The Complete Guide to AML Transaction Monitoring

Looking to increase your compliance knowledge? Read our guide with everything you need to know to get started. ‍ It can be hard to know where to begin with transaction monitoring. Whether you're starting from scratch or looking to better understand the systems you already have in place, this guide will provide you with all the AML transaction monitoring knowledge you need. Download the Transaction Monitoring Brochure.

New attack vectors, criminal methodologies, and regulatory requirements are constantly moving the goalposts and changing the way that firms comply with their obligations.

To detect and prevent financial crimes such as money laundering and terrorist financing, businesses must work hard to understand the financial activities of their customers by implementing transaction monitoring — a key component of a wider anti-money laundering (AML) and combating the financing of terrorism (CFT) framework. 

What is Transaction Monitoring?

AML transaction monitoring is the process that helps financial institutions detect and prevent money laundering and other types of financial crime. Information that’s gathered during transaction monitoring is mostly used to meet obligations under AML and CFT laws, for filing suspicious activity reports (SARs), and to inform decision-making. ‍

Transaction monitoring is important because compliance with financial regulations is non-negotiable. Firms can face significant fines for not detecting and reporting any transactions tied to illegal activity. ‍

Transaction monitoring activity is becoming more common and more visible to end-users. Unusual or high-value purchases may require approval via mobile banking or request a one-time password sent to a customer’s phone or email address. ‍

Although transaction monitoring methods will vary between different firms and tools, they all work to do the same thing — to identify suspicious activity, assess risk levels, and make predictions about the future.

Who Needs Transaction Monitoring?

Any firm operating in the financial sector should be conducting it as a part of its day-to-day operations, including: ‍

• Digital banks and neobanks
• Money transfer companies
• Crypto platforms
• Accounting, legal, and real estate firms
• Insurance firms 

What is the AML Transaction Monitoring Process?

While regulated companies are invariably obligated to carry out transaction monitoring, the specific AML transaction monitoring process they adopt often varies. There is little clear guidance from regulators and defined requirements are uncommon, allowing firms flexibility in designing their approach.

Typically, the AML transaction monitoring process involves a mixture of manual review and automation, utilizing various tools and tech-led solutions to ensure the most effective results in identifying suspicious activities.

Here’s our brief step-by-step guide to achieving comprehensive transaction monitoring within your AML framework:

1. Assign a Risk Value — Different clients will represent different levels of AML risk depending on current and historical factors, such as industry and location.
2. Create Risk-Based Rules — Based on the risk value, financial institutions should assign specific rules for each category. These rules should be dynamic and customizable.
3. Set up Alerts — When your AML rules are breached, an alert should be issued. This doesn’t mean that illegal activity has occurred but rather that a review is necessary.
4. Assign your Compliance Team — Once an alert has been triggered, the transaction may be put on hold, pending further investigation by compliance or risk personnel.
5. Create a Suspicious Activity Report — If evidence of a financial crime is detected, a SAR should be created. The transaction in question should also be reported to the relevant Financial Investigation Unit (FIU).

The Risk-Based Approach

Although regulated companies are free to curate their own transaction monitoring processes, the Financial Action Task Force (FATF) recommends that they should take a risk-based approach. ‍

In practice, this requires businesses to perform assessments on individual customers and then respond in proportion to the risk that they present. Transactions involving higher-risk customers might be subject to more stringent monitoring while lower-risk customers will be looked at with less scrutiny. ‍

In addition to the above steps, a risk-based approach might also be supported by additional measures and controls such as: ‍

• Customer Due Diligence — Businesses should verify their customers’ identities by conducting due diligence checks, such as collecting names, addresses, dates of birth, and more. 
• Adverse Media Monitoring — Risk level can be informed by external factors, such as a customer’s involvement in adverse media stories in both print and online sources.
• Sanctions Screening — Regulated businesses should screen their customers against sanctions and watch lists to avoid doing work with sanctioned entities.

What are Suspicious Activity Reports?

SARs are an important part of the transaction monitoring process.

When a suspicious transaction is flagged, it is the duty of the regulated business to report it to the relevant authorities. In most countries, this is managed through the submission of SARs, which are forms that are sent to the authorities each time a new suspicious transaction crops up. They are very important, and relevant employees must know when and how to complete SARs, and how to file them in line with regulatory requirements.

