Transaction Monitoring: Overview, Process & Benefits

Modern technology has imparted speed and convenience to perform financial transactions. This has also opened up Pandora’s box for regulators—the ability to squander away funds and perform illicit activities in seconds. To counter this, transaction monitoring has become mandatory and much needed practice for financial institutions and banks around the globe.    

As part of the anti-money laundering (AML) and counter finance processes, transaction monitoring is the framework for monitoring transactions of a customer on an ongoing basis to counter risks. The monitoring is done in real-time and verified against the customer’s information such as historical transactions, profile, and customer behavior among others. The analysis carried out helps the organization  safeguard itself from illicit transactions. Under the radar of regulators and customers, financial institutions today are under immense pressure to discharge their responsibilities carefully. Take for instance the case of British banks. The banks forked out a whopping USD 5 billion to tackle financial crime in the year 2019. 

SCOPE OF TRANSACTION MONITORING

Manually tracking each and every transaction and then vetting them with customer profiles is an arduous task, prone to human errors and slippages. However, advanced AML tools today are capable of keeping a close eye on customers based on their profiles. Statista projects the global cloud-based anti-money laundering software to reach nearly USD 230 million in revenue. 

The transactions that can fall under the ambit of screening are:

1. Fund deposits and withdrawals
2. Online or wire transfers among accounts
3. Extending credit lines
4. Other payments and transactions
5. ACH (automated clearing house) payments

PROCESS OF AML TRANSACTION MONITORING 

In most scenarios, the AML transaction monitoring solutions are used to know your customer’s (KYC) information and map it against the risk metrics. Banks and financial institutions, can then undertake the risk mitigation measures as per the circumstance to check and identify specific activities for investigation and possible disclosure. 

Regulatory sanctions and investigations often lead to a review of transaction monitoring systems in an organization. It is better to include a screening of sanctions and customer profiles and blacklists to avoid such incidents. 

Normally, the process for transactions monitoring includes:

1. Identification of a customer’s suspicious behavior and illicit activities
2. Performing checks to set alerts by mapping the customer’s transaction risk against regulatory norms
3. Establish a clear audit trail of CFT (countering the financing of terrorism) monitoring and investigations
4. Notify regulators or increase vigilance of the specific account to proactively spot any irregularities

Often, the risk factors may not be visible during the early stage like onboarding and periodic screenings but can be detected using an effective transaction monitoring system. 

FALLOUTS OF INSUFFICIENT TRANSACTION MONITORING

As stated above the fallouts of insufficient transaction monitoring can drain the financial institution of significant sums of money to settle regulatory fines, cause brand and reputation erosion and even lead to liquidation, in some cases. 

An example in this context can be Danske Bank—the Copenhagen-based bank, which fell prey to money laundering. The US Department of Justice initiated investigations into the money laundering case in which 200 billion euros of non-resident money was transacted through the Bank’s Estonian branch in 2018. Danske Bank finally acknowledged five years later that over USD 230 billion had passed from Russia and other Soviet states through its Estonian branch. As per reports, the huge corpus of money involved is equal to more than all the corporate profits in Russia in a year.

In 2022, the is revamping its financial crimes controls function and looking to recover from the scandal that engulfed almost the entire Nordic region. The number of fallouts in transaction reporting despite the stringent actions and rules is glaring. 

ADDITIONAL CHECKS FOR ALL-ROUND AML TRANSACTION MONITORING

There are a few other ways to ensure a robust anti-money laundering transaction monitoring programs such as:

• Crafting an effective AML transaction monitoring strategy with comprehensive reporting and checks in place
• Empowering your compliance teams with necessary tools, skills, and continuous learning by setting up a feedback look
• Making use of powerful AML automation solutions to map all transactions effectively
• Staying updated with the regulatory requirements and technological landscape
• Conducting reviews and audits on an ongoing basis
• Documenting the AML policies and risks to ensure robust risk assessment and mitigation in place

ARE THERE ANY BEST APPROACHES FOR TRANSACTION MONITORING

There are no best approaches, or one-size-fits-all in case of transaction monitoring. Though you can implement some good practices to meet your desired outcome. 

Some tenets of a good transaction monitoring process are: 

1. Robust framework 

The changing regulatory environment and technology landscape mandates that any transaction monitoring system should be capable of performing accurate checks incorporating voluminous information from various sources.

2. Risk awareness

Being aware of the risks is important to steer clear of the troubled waters. Financial institutions can ensure this by building a team that has a competent and well-trained staff. Those who can exercise good judgment in monitoring and spotting unusual transactions, illicit activities, and erratic behaviors.

3. Integrated processes

The transaction monitoring function cannot work in silos. Proper integration and collaboration with– frontline staff, compliance and support department, audit and risk department. Banks and financial institutions should therefore see that the transaction monitoring systems and frameworks are reinforced with anti-money laundering controls.

BENEFITS OF TRANSACTION MONITORING

Transaction monitoring is an integral process for financial institutions today. Detection of suspicious activities like illicit and large deposits or wire transfers, currency exchange, and money orders, among others, can be done proactively to identify financial crimes before they occur. 

Some benefits of transaction monitoring are:

1. Helps to respond effectively to AML, CFT, and KYC requirements of a company and avoid regulatory breaches. 
2. A transaction monitoring software can show red flags and trigger alarms for further investigation.
3. Help to fight financial crimes effectively with the adoption of a risk-based approach.
4. To understand the customer’s transaction pattern better and provide regular inputs for tailored offerings. 
5.  Adoption of transaction monitoring practices helps in better audits with improved data quality.  

There are numerous other benefits like enhanced efficiency, AML cost reduction, better client segmentation, and oversight, which make a strong case for AML transaction monitoring. 

CONCLUSION

It is essential for companies to have a clear perspective of the AML transaction monitoring framework and identity verification services suitable for the organization, and compatible with the existing systems and processes. Using a tool provides a more targeted approach by combining technology, knowledge of financial crime, and analytics expertise. New technologies like  Artificial Intelligence (AI), and Machine Learning (ML) packed with automation tools give a much needed boost to compliance and monitor transactions intelligently. 

FAQs

Is transaction monitoring a legal requirement?

Yes, transaction monitoring is a legal regulatory requirement for firms to fulfill and conduct their business in a compliant manner.

What is high-risk transaction monitoring?

It is basically the supervision of high-risk customers to protect your financial institution from suspicious activity and money laundering with timely alerts.

Is transaction monitoring part of KYC?

No, it is not. However, KYC information is used as a feed to understand customer behavior and effectively monitor suspicious activities by mapping all the information.