Criminals launder up to 5% of global GDP annually, according to UN estimates. With the global GDP for 2024 estimated at $106.17 trillion, this equates to as much as $5.31 trillion in illicit funds infiltrating financial systems. The rise of real-time digital payments has further complicated efforts to combat money laundering, creating new vulnerabilities while offering convenience to consumers and businesses.
Effective AML frameworks, guided by regulations like the FATF Recommendations, the U.S. Patriot Act, and the EU’s AML Directives, are key to fighting financial crime. Central to this is transaction monitoring, which helps detect suspicious activity and ensure compliance.
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 a key part of any anti-money laundering (AML) program. It helps financial institutions spot and prevent illegal activities like terrorist financing, human trafficking, corruption and arms trading.
Businesses that could be used for money laundering must follow strict regulations. Transaction monitoring plays a crucial role by offering the following benefits:
- Identifying suspicious activity: By analyzing transactions, financial institutions can detect unusual patterns that may signal money laundering or other financial crimes. If something looks out of the ordinary, it can be flagged for further review.
- Meeting compliance requirements: Regulators require financial institutions to have strong AML systems in place. Failing to monitor transactions properly can lead to hefty fines, reputational damage and financial losses.
- Preventing financial crime: Catching suspicious activity early allows institutions to act quickly and stop potential money laundering before it escalates. This not only protects the business but also helps safeguard the financial system as a whole.
- Managing risk: Transaction monitoring gives financial institutions valuable insights into customer behavior. Understanding these patterns helps businesses assess risks and make smarter decisions on resource allocation and risk management.
- Strengthening customer due diligence: Ongoing monitoring ensures businesses keep track of customer activity over time. This allows them to reassess risk levels and maintain compliance with evolving regulations.
- Building trust: A strong AML program reassures customers, regulators and the public that a financial institution is serious about preventing financial crime. This trust is essential for maintaining a good reputation and long-term success.
In short, transaction monitoring isn’t just about meeting regulations — it’s a critical tool for protecting businesses, customers and the entire financial system.
Learn how transaction monitoring works and discover the best software and tools to mitigate risks.
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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.
See how SEON’s machine learning and custom rules can help you catch suspicious activity in real time and strengthen AML compliance.
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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:
- Define the high-risk countries by creating a custom list titled “High-Risk Countries.”
- 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.
- 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.
Tools like SEON’s customer screening empower your anti-fraud and money laundering prevention strategy by providing access to hundreds of user identity and transaction data points. These insights enable the creation of customized, flexible, and powerful rules to mitigate AML risks while also protecting against other types of fraud.
Related Articles of Transaction Monitoring Across 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
AML transaction monitoring is a key part of national and international anti-money laundering strategy, which forces companies to examine transactions over a certain threshold. The transactions must be linked to someone’s identity to reduce the risk of money laundering.
A collaborative effort of international organizations, regulatory agencies, and national governments is responsible for establishing the standards and regulations that financial institutions and other entities must adhere to in order to combat money laundering and terrorist financing.
For banks and other fintech organizations, this works by having software monitor all transactions and flag all those that exceed a certain threshold ($3000) for investigation, which often involves manual review. Additionally, the system ascertains that customers are not on PEP or sanctions lists. If anything seems suspicious after this, the bank ought to file a suspicious activity report (SAR).
The main challenges in the transaction monitoring process include high false positives that waste time and resources, constantly evolving fraud tactics that outpace static systems, complex and changing regulations across regions, and the need to balance strong security with a smooth customer experience. To overcome these, businesses must adopt automated, adaptive, and risk-based approaches for more accurate and efficient monitoring.
Payment screening is the process of vetting payments against watchlists before they enter the system, aiming to stop suspicious activity upfront. Transaction monitoring, on the other hand, is the process of continuously analyzing payments for unusual patterns that could signal financial crimes.
Sources
- UNODC: Money Laundering portal