The exact rules depend on the jurisdiction, but firms generally have 30 days to do their own initial work and submit a SAR once the suspicious activity has been detected.

Scenarios that might cause a SAR to be submitted can include unusual transactions, transactions over a certain value, and large cash deposits. SARs can also be submitted if employees have engaged in suspicious behavior; they’re not just for customers. ‍

Transaction Monitoring Challenges

Transaction monitoring is not without its challenges. Here are some of the more common ones faced by regulated businesses and financial institutions when deploying transaction monitoring processes.

1. False Positives

These are by far one of the main challenges faced by regulated companies when implementing internal transaction monitoring tools. False positives arise when a rule is defined in a way that causes legitimate transactions to be flagged as suspicious, and they can lead to increased labor expenses and cause analysts to be distracted from focusing on real suspicious transactions that require their attention.

2. Speed and Anonymity

Online transactions give criminals a degree of anonymity that they wouldn’t have with in-person transactions. This might lead to high-risk customers being able to conceal their identities when conducting transactions and subvert transaction monitoring efforts. Criminals can also leverage the speed of online banking services to quickly move money between accounts and across different jurisdictions while flying under the radar of AML/CFT controls.

3. Capturing all Eventualities

There’s a real temptation to try and use transaction monitoring software to capture every possible suspicious transaction, and firms often try to do this by creating a huge list of rules and scenarios. This can have a detrimental impact, however, as too many rules and scenarios make it difficult to maintain context which can lead to even more false positives.

Transaction Monitoring FAQs

What are transaction monitoring tools?

Transaction monitoring tools are sophisticated software solutions that analyze financial transactions to identify suspicious patterns. These systems often utilize a combination of rule-based logic, artificial intelligence, and machine learning to detect anomalies, streamline investigations, and reduce the number of false positive alerts, helping financial institutions manage vast transaction volumes effectively.

Can you give examples of transaction monitoring rules?

Transaction monitoring rules are predefined criteria designed to flag unusual transactional behavior. Examples include setting thresholds for large cash transactions, identifying multiple deposits just below reporting limits (structuring), detecting rapid fund movements between accounts, or flagging transactions involving high-risk jurisdictions or sanctioned entities. Effective systems allow for dynamic customization of these rules to adapt to evolving risks. 

What should a transaction monitoring policy include?

A robust transaction monitoring policy should outline a risk-based approach to monitoring customer activities, detailed procedures for generating and managing alerts, guidelines for investigating suspicious transactions, and clear protocols for filing SARs. It also typically includes requirements for thorough documentation, ongoing training for compliance teams, and regular review and optimization of monitoring rules to ensure continued effectiveness and regulatory adherence. 

What is the penalty for non-compliance with transaction monitoring obligations?

The penalties for non-compliance with transaction monitoring obligations can be severe, including significant financial fines, regulatory reprimands, operational restrictions, and reputational damage. In some cases, individuals responsible may face imprisonment. Adhering to these obligations is critical for financial institutions to maintain their licenses, avoid legal repercussions, and safeguard their integrity.

Discover our study: Regulatory Penalties in North America Account for 95% of Global Financial Penalties in 2024. 

How does transaction monitoring relate to the stages of money laundering?

Transaction monitoring is a continuous process that helps detect illicit activities across all three stages of money laundering: placement (introducing illicit funds), layering (disguising their origin through complex transactions), and integration (reintroducing them into the legitimate economy). It serves as an ongoing defense mechanism to identify and respond to suspicious patterns at any point within the money laundering cycle. 

How does transaction monitoring help in preventing money laundering?

Transaction monitoring plays a crucial role in preventing money laundering by continuously scrutinizing financial transactions to identify unusual patterns or deviations from a customer's typical behavior. By leveraging advanced analytics, these systems can flag potential illicit activities, enabling compliance teams to investigate, intervene, and report suspicious transactions to relevant authorities, thereby disrupting money laundering schemes and protecting the financial system. 

What are the red flags in transaction monitoring?

Red flags in transaction monitoring are indicators of potentially suspicious activity that warrant further investigation. Common examples include transactions inconsistent with a customer's known profile, frequent or large cash transactions without a clear business purpose, multiple transactions falling just below reporting thresholds, transfers to high-risk jurisdictions, or reluctance by a customer to provide requested information during due diligence processes.