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What is AML Transaction Monitoring?

What exactly is transaction monitoring?

AML transaction monitoring is a process that helps prevent money laundering, fraud, terrorist financing, and other types of financial crime. Although each transaction monitoring solution will operate slightly differently, essentially they monitor customer transactions to identify suspicious activity, assess risk levels, and even predict future activity.

AML transaction monitoring is generally automated through the use of software. If any potential criminal activity is identified, an alert is issued and a manual, follow-up assessment is carried out by compliance teams. AML transaction monitoring is a legal requirement for all firms that are subject to AML compliance regulations.

Who needs transaction monitoring?

As the financial sector has expanded to include neobanks, fintech firms and other businesses, the number of organisations that must have awareness of transaction monitoring has also grown. Here’s a list of the types of companies that need to employ transaction monitoring:

  • Banks
  • Money transfer companies
  • Insurance firms
  • Legal professionals
  • Real estate agents
  • Law enforcement agencies
  • Accountants and accounting firms
  • Financial services

Steps in the AML transaction monitoring process

Should even one transaction turn out to be associated with illegal activity, organisations can face significant fines. Fortunately, AML transaction monitoring needn’t be a complicated process. Here’s our step-by-step guide on how to achieve proper monitoring:

  • Assign a risk value - Different clients will have different levels of AML risk associated with them. This will depend on current and historical factors, such as industry and location.
  • Create a set of rules for each inherent risk - Based on the risk pillar, financial institutions should assign specific rules for each category. These rules should be dynamic and customisable.
  • Set up alerts - When your AML rules are triggered, an alert should be issued. This is not evidence that illegal activity has occurred but simply that additional scrutiny needs to take place.
  • Deploy your compliance or risk department - Once an alert has been triggered, the transaction may be put on hold, pending further investigation by compliance or risk personnel.
  • Create a Suspicious Activity Report (SAR) - If evidence of a financial crime is detected, a SAR or STR (Suspicious Transaction Report) should be prepared. The transaction in question should also be reported to the relevant Financial Investigation Unit (FIU).

What to look for in your AML transaction monitoring solution

Today, there is a multitude of different AML transaction monitoring platforms for businesses to choose from. To ensure your transaction monitoring process is working as it should be, look for these three crucial features in your program of choice:

  • The use of clear and structured data - Transaction monitoring depends on good sources of data to determine when illegal activity is occurring. If there is any ambiguity in the data capture process, errors can occur and fraudulent transactions can easily go unnoticed.
  • Customisable - Rules will change, regulations will shift and client circumstances will evolve. That’s why your software must be flexible.
  • Option to build, iterate and test rules - No AML process, nor any piece of software is ever really complete. Businesses must be able to adapt and improve their transaction monitoring process as new data comes to light.

    The future of transaction monitoring

    With the regulatory landscape constantly shifting, it is difficult to say with certainty what the future transaction monitoring landscape will look like. One possibility though surrounds greater levels of collaboration. In the Netherlands, for example, five banks (ABN AMRO, ING, Rabobank, Triodos Bank and de Volksbank) have established Transaction Monitoring Netherlands (TMNL) to collectively tackle fraudulent financial activity.

    If successful, we might see more financial organisations working together to monitor customer transactions more effectively.