What is AML transaction monitoring?

In the past few years, transaction monitoring has become a vital part of anti-money laundering (AML) compliance. This is because the ability to spot a suspicious transaction could prevent thousands or millions of dollars from being laundered by criminals through your business. It can also prevent your organization from being caught up in a money laundering scandal. 

AML transaction monitoring refers to the process of monitoring customer transactions. In this process, both historical and current customer interactions are monitored so that a complete picture of customer activity can be built. Although this process can be done manually, it is incredibly time consuming. For this reason, most financial institutions use software.

AML transaction monitoring procedures and rules

Financial regulators around the world are starting to make transaction monitoring a regulatory requirement. The process was introduced in the 4th money laundering directive in Europe in 2015, but it has since been expanded upon and modernized in the Anti-Money Laundering Act (2020).

The actual process of monitoring transactions depends on the services your business provides. However, generally speaking, in order to monitor financial transactions, a company will create a rules-based system that’s based on their needs. If a suspicious transaction then triggers any of these rules, an alarm will be sounded by the transaction monitoring software (or a person monitoring a transaction if the process is done manually). At this point, the transaction is stopped so that it can be reviewed by a company’s compliance or risk department.

If the person reviewing the transaction believes that it can be linked to crime, then it is reported to regulators in the form of a Suspicious Activity Report (SAR).

AML transaction monitoring thresholds

As a financial services company, there are many local and global AML regulations that your company must comply with. 

However, the Financial Action Task Force (FATF) sets the standards that are tied to AML and CTF procedures. It recognizes the following factors as determinants of the proper extent of AML/CFT controls:

• The diversity of a financial institution’s operations
• The nature, scale, and complexity of the business
• The extent to which the financial institution is dealing through intermediaries, third parties, or non-face-to-face access (if applicable)
• The distribution channels that are used
• The volume and size of transactions
• The degree of risk that is associated with each area of the financial institution’s operation
• The customer, product, and activity profiles of the financial institution

AML transaction monitoring and KYC

The AML transaction monitoring process ensures that you know exactly who your customers are. It also ensures that you do not fall foul of the latest AML and KYC requirements.

Transaction monitoring systems have been common in financial institutions for the past several years, and they provide risk-based AML transaction monitoring.

A transaction monitoring system uses information gained from the KYC processes of your business to account for client risk. These risk measures are then used as part of the rules that help identify certain account-based activities for investigation and possible disclosure.

Benefits of AML transaction monitoring

Put simply, AML transaction monitoring is an effective way for financial institutions to combat crime and comply with AML/CFT regulations. It can be used to detect:

• Money laundering
• Terrorist financing
• Fraud
• Drug trafficking
• Bribery
• Corruption
• Identity theft

In addition to this, across the past couple of years, regulators from across the globe have imposed large fines on financial institutions for failing to adequately monitor financial transactions, with some of these fines being in excess of £200 million. 

These fines accurately illustrate the importance of adequate transaction monitoring. They also show how important it is that your business can provide evidence that it’s complying with legal and regulatory requirements.

AML transaction monitoring best practices

When it comes to the process of monitoring transactions, the legislation is not prescriptive. This means individual financial institutions can choose an approach that suits them.

Although some small financial firms choose to use a manual approach where employees check transactions, this can be incredibly resource intensive. It may also mean your business is unable to adapt to emerging risks or changes in the regulatory landscape. 

As a result, many firms instead choose to adopt an automated approach. Although automated tools can be expensive, they are noticeably less resource intensive and are highly accurate. 

That said, many effective transaction monitoring approaches that employ an automated approach do still rely on some level of human intervention. This ensures that:

• The scope of transaction monitoring is monitored
• The systems and the rules in operation are monitored and updated
• The potential issues identified are reviewed regularly
• Legal and regulatory requirements are fulfilled
• Reporting is provided to senior managers and regulators
• Assurance activities that are proportionate to the scale and complexity of the organization are undertaken regularly

As a result, each firm must identify and document the correct transaction monitoring approach for their business. Although the right approach for you will depend on transaction volumes, time pressures, and regulatory requirements, it’s important to note that culture, education, and training are all keys to preventing financial crime.

AML transaction monitoring red flags and what to avoid

The AML red flags your financial institution will need to look for will largely depend on the nature of your business. However, red flag indicators can include:

Client behavior

When assessing your client, certain behaviors or requests may prompt you to make further enquiries. These include:

• The client has changed advisors several times on short notice without providing a reason
• The client has chosen an advisor who is geographically distant from the transaction
• The client is asking for shortcuts or an expedited process
• The client is vague about other parties in the transaction or who has legal ownership of something
• The client has known convictions for crimes related to money laundering
• The client seems to lack knowledge about the subject

Source of the finance

On occasion, the source of the client’s funds may raise questions in your mind. Red flags include:

• A significant amount of funding is coming from a private party without a connection to the client
• The amount of funding provided by someone is inconsistent with their socio-economic profile
• Finance is provided by a lender and there is no economic justification for this
• A large sum of money is being provided in cash

The nature of the business

Finally, if you’re dealing with a business, then the way this business is structured may also present concerns. You should be concerned if:

• The ownership structure of the business is overly complicated
• The business transaction involves countries where there is a high risk of money laundering
• You have reason to believe false or suspicious documents are being used to back the transaction

This list is by no means exhaustive, and the exact red flags you’ll need to look for will depend on the nature of your business. You should also be aware that one red flag may indicate that you need to make further enquiries with your client or customer. If several red flags are present together, without reasonable explanation, then this may indicate a larger issue. 

AML transaction monitoring tools and software

Transaction monitoring tools and pieces of software are the most effective way of helping institutions fight financial crime and comply with AML and CFT regulations. They can also provide evidence to regulators, auditors, and other stakeholders about your company’s efforts to stop financial crime.

By automating your processes, you’ll be able to show regulators that you take financial crime seriously. 

With our solution, you’ll be able to verify new customers in six seconds. You’ll also be able to verify 95% of your customers on the very first try. This means there’s no reason to leave your honest customers waiting.

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