Decision Tree

In AML compliance, a decision tree is a tool that uses a series of yes/no or if/then questions to help financial institutions assess risks related to transactions, customers, and alerts for suspicious activity. It provides a clear, structured process for deciding when further action, investigation, or reporting is needed.

This tool is used in various situations, including:

• Assessing risk during customer onboarding or transaction reviews.
• Deciding which alerts generated by automated systems need further investigation.
• Ensuring compliance with AML rules, guiding decisions on whether to file a Suspicious Activity Report (SAR) or take other necessary actions.

Example:

Scenario:

A bank (Firm X) gets an alert for a $15,000 cash deposit from a customer, Mr. Yahya, flagged by the bank's automated system as potentially suspicious. The bank uses a decision tree to decide whether to investigate further.

Here’s how the decision tree works:

• Does the customer have a clear source of funds?

Yes: Move to the next question.

No: Investigate further.

• Is the transaction amount higher than usual for this customer?

Yes: Move to the next question.

No: No investigation needed, dismiss alert.

• Is the customer’s behavior unusual based on their history?

Yes: Investigate further.

No: Move to the next question.

• Is the deposit linked to high-risk countries or individuals?

Yes: Investigate and file a Suspicious Activity Report (SAR).

No: Move to the next question.

• Does the transaction match common money laundering patterns?

Yes: File a SAR and investigate.

No: Dismiss alert, no further action needed.

In this case, since Mr. Yahya's deposit raises multiple red flags, the decision tree leads to a full investigation and filing a Suspicious Activity Report (SAR).

What Happens Next:

• The bank finds that Mr. Yahya is linked to a drug trafficking operation, and the SAR helps authorities track the illegal money.
• The decision tree helped the bank stay consistent in its decision-making, ensuring compliance and preventing money laundering.

Key Points:

• A decision tree helps AML teams decide whether to investigate or dismiss alerts based on clear, structured questions.
• It ensures consistency and compliance with regulations by guiding financial institutions in making the right decisions.
• The example shows how the decision tree helps banks properly assess alerts and take action like filing a Suspicious Activity Report (SAR).