What is AML Transaction Monitoring? How can it Help Businesses Combat Financial Crimes?

• March 21, 2023
• Rachna Pandya

Transaction Monitoring is an end-to-end process that scrutinizes client transactions and matches the logic against their history and onboarding profile. In this blog, we will learn the fundamentals of AML Transaction Monitoring and explore why transaction tracking is important to mitigate money laundering risks.

What is AML Transaction Monitoring

AML Transaction Monitoring uses technologies such as pattern recognition and anomaly detection to analyze large amounts of data to identify potential money laundering activities. The system can monitor both internal and external transactions, allowing organizations to reduce their risk of exposure to financial crimes effectively.  

Transaction Monitoring is critical for Anti-Money Laundering (AML) compliance to level security against potential contactless merchant payment risks in fiat and cryptocurrencies. As part of AML and Counter Financing Terrorism (CFT) regulations, organizations must track and report wary transactions to reduce money laundering and terrorism crimes.

How does AML analytics function

The analytics in the system is based on automated software that utilizes customer profiles and risk vectors to detect transactions that are outliers in comparison to standard customer behaviors and alerts the authorities to investigate further. In other words, AML Transaction Monitoring can detect potential risks by monitoring transactions such as transfers, incoming payments, and wire transfers. As a result, the system helps organizations increase their control over suspicious activities and deepens their understanding of what constitutes normal, low-risk customer behavior.

Transaction Monitoring System (TMS) sequential events: –

• it uses preset or rule-based models to evaluate transactions against business rules,
• raising the alarm when a transaction breaks a particular rule,
• a TMS analyst then reviews the pattern and creates a Suspicious Transaction Report (STR) or Suspicious Activity Report (SAR),
• which is sent to the relevant Financial Intelligence Unit (FIU) to determine if a potential risk is associated.

Suspicious activities and red-flag alerts

Red flags generation using AI Machine Learning (ML) algorithms includes any unscrupulous activity that does not fit certain preset scenarios or rule-based datasets. Such activities may include irregular money flows, abnormally high profits, and payments to foreign entities. A TMS tool monitors and detects these behaviors in real-time while providing solutions to meet compliance requirements like screening against sanction lists, tourist blacklists, and other watchlist data sources.

Potential red flags of Transaction Monitoring one should watch out for include;

• payments exceeding preset thresholds within the system,

• frequent transactions in a certain period,

• a sudden increase or decrease in payment exchanges,

• engagement with individuals, organizations, and countries mentioned in government sanction lists,

• transactions that appear inconsistent with client profile information and history,  

• client exposed as high-risk on the current adverse media updates,

• business dealings with riskier countries and transactions involving Political Exposed Persons (PEPs).

Any anomalies found in transaction activities are then flagged as possible red flags that need further examination. To ensure accuracy, false positives are filtered out from the identified patterns before making final decisions.

Real-time client AML Transaction Monitoring and screening

AI Transaction Monitoring uses powerful machine learning algorithms to quickly parse bulk data, making it possible to identify suspicious patterns and potential criminal activity in real-time.

Financial and obligated institutions process the data for crucial decision-making and increase customer protection efforts. Real-time transactional data is used to identify, assess, and monitor customers; data researchers use the live data experience to build future scenario models.

Businesses must comply with AML regulations to avoid penalties and protect their customers.

Real-time AML Monitoring helps businesses detect and deter money laundering by

• monitoring live customer transactions
• detecting anomalies, and
• flagging suspicious activities

Merchant monitoring regulatory obligations

Transaction Monitoring, also used interchangeably as Client Screening, is essential for businesses to perform when meeting national and international regulations. According to the Financial Action Task Force (FATF) Recommendation 20^th, it’s important for Suspicious Activity Reports (SAR) and Suspicious Transaction Reports (STR) to be filed immediately with FIUs and other financial authorities.

Failing an instant SAR filing can put AML-CFT safeguards of the enterprise and state at risk. Therefore, businesses must swiftly report any learned untoward transactional incidents, no matter the size of the transaction, to prevent money laundering or terrorism financing. This is addressed in Recommendation IX, number IV of the FATF CFT rule, which makes it mandatory for companies in the financial sector to report any apprehensive transactions related to terrorism.

Most countries and regulatory organizations like FinCEN (US), FINTRAC (CA), and FCA (UK) have mandated companies to implement AML Transaction Monitoring. This allows for a predetermined set of rules and criteria that must be followed to monitor any suspicious activities. By implementing the necessary tools and processes, organizations can ensure compliance with the various regulations and laws designed to prevent financial crimes and other fraudulent activities.

Common deployment challenges

Implementing AML Transaction Monitoring can be a challenging process for organizations. It requires significant time, resources, and expertise to monitor financial transactions accurately, define effective rules and criteria, and identify suspicious activity. Additionally, dealing with the complexity of data from numerous external sources can take time to manage.

However, with a comprehensive understanding of the regulations and knowing how to configure a TMS properly, companies could be safe from not meeting their obligations or exposing themselves to regulatory fines.

What does the future hold for AML Transaction Monitoring

Transaction Monitoring Software is an imperative tool for financial and non-financial institutions dealing with non-face-to-face client onboarding and payments. It provides insights and analysis into cash payments, deposits, withdrawals, ACH payments, wire transfers, currency exchange, credit extensions, UPI modes, and national/international payments. In addition, with the rise in Virtual Assets Service Providers (VASPs), Transaction Monitoring Software also monitors suspicious activity involving both fiat and cryptocurrency transactions.

The future of AML Transaction Monitoring is promising, given that the technology continues to evolve and become more sophisticated. For example, companies can now use Artificial Intelligence (AI) and Machine Learning (ML) algorithms to process data quickly and accurately identify potential money laundering activities. In addition, advances in cloud computing are helping to make AML Transaction Monitoring faster and more efficient. As a result, businesses can reduce their risk of financial crime while staying compliant with increasingly stringent anti-money laundering regulations.