The changing role of the compliance officer in transaction monitoring

Intended result: a stable and reliable financial system

Transaction monitoring keeps the financial system stable and reliable, free from crime. The estimate of the extent of money laundering in the Netherlands only confirms that it’s a necessary practice. The University of Utrecht has estimated that in 2019, based on the data published by the FIU, its volume will reach 13 billion euros for the Netherlands.

In the Netherlands, the Anti-Money Laundering and Anti-Terrorist Financing Act (Wet ter voorkoming van witwassen en financieren van terrorisme, or Wwft) and the Sanctions Act 1977 are essential for the implementation of transaction monitoring. The cornerstone for transaction monitoring at financial institutions is a valid policy and correct structure of processes.

Challenges in transaction monitoring

A solid transaction monitoring system
A well-designed IT system to monitor transactions and generate alerts based on the set scenarios is a prerequisite for adequate transaction monitoring.

The right scenarios
For transaction monitoring to work correctly, the right scenarios are essential. This results in the right alerts to investigate. A risk analysis must be carried out to draw up different scenarios. Legislation and regulations also set input for scenarios. The scenarios’ evaluation happens periodically. Through Compliance and First Line Monitoring (FLM), the findings of the alert handling are used to optimize the scenarios and thus the transaction monitoring system.

CDD in good order
If the CDD and thus the client file and profile (with the risks mapped out) are in order, transaction monitoring in itself is not difficult. In our opinion, it is a precondition for adequate transaction monitoring.

Also, the compliance officer monitors whether management is fulfilling its responsibilities. Furthermore, he advises on policy and procedures. Internal audit, the third line of defense (3LoD), assesses the establishment of transaction monitoring in terms of policy, process and work instructions. In addition, the 3LoD checks whether the 1LoD and 2LoD are properly fulfilling their responsibilities and reports its findings.

Role of the first line of defense: Analysts, Quality Assurance (QA) and First Line Monitoring (FLM)

• Drafting of scenarios and adjustments based on practical experience by the management of the 1LoD. Input for aforementioned is their own valuable experience and advice from Compliance, Risk and Legal.
• The analysts within the 1LoD examine the alerts and determine possible transactions that are subject to reporting. Then they submit the files to QA for review.
• QA assesses whether the investigation performed by the analyst is correct.
• Notifiable transactions are usually forwarded to another department within the 1LoD or to Compliance for further investigation and possible FIU reporting.
• FLM monitors on a random basis whether the analysts have carried out the processes properly and have fully and correctly described and mitigated the integrity risks.

Role of the second line of defense: Compliance
In a nutshell, the compliance officer verifies compliance with legal rules and internal policies, thereby guarding the organisation’s integrity. The role of Compliance within transaction monitoring can be divided into advice, monitoring and reporting.

Advice:

• The compliance officer provides advice for translating client integrity risks and trend analyses into specific transaction monitoring scenarios.
• Based on backtesting on alerts, the compliance officer provides advice to management and the 1LoD on any scenarios’ adjustments.

Monitoring:

• The compliance officer continuously monitors the transaction monitoring process. Risk-based.
• Periodically, the compliance officer assesses the adequacy of the procedures, processes, and guidelines related to transaction monitoring. If necessary, the compliance officer proposes changes based on the findings.

Reporting

• Internal: the compliance officer draws up reports for the management, indicating what is going well and what wrong, and where to introduce improvements in terms of process and content.
• External: the compliance officer usually checks whether a report of an unusual transaction is justified and whether further information and investigation are required before reporting the case to the FIU. In principle, the compliance officer is the contact person for the FIU.

Role of the third line of defense: the internal audit department
The internal audit department controls whether transaction monitoring is appropriately set up regarding policy, process, and work instructions and it randomly checks files.

Final responsibility with management
Management has ultimate responsibility for transaction monitoring, including the creation and improvement of the scenarios.

Hard and soft skills required to fulfil the compliance role

Monitoring and reporting to management are demanding more and more capacity from the compliance officer. It can result in a narrowing of the scope of the compliance officer. On the other hand, we see that more and more soft skills are required from the compliance officer to give advice and embed integrity awareness within an organization. Is it realistic to expect one person to have both these soft skills and the hard skills needed to monitor and report? We see in practice that specialization on one or the other is slowly taking hold. Except, not everywhere. As long as a management team only steers for the number of alerts handled and not the quality, increasing integrity awareness comes second. Possible risk of this is that people with knowledge walk away. Paying more attention to integrity awareness can prevent it. The specialization in soft skills and a broader view within advising are, in our opinion, interesting changes in the role of compliance.