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TRANSACTION MONITORING APP

Overview

The Transaction Risk Monitoring app calculates risk scores for cashflows, trades, and options. Before transactions are monitored in Kooltra, the Transaction Risk Monitoring App must be enabled in the Entity > Entity Settings (Apps tab). To enable this app, follow the video below.

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Each input setting can be tailored towards your organization's risk tolerance. For more information about each setting, please review our Transaction Monitoring white paper.

Calculating Risk Scores

Risk scores are calculated using the same scoring system for cashflows, trades and options. This scoring system takes into account three factors:

  • Know-your-customer (KYC) risk
  • Transaction size risk
  • Trading frequency risk

The total risk score of the account is calculated by assigned a different percentage weight to each of these factors, and multiplying them together. This results in a risk score between 0-100. The total risk score will fall into one of three categories: 

  • High - Risk Score of 85-100
  • Medium - Risk Score of 70-84
  • Low  - Risk Score of 0-69

The lower threshold for both the medium and high risk categories can be adjusted depending on your business risk tolerance. These are changed by changing the input boxes Warning and Alert, respectively. 

Know-your-customer (KYC) Risk

Kooltra calculates KYC risk using the details of the account, contact and beneficiary.

The specific information that affects KYC score for account, contact and beneficiary are summarized below:

Account - Affected by country risk and industry risk

Contact - Affected by country risk and associated account industry risk

Beneficiary - Affected by industry risk and the larger of beneficiary country risk or beneficiary bank country risk. 

Note that both country and industry risk are manually set at the entity level on Compliance Risk page.

Transaction Risk

The transaction risk is dependent on the size of the transaction. This size is compared to maximum allowable transaction size, minimum allowable transaction size and average transaction risk size over the past 6 months.

For more details about the transaction risk, please refer to the Transaction Monitoring white paper.

Transaction Frequency Risk

The transaction frequency risk is dependent on the number of transactions done with that account (counterparty) in the past week, as well as the average number of transactions over the last 6 months.

Flagged Transactions

Transactions are flagged if:

  • The risk score is greater than high (Alert) threshold set on the app in Entity Settings
  • The currency on the transaction is not listed on currencies on the account
  • The transaction size is smaller or larger than minimum or maximum allowable transaction size
  • The number of transactions with this client is different than the than weekly average number of transactions booked (calculated over the past six months)

Examples

Customer: Acme Corp — Country/Industry: Canada/Manufacturing (Country Score/Industry score set to 10)* — Authorized Currencies: CAD, USD, EUR, GBP — Average Weekly Transaction Size: $500,000.00 USD — Number of Weekly Transactions: 10

*Note that both country and industry risk are manually set at the entity level on Compliance Risk page.

Data Provided for All Examples:

Account Details:

  • Customer: Acme Corp
  • Country: Canada (Associated Industry set to 5 by user)
  • Industry: Manufacturing (Associated Industry set to 10 by user)
  • Authorized Currencies: CAD, USD, EUR, GBP
  • Average Transaction Size (Over Last 6 Months): $100,000.00 USD
  • Standard Deviation Transaction Size (Over Last 6 Months): $10,000.00 USD
  • Average Weekly Transactions (Over Last 6 Months): 10

User App Settings:

  • Medium Score Threshold: 70
  • High Score Threshold: 80
  • Exponential Growth Factor: 2
  • Country Risk Weight: 7
  • Industry Risk Weight: 3
  • Staticdata Weight:4
  • Transaction Size Weight: 4
  • Transaction Size Standard Deviation Factor: 4
  • Maximum Current-to-Average Frequency Factor: 5
  • Transaction Frequency Weight: 2

Example 1: Unauthorized Currency

Transaction Details:

  • Account: Acme Corp
  • Transaction Type: Forward
  • Amount 1: $100,000
  • Rate: 1.3
  • Amount 2: $130,000
  • Currency 1/Currency 2: USD/AED
  • USD Transacted Amount: $100,000

Risk Score: High (Flagged for “Unauthorized Currency” because AED is not authorized)

Example 2: Calculation of Account Score

Transaction Details:

  • Account: Acme Corp
  • Transaction Type: Forward
  • Amount 1: $100,000
  • Rate: 1.3
  • Amount 2: $130,000
  • Currency 1/Currency 2: USD/AED
  • USD Transacted Amount: $100,000

Account Score = (Country Weight)*(Country Risk)+(Industry Weight)*(Industry Risk)

Account Score = (0.7)*(5)+(0.3)*(10)

Account Score = 6.5

Example 3: Transaction Size below the Minimum Allowable Score

Transaction Details:

  • Account: Acme Corp
  • Transaction Type: Forward
  • Amount 1: $50,000
  • Rate: 1.3
  • Amount 2: $65,000
  • Currency 1/Currency 2: USD/AED
  • USD Transacted Amount: $50,000 

Minimum Size = (Average Size)-(Transaction Size Standard Deviation Factor)*(Standard Deviation Transaction Size)

Minimum Size = (100,000)-(4)*(10,000)

Minimum Size = 60,000

Risk Score: High (Flagged for “Size” because the USD Transacted Amount is less than the Minimum Allowable Size)

Example 4: Transaction Size above the Maximum Allowable Score

Transaction Details:

  • Account: Acme Corp
  • Transaction Type: Forward
  • Amount 1: $150,000
  • Rate: 1.3
  • Amount 2: $195,000
  • Currency 1/Currency 2: USD/AED
  • USD Transacted Amount: $150,000

Minimum Size = (Average Size)+(Transaction Size Standard Deviation Factor)*(Standard Deviation Transaction Size)

Minimum Size = (100,000)+(4)*(10,000)

Minimum Size = 140,000

Risk Score: High (Flagged for “Size” because the USD Transacted Amount is greater than the Maximum Allowable Size)

Example 5: Transaction Frequency Above the Maximum Allowable Frequency

Transaction Details:

  • Account: Acme Corp
  • Transaction Type: Forward
  • Amount 1: $100,000
  • Rate: 1.3
  • Amount 2: $130,000
  • Currency 1/Currency 2: USD/AED
  • USD Transacted Amount: $100,000
  • Current Transaction Weekly Frequency: 60

Maximum Frequency = (Average Weekly Frequency)*(Maximum Current-to-Average Frequency Factor)

Maximum Frequency = (5)*(10)

Maximum Frequency = 50

Risk Score: High (Flagged for “Frequency” because the USD Transacted Amount is greater than the Maximum Allowable Frequency)

Example 6: Calculation of Risk Score

Transaction Details:

  • Account: Acme Corp
  • Transaction Type: Forward
  • Amount 1: $120,000
  • Rate: 1.3
  • Amount 2: $156,000
  • Currency 1/Currency 2: USD/AED
  • USD Transacted Amount: $120,000
  • Current Transaction Weekly Frequency: 15

Static Score = (Country Weight)*(Country Risk)+(Industry Weight)*(Industry Risk)

Static Score = (0.7)*(5)+(0.3)*(10)

Static Score = 6.5

Size and Frequency Score (Please review the white paper for the calculation of these scores):

Size Score = 34, Frequency Score = 0

Final Risk Score Calculation

Risk Score=(Static Risk Weight)*(Static Risk Score)+(Transaction Size Weight)*(Size Score)+(Transaction Frequency Weight)*(Frequency Score)

Risk Score=(0.4)*(6.5)+(0.4)*(34)+(0.2)*(0)

Risk Score = 6.2

Risk Score: Low (Low Risk Score since the risk score is below the Medium Score Threshold)

FAQs:

What is a risk factor?

A risk factor is an input to the scoring system. The current factors that affect the total risk score are Know-your-customer (KYC) risk, Transaction details risk, and Trading frequency risk.

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transaction monitoring app, risk scoring setup, risk configuration