Enhancing Compliance: Transaction Monitoring

Trust offices manage trusts, estates, and provide fiduciary services, ensuring the safeguarding and legal distribution of assets. They often also provide corporate services, such as serving as a correspondence address for companies. In the Netherlands, trust offices must adhere to laws such as the Act on the Supervision of Trust Offices (Wtt), the Anti-Money Laundering and Anti-Terrorist Financing Act (Wwft), and the Sanctions Act (SW). To prevent financial crime, trust offices are required to conduct Customer Due Diligence (CDD) before establishing any business relationship or offering trust services. They must also maintain robust Transaction Monitoring (TM) processes to detect and prevent suspicious activities.

When trust offices provide services to operating companies or other businesses with a high volume of transactions, transaction monitoring becomes significantly more complex. While it is considered one of the Dutch central bank’s (or DNB’s) Good Practices for trust offices to have online viewing rights to bank accounts, the sheer volume and diversity of transactions associated with operating companies often limits the trust office’s ability to fully understand the nature of each transaction.

In such scenarios, the need for a robust transaction monitoring system or TM system becomes evident. Unlike banks, trust offices cannot integrate such a TM system directly into payment systems because they are not part of the technical payment stream. Instead, trust offices must rely on, for example, their viewing rights to bank accounts and ensure that they can process and analyze transaction data from multiple banks across various countries and currencies. This adds another layer of operational and technical complexity that must be addressed for effective monitoring.

However, the reality is that not all trust offices maintain effective transaction monitoring practices. Over the past year, various trust offices have been fined by the DNB due to compliance issues and/or deficiencies in their CDD. This serves as a reminder that while laws and regulations are in place, adequate adaptation is essential to ensure compliance and to effectively detect and prevent financial crimes.

Despite the guidelines provided by regulatory authorities like the DNB, trust offices face distinct challenges in establishing and maintaining effective transaction monitoring processes. DNB's best practices include:

• Analyzing integrity risk on client level.
• Developing and actively applying transaction profiles.
• Monitoring all transactions, including rights and obligations of entities, and gaining insight into bank transactions via 'online viewing rights'.
  
• Adequately documenting transaction monitoring activities and results in client files. 
• Reviewing past and related transactions when an unusual transaction is detected.
• Reporting unusual transactions to the Financial Intelligence Unit (FIU).
  

While these guidelines are insightful, trust offices encounter specific challenges that make compliance difficult.

Trust offices often manage a wide range of transactions, including documentary transactions, involving different client entities with complex asset structures, contributing to a high variety and volume of transactions. This complexity can create difficulties in maintaining effective and efficient transaction monitoring without investing in advanced tools and systems that are capable of handling intricate datasets.

Trust offices face significant challenges in the technical Extract, Transform, Load (ETL) process due to the diversity in data streams. The wide range of information sources, including various bank accounts and client portfolios, makes it difficult to consolidate and process data effectively. While transaction monitoring tools are available and can support aspects of compliance, trust offices often find that the challenge lies more in integrating and processing data rather than in the actual analytics. Especially in cases when they are provided with bank statements instead of direct access to bank account data. As such, there are TM solutions specifically targeted to the trust sector that focus on simplifying this ETL process.

While the DNB offers a robust set of good practices, trust offices often encounter challenges in aligning these recommendations with their existing operational TM frameworks. This misalignment can complicate effective implementation and compliance with regulatory requirements.

These challenges are particularly difficult when only a small subset of a trust office’s clients generate transaction volumes significant enough to warrant technical TM systems. For other clients, traditional methods – such as manually completing transaction analysis forms – may still suffice, creating a fragmented approach to monitoring that can be difficult to manage consistently.

Banks have long been at the forefront of developing and refining TM systems, and both their and other financial institutions’ experiences offer valuable lessons for trust offices:

• Rule design and coverage: A comprehensive set of transaction monitoring rules that address various types of risks and transaction patterns is crucial, but not everything is relevant. As such, banks align their monitoring to their SIRA. Trust offices can benefit from adopting this approach to ensure coverage across all areas of potential and relevant risk.
• Threshold setting and risk appetite: Establishing appropriate thresholds and aligning them with a defined risk appetite is essential. Fine-tuning the balance between an institution’s risk appetite and operational efficiency helps prevent both under- and overmonitoring.
• Monitoring of the process: Ongoing monitoring of the transaction monitoring process itself is vital. Regular validations help identify and correct potential shortcomings, ensuring that processes remain efficient, effective, and compliant.
• TM system functionality: Although the key functionality of a TM system is the ongoing monitoring, banks have learned that it is also key that systems are able to support in activities such as lookbacks, simulations and backtesting.
• Data quality: A frequent issue for banks is the accuracy and completeness of data used within the monitoring process. As such, banks have invested heavily in robust data governance and data quality monitoring.

For trust offices with operating companies, transaction monitoring is becoming an even more important aspect. They face unique challenges that require tailored solutions, especially when dealing with the complexities of data integration and monitoring processes. By learning from other financial institutions’ best practices, trust offices can enhance their transaction monitoring frameworks and ensure adherence to regulations.

At KPMG Forensic, we offer support to financial institutions, including trust offices, to enhance their transaction monitoring processes. Our expertise helps these institutions remain compliant and proactive in an ever-changing regulatory landscape. Want to know more? Visit the KPMG Forensic website via Forensic Services - KPMG Nederland or contact us directly.