position to figure out how best you can monitor your customers’ transactions.

The design of a transaction monitoring program will depend on all the circumstances of your particular organisation: the types of designated services provided, the types of customers you have and why they transact with you, transaction volumes, dollar amounts, your system capacity (e.g. can it generate rules-based alerts that can be used to trigger investigations, or are you relying on eye-balling?), etc, etc, etc. Typically, you will be looking for outlier transactions that make no sense, given the information you hold about that particular customer and their historical behavioural patterns.

The bottom line is that you must have appropriate processes in place to identify potentially problematic transactions, which will need to be further investigated to determine whether an SMR should be lodged.

Please get in touch if you have any questions, comments or if you need any assistance with the above.

Note: Xiaoshu is not a legal practitioner. This article has been provided for general purposes only and cannot be construed as legal advice.