The Reserve Bank of India (RBI) has partnered with the Bangalore based Open Financial Technologies, a neo-banking company to deploy block chain technology for smoother payments across borders. Though this innovation apparently brings in hassle-free transaction and accurate ‘book-keeping’, many view this as a smart move of tamper proof monitoring in the context of rising shady financial transactions.
The RBI, regulator for Banks, wants the lenders to tighten their monitoring of overseas transactions, to reduce the intensity & frequency of overseas money laundering activities.
Unitech received ₹1,805.86 crore from six financial institutions, of which ₹763.06 crore was not used for the projects, and three subsidiaries of Unitech made investments of ₹1,745.81 crore in 10 Cyprus-based companies in 2007-10.52 shell companies helped Unitech promoters launder money, say ED insiders– Economic Times article dated December 8th 2021.
This is only one incident among many such fraudulent transactions.
What is meant by overseas transactions monitoring?
Overseas transaction monitoring (OTM) is the process of monitoring a customer’s global transactions such as trade transactions (imports & exports), wire transfers, overseas payments, deposits and withdrawals. Banks &FIs have an OTM system, configured with rules and scenarios based on Anti-Money Laundering (AML)/ combating the Financing of Terrorism (CFT) typologies, which analyze the details of all transactions processed by the FI. The OTM system flags a transaction as suspicious if it meets the criteria of the rules configured and generates an alert. These alerts are then analyzed & investigated to determine whether a suspicious activity report (SAR) is to be filed with the Financial Intelligence Unit (FIU), as per regulatory guidelines.
Why is overseas transaction monitoring important?
The key reasons for banks to have an effective OTM framework in place is to remain compliant and avoid regulatory breaches, to spot financial crimes before they take place, to aid the adoption of a risk based approach & to better understand and service customers.OTM aids in preventing terrorist financing, money laundering & other malicious financial crimes that cause challenges to security & safety across the globe.
Challenges in monitoring of overseas transactions
The main issues banks are grappling with in monitoring of overseas transactions are
- Extensive data flows, data quality & its complexity, archaic IT architectures– Banks have been operational for decades and over time have built different systems and processes. There are often disparate sources of data across the banks which leads to inconsistent and poor quality data- Ex a corporate customer wrongly tagged as retail customer in banks databases& vice versa.
- Generation of high false positives– Due to the poor quality of data being fed into the OTM systems, FIs are faced with large volumes of alerts being generated. OTM systems are unable to differentiate between genuine business transactions and money laundering transactions due to which a lot of false positives are analyzed, increasing cost of compliance.
- Structuring patterns– Criminals deposit illegal funds by breaking down transactions below reporting threshold, to escape detection, honest business man do the same? OTM Software are not tuned to catch suspicious activity via customer profiles & the pattern of transactions.
- Effective coordination between banks and vendors– Banks and vendor’s ability to cooperate with each other with regards to sharing compliance & technical knowledge needs to be better synthesized in order to create a solution that would be best applicable to the bank.
What is the regulator pushing the banks towards?
Banks should develop a risk based approach to monitoring of overseas transactions to eliminate disruption to genuine customers, detect potential criminal behavior and demonstrate full ongoing compliance. The OTM software should send notifications on the transactions that matter and enable banks to automatically apply a full pattern analysis on suspicious transactions in real time, to preempt financial crimes and avoid regulatory breaches and reputational losses to the banks.
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Is inefficient fraud monitoring mechanism causing the rise in fraudulent bank transactions? Why?
Will the better monitoring, investigations & reporting of overseas transactions enable reduction in money laundering activities & remittances to tax havens? Can it, indirectly, lead to increased tax compliances?
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- Ebrahim Muzammil. (2022). Transaction Monitoring Optimisation – Using an intelligence lead approach to Transaction Monitoring.
- ACAMS Netherlands Chapter board. (2016). Transaction monitoring challenges- ACAMS, Netherlands chapter.
- Comply Radar. (2020). Five key challenges when tuning AML transaction monitoring software.
- Ohri Raghav. (2021). 52 shell companies helped Unitech promoters’ lauder money, say ED insiders.
- Devesh K Pandey. (2020). Former Unitech chief, sons booked for bank fraud.