What Is Transaction Monitoring in AML & How to Set It Up

Criminals launder up to five percent of global GDP annually, about $2 trillion. Real-time digital payments have increased high-risk transactions, offering new opportunities for money laundering despite their benefits for consumers and businesses.

As financial transactions become faster, identifying illicit activities becomes more complex. This highlights the need for effective Anti-Money Laundering (AML) monitoring to detect suspicious patterns and ensure compliance with regulations like the FATF, the Patriot Act, and the EU’s Anti-Money Laundering Directives.

What Is Transaction Monitoring in AML?

Transaction monitoring refers to the process of overseeing the swift transaction capabilities customers expect, like the ability to transfer, deposit and withdraw money, in order to ensure that they are protected. The process involves compiling and analyzing historical and current customer data, allowing organizations to identify suspicious behavior that could indicate money laundering or financial crime.

Many financial institutions use transaction monitoring software to automatically keep pace with transaction volume. Monitoring flagged accounts surpassing risk thresholds are then routed to risk and compliance teams to explore further, identify potential issues and prevent unwitting involvement in money laundering. 

The most state-of-the-art AML transaction monitoring systems combine technology, data and human insight. While machine learning analyzes hundreds of millions of data points, performing monotonous, repetitive tasks to detect patterns, the human mind can make decisions based on the patterns identified. When enhanced with proprietary data and consolidated in one place with an intuitive user interface, managing data and making decisions is significantly more efficient and effective, allowing for quicker responses to potential threats and a streamlined approach to compliance.

Why Is AML Transaction Monitoring Important?

Transaction monitoring is one of the most effective tools in anti-money laundering programs because it plays a vital role in identifying and preventing potentially illicit activities such as terrorist financing, arms trading, human trafficking and corruption.

Any business at risk of facilitating money laundering must ensure it complies with the legal requirements imposed by authorities. Transaction monitoring in AML works to provide the following benefits:

• Detection of suspicious activities: Transaction monitoring enables financial institutions to detect unusual or suspicious activities that could indicate money laundering, terrorist financing or other financial crimes. By analyzing transaction patterns and behaviors that deviate from a customer’s typical activity, institutions can identify potential risks and flag them for further investigation.
• Compliance with regulatory requirements: Financial institutions are required by law to have robust AML programs; transaction monitoring is critical to these requirements. Failure to effectively monitor transactions can result in significant legal penalties, reputational damage and financial losses.
• Prevention of financial crime: By identifying suspicious activities early, transaction monitoring allows institutions to take timely action to prevent potential money laundering or terrorist financing. This protects the institution and contributes to the broader fight against financial crime and the integrity of the greater economic system.
• Risk management: Transaction monitoring helps financial institutions manage risks by providing insights into customer behavior and identifying areas of potential exposure. This information can inform risk management strategies and help institutions allocate resources more effectively.
• Customer due diligence: Ongoing transaction monitoring is essential to customer due diligence. It ensures that institutions continuously understand their customers’ activities and can reassess the risk levels associated with different customers over time.
• Maintaining trust: By demonstrating a commitment to preventing money laundering and complying with AML regulations, financial institutions can support and enhance trust with customers, regulators and the public. This trust is fundamental to the stability and reputation of the financial sector.

AML Transaction Monitoring System

To confront challenges and capture both functionality and efficiency in AML transaction monitoring, it is important to understand the regulatory backdrop and the universal objectives that guide these processes.

Key features that drive functionality and efficiency in AML transaction monitoring typically include: 

• Real-time monitoring: Through advanced digital footprinting and proprietary device intelligence data coupled with AML screening for sanctions, crime, politically exposed persons and financial watchlists, companies can obtain a comprehensive picture of new and existing customers all in one place to stay ahead of AML regulations and reduce investigation times. 
• Custom rules engine: While AML regulations are clear cut, flexibility in transaction monitoring enables entities to create customized rules based on risk tolerance that can reduce false positives while ensuring accuracy, safety and security. 
• Proprietary data: Proprietary data in AML transaction monitoring represents unique, in-house collected or generated data that provides deeper insights into customer behavior and risk profiles, including historical transaction patterns, behavioral analytics and risk scoring models. 
• API integrations: By seamlessly facilitating data exchange and interoperability between systems and applications, API integrations streamline data flows and automate process to reduce manual efforts, minimize errors and speed up response times. Integrations can include connections with external databases for sanctions, watchlists and politically exposed person (PEP) lists.  
• Regulatory reporting: From initial alert to final reporting, document and collaborate seamlessly during case management with cross-check capabilities. 
• Fraud and AML data together: Reduce investigation timelines and streamline case management across your fraud and risk teams by connecting data that unlocks greater operational efficiencies and more time to build strategic, data-driven risk management strategies to combat money laundering.

