Are your Transaction Monitoring Rules Effective & Efficient ?

An effective transaction monitoring (TM) rule will identify suspicious transactions and generate alerts to highlight these suspicions. 

An efficient TM rule will generate reasonable volumes of alerts which represent real suspicions i.e. low volume of false positives.

How do you measure effectiveness and efficiency rates for your automated TM system rules?

A combination of qualitative and quantitative approaches are needed. 

1. Ensuring an open channel between the system analysts and the AML investigations team is crucial.

  • Regular meetings should be held to discuss planning and development of new rules but also to discuss existing rules, for example are the investigators identifying patterns relating to the alerts and suspicions being flagged.  These types of observations can suggest further tuning of a rule is required.
  • A certain rule may be resulting in identification of more complex cases when the investigators review the alerts in detail and this could lead to development of further rules or a request to reduce the thresholds etc.  This can only be identified through discussions with the investigators.
  • Are the investigators seeing an overlap with manual SARs/STRs that are being raised. While some of these points can be analysed by crunching the numbers and the MI, first-hand incite is invaluable. 

2. Conversion Rate and the False Positive rate – the conversion rate is the number of alerts from the TM system which are considered suspicious and are converted to a SAR/STR for onward reporting.  The False Positive Rate is the number of alerts that are closed and not considered suspicious. 

  • For example, if a rule generated 10 alerts in 1 month and 4 alerts are deemed suspicious and are converted to SARs/STRs then the conversion rate can be considered 40%.  The question is do you think this is a good return on your investment? 60% of the alerts that were investigated were discarded as false positives and only 40% generated a positive result.
  • This is a powerful measure for looking at how effective the rules are and how efficient the system is. It has been reported that typical rates for TM system rules to identify suspicions is a low as 5%, which means a staggeringly high 95% are false positives.  Are you using your AML investigators wisely and effectively if you are running high false positive rates and low conversion rates.  
  • Having a view on what represents appropriate conversion rates and false positives rates for your organisation is important – different levels may be considered for different risks being monitored.  
  • These rates can be improved through an ongoing programme of threshold and rule tuning and refinement. 

3. Management Information – The breath of MI and statistics available regarding TM and the processing of the alerts is immense. Understanding how best to utilise the data is crucial and heavily dependent on a strong data analyst or reporting team. 

  • Seemingly basic statistics can offer much insight – for example monitoring the number of alerts generated for each rule and comparing over a period of time can indicate if the rule is continuing to work correctly, possibly indicating issues with the source data if there is decrease in the volumes of alerts being generated.  Time for processing alerts can indicate if certain rules are presenting more complex alerts. 
  • Trend analysis can support the case for changing thresholds or introducing new rules.  Looking at other elements that make up the TM strategy such as manual SAR reporting or other types of reports used in the business and combining all can also indicate how effective certain rules are.
  • It is necessary to put in place a comprehensive reporting function to support the TM programme. 

4. Ongoing assurance Reviews – using an independent party with the appropriate expertise to assess your rules and TM system looking at it from an end to end perspective will prove invaluable both from management perspective but also by way of satisfying legislative requirements.  

The above provides a brief overview on understanding your TM rules and how to ensure you are getting value from your investment.  SQA Consulting can provide you with a detailed assurance review of your TM system, reviewing the coverage of the rules, benchmarking these against industry standards, ensuring they are working correctly, assessing the overall effectiveness  and efficiency rates of the rules and identifying any possible room for improvement. Please contact us to find out more about this article, or review our TM brochure here.

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