Transaction monitoring systems are essential tools for identifying suspicious behavior that may indicate money laundering or terrorist financing. For internal auditors, reviewing these systems requires both technical understanding and an appreciation of operational challenges.
A critical starting point is system design. Auditors should evaluate whether monitoring scenarios cover the full spectrum of risks relevant to the business. For example, a retail bank should have scenarios tailored to cash deposits, wire transfers, and card activity, while a trade finance firm may need scenarios that account for invoice manipulation and cross-border shipments.
Calibration of thresholds and rules is another area of focus. Systems that generate excessive false positives drain resources and reduce effectiveness, while systems with thresholds set too high may miss critical red flags. Auditors should assess whether thresholds are reviewed regularly, tested against real data, and adjusted to reflect evolving risk.
Data integrity is equally important. Monitoring systems are only as good as the data they process. Internal auditors should evaluate whether data feeds are complete, accurate, and timely. This includes reviewing how customer information, transaction details, and external watchlist data are integrated.
Auditors should also assess the investigation process. When alerts are generated, are they triaged efficiently? Are investigators trained to recognize patterns and escalate cases appropriately? Internal audit should review case files to confirm investigations are documented, timely, and compliant with regulatory expectations.
Technology introduces both opportunities and risks. Machine learning and artificial intelligence are increasingly used to improve detection. Auditors should ensure these models are validated, explainable, and not introducing bias. Governance around model use, testing, and change management is critical.
Another area to examine is regulatory reporting. Auditors should verify that suspicious activity reports (SARs) are accurate, complete, and filed within required timeframes. Delays or errors can result in significant penalties.
Finally, auditors should focus on governance and oversight. Senior management and the board must receive regular reporting on system effectiveness, backlog levels, and remediation efforts. Internal audit can add value by ensuring reporting is transparent, risk-based, and actionable.
Effective transaction monitoring requires constant tuning and oversight. By challenging assumptions and validating processes, internal auditors play a pivotal role in keeping AML defenses effective.