How to Set Up Transaction Monitoring in AML

To set up AML transaction monitoring, the first step is to customize rules based on the regulatory requirement(s) you must adhere to. Note that there may be various regulatory agencies with different requirements you must adjust for and accommodate.

Next, you will want to adjust customization based on your company’s unique business. For example, setting up rules that monitor for:

• Large transactions: Monitoring transactions above a certain threshold to identify potentially high-risk activity.
• Unusual patterns: Detecting abnormal transaction patterns or behaviors that deviate from a customer’s normal activity.
• Structuring or smurfing: Identifying multiple smaller transactions designed to evade reporting thresholds.
• Rapid movement of funds: Detecting swift movement or velocity of funds between accounts or if outflows rise over a certain amount may suggest illicit activity.
• High-risk countries: Flagging transactions involving countries known for money laundering or terrorism financing.
• Politically Exposed Persons (PEPs): Monitoring transactions involving individuals with political influence to prevent corruption or bribery.
• Sanctions Screening: Checking transactions against government-issued sanctions lists to identify dealings with restricted entities.

Setting Up AML Transaction Thresholds

You’ll need to set up a rule to ensure that transactions over a certain threshold are logged and monitored.

To do so, use the “compare” parameter and the operator “greater or equal to.” The demonstration value is $3,000, the most recent US banking AML requirement. Every time this setting is met, the rule will trigger. Note that you can manage currencies in settings and change each currency at the rule level. 

Setting Up a Rule for High-Risk Countries

To set up a rule using high-risk countries, you’ll want to:

1. Define the high-risk countries by creating a custom list titled “High-Risk Countries.” 
2. Examine IP addresses and complete data for the IP country, adding those found on the international sanctions lists. Notice that SEON uses the country code.
3. Create your rule and title it “IP country is AML HIGH RISK.”

This rule checks if a user’s IP is on the list of high-risk countries and, if so, will create a REVIEW alert that you can choose to automatically APPROVE or DECLINE the user’s transaction based on your risk appetite.

If it’s sent for manual review, your AML compliance team can check the transaction details for more information – or log the details to submit a Suspicious Activity Report (SAR). 

 

Setting Up Velocity Rules for Suspicious Transaction Behavior

Slightly more complex, velocity rules are designed to alert your team when a user suddenly increases their normal transaction volumes.

The velocity rule showcased here: 

• Aggregates the amount of all transactions over 24 hours
• Looks for an increase in spending over 200%

Here is what it looks like on the dashboard when turning on the rule, setting parameters and once the rule has been triggered.

 

Transaction Monitoring: Key Takeaways

In AML, transaction monitoring is essential for safeguarding financial institutions and companies from being exploited for money laundering, ensuring compliance with regulations, and maintaining financial integrity. As fraudsters increasingly leverage advanced technologies and real-time digital payments, proactive oversight through transaction monitoring becomes crucial in detecting and preventing illicit activities. 

Utilizing tools like SEON can empower your anti-fraud and money laundering prevention strategy, offering access to hundreds of user identity and transaction data points. This enables the creation of customized, flexible, and powerful rules, allowing you to effectively mitigate AML risks while simultaneously protecting against other types of fraud.

Related Articles for TM – Industries

• Digital Banking: Transaction Monitoring in Digital Banking
• iGaming: Transaction Monitoring in iGaming
• Retail: Transaction Monitoring in Online Retail
• Forex: Transaction Monitoring in Forex Trading
• Crypto: Transaction Monitoring in the Crypto Space

Frequently Asked Questions

Sources

• UNODC: Money Laundering portal