Expected transaction profiles (ETP) are playing an increasingly pivotal role in banks’ anti-financial crime efforts. A well-built ETP can help your organisation mitigate money laundering (ML) and terrorist financing (TF) risks - and enhance your client risk assessment.
Based on our experience, here is a brief explanation of how ETPs work and four ways to implement and improve them to ensure the most powerful benefits.
What is an expected transaction profile?
The ETP captures the expected transactions of a client throughout your financial institution. It asks ‘what transactions do we expect for this client given their profile and the product offering?'
It considers which variables to use in detecting ML and TF ‘red flags’ for each client-product combination. This information is captured during onboarding and updated continuously throughout the client lifecycle.
The ETP is valuable in:
- Baselining your alert handling - An ETP can help you accurately identify unusual or potentially suspicious behaviour and reduce the questions you need to ask a client.
- Configuring transaction monitoring rules - Including expected client behaviour in your business rules helps reduce false positives.
- Improving your client risk profile - A feedback loop from transaction monitoring to client due diligence (CDD) ensures the risk profile reassessment includes deviations from the ETP. The ETP also contains valuable information for assessing other factors such as geographic and product risk.
Proper integration of an ETP in your anti-financial crime regime can improve its effectiveness and support a risk-based way of working.
Here are four ways to kick-start your ETP project:
1. Use a risk-based approach with an iterative method
To implement ETP while capturing the high risks of ML and TF, you must keep it simple and improve incrementally. With an iterative approach, you can start with high-risk client groups. For example, retail banks can focus on groups of clients with large amounts of cash, foreign transactions, or cryptocurrency trades.
Large corporate clients are harder to group. Focusing on high-risk products is a better way to kick start your ETP. Or you could include some behavioural patterns or red flags – such as high-risk countries or ways of using cash.
2. Start with a good data strategy
There are many effective ways to gather ETP input, including:
- Requests at the source - With corporate clients, this means asking the relationship manager, and or client directly, to outline expected product use.
- Historical behaviour data - Although historical actions do not always predict future behaviour, they can guide detection of deviations.
- Automated peer grouping - A more technical solution is anomaly detection to identify outlying behaviour compared to similar clients in a peer group. These automated ways of analysing deviations are more cost-efficient. However, they require proper data management capabilities.
3. Tailor your implementation
A concept is only as good as its implementation, and the implementation is only good if it suits the user’s needs.
State-of-the-art detection solutions are the best way to detect potential money laundering and terrorist financing. But there can be pitfalls in their implementation. Agile and lean methods that focus on getting the right feedback from the end user help guide effective execution.
Another tip for increasing the chance of successful implementation is to involve end users early in the solution design process. Give them clear responsibilities, so they can eventually become super users with special privileges.
Use continuous feedback and lean methods to investigate and improve the efficiency and effectiveness of the end users. Lean feedback cycles can identify root causes of problems early in the design phase, and help you keep improving after implementation.
Finally, communicate the different phases of the project clearly. Priorities shift from stage to stage – such as design, go-live, aftercare, and continuous improvement. If you communicate them clearly, this enables employees to focus on the critical deliverables.
4. Keep momentum by focusing on a narrow, clearly-defined scope
ETP implementation is not straightforward, especially with so many departments involved; conflicting priorities on IT project backlogs; and the need to create new processes around the ETP. Starting with a clear mandate and governance framework is critical. Set tangible goals and guiding principles to ensure focus.
Even more importantly, keep a narrow scope. For example, organisations can have challenging structures, and different local requirements and product uses. So choose a single segment or product in an entity to start developing an ETP solution. You can add more complexity later.
How Delta Capita can help
Financial and economic crime consulting is in our DNA. We have implemented ETPs at several Dutch banks. We understand the challenges organisations face in doing this and can support them in maturing their approach.
To kick off your moves towards greater maturity, we help you look at current ways of working and brainstorm next steps. For example, a manual approach fits better for some organisations. Others are ready to use more state-of-the-art technology.
To find out more, contact us today.
This article was written by Thomas van den Broeck, Managing Consultant, Jeroen Davidson, Senior Managing Consultant and Maikel Migglebrink, Head of Risk & Regulation, Delta Capita.
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