Scenario Testing examples for transaction Monitoring in banking and financial services sector
Scenario testing is a vital part of transaction monitoring for dealer broker firms, as it helps to identify and mitigate potential risks of money laundering and market abuse. By creating and testing scenarios that reflect real-world threats, firms can ensure that their transaction monitoring systems are effective in detecting suspicious activity.
Here are some examples of scenario testing for transaction monitoring for dealer broker firms:
- High-value transactions:Test how the system would respond to a sudden increase in the number or value of transactions from a particular client. This could indicate that the client is trying to launder money or manipulate the market.
- Unusual activity:Test how the system would respond to transactions that are outside of a client's normal activity patterns. This could include transactions that are made from a new location, involve new products or services, or are of an unusually large or small size.
- Suspicious relationships:Test how the system would respond to transactions between clients who are known to be associated with each other. This could indicate that the clients are colluding to manipulate the market or launder money.
- Sanctions violations:Test how the system would respond to transactions involving individuals or entities that are on sanctions lists. This could indicate that the firm is doing business with sanctioned individuals or entities, which is a violation of the law.
These are just a few examples, and the specific scenarios that a firm should test will vary depending on its individual risk profile. However, scenario testing is an essential tool for dealer broker firms to ensure that their transaction monitoring systems are effective in detecting and preventing money laundering and market abuse.
In addition to the examples above, here are some examples of scenario testing from the commercial/retail bank sector:
- Account takeover:Test how the system would respond to a hacker taking over a customer's account and making unauthorized transactions.
- Fraudulent loan applications:Test how the system would respond to a fraudulent application for a loan.
- Payments to high-risk countries:Test how the system would respond to a customer making payments to countries that are considered to be high-risk for money laundering.
For easy understanding:
Let's break down some relevant situations using analogies:
Imagine you're a librarian managing a book borrowing system:
- Scenario 1: Unusually high book borrows:One reader suddenly borrows 20 books on obscure topics they never showed interest in before. This could be suspicious, like gathering research materials for a scam.
- Scenario 2: Borrowing books for someone else:A reader consistently borrows books for different people with no connection to them. This could indicate identity theft or money laundering schemes.
- Scenario 3: Borrowing banned books repeatedly:A reader keeps checking out books despite knowing they're banned or restricted. This could be a sign of trying to access illegal information.
Now, think of yourself managing your online shopping account:
- Scenario 1: Sudden surge in expensive purchases:You buy thousands of dollars worth of electronics you never expressed interest in. This could be a hacker using your account for fraud.
- Scenario 2: Purchases from unfamiliar locations:You see charges from countries you've never visited. This could be someone using your stolen card details.
- Scenario 3: Unusual payment methods:You see payments made using gift cards or unfamiliar wallets, which you never set up. This could be a sign of money laundering activity.
Examples of Scenario Testing for Transaction Monitoring in Banks and Securities Trading Firms:
Client Deposit and Withdrawal:
- Scenario 1: Sudden influx of large deposits:A low-income customer suddenly deposits a million dollars.This could indicate money laundering or fraud.
- Scenario 2: Frequent small cash withdrawals:A customer makes numerous small cash withdrawals just below reporting thresholds,potentially to avoid scrutiny.
- Scenario 3: Unexplained international transfers:A customer with no overseas connections sends regular wire transfers to high-risk countries.
Politically Exposed Persons (PEPs):
- Scenario 1: PEP with unusually high trading activity:A PEP exhibits sudden bursts of aggressive trading,potentially using insider information.
- Scenario 2: PEP transferring funds to sanctioned entities:A PEP sends money to individuals or companies on sanctions lists,violating regulations.
- Scenario 3: PEP receiving funds from anonymous sources:A PEP receives large deposits from unidentified entities,raising concerns about bribery or corruption.
High-Risk Countries:
- Scenario 1: Frequent transactions with sanctioned countries:A company conducts numerous transactions with countries under sanctions,potentially violating regulations.
- Scenario 2: Payments to shell companies in high-risk countries:A business sends funds to seemingly empty companies in high-risk jurisdictions,indicating potential money laundering.
- Scenario 3: Unusual trade patterns with high-risk countries:A company exports large quantities of sensitive goods to high-risk countries,raising concerns about proliferation financing.
Nature of Business:
- Scenario 1: Cash-intensive business with low cash deposits:A restaurant generates high cash revenue but deposits significantly less,suggesting potential tax evasion.
- Scenario 2: Sudden shift in business activity:A company historically dealing in low-risk products starts trading high-risk commodities,increasing money laundering risk.
- Scenario 3: Unexplained transactions linked to high-risk industries:A legitimate company conducts transactions with entities linked to illegal activities like gambling or wildlife trafficking.
