In 2022, money laundering-related penalties worldwide reached $22 billion across nearly 3,500 total reported AML events. It was an unprecedented year for AML-related scandals and fines, showing that not only are money laundering events becoming more prevalent, but also that many institutions aren’t equipped to handle them.
Transaction monitoring forms a core function of anti-money laundering (AML) activities. In fact, any financial institutions that are subject to AML regulations are required to implement transaction monitoring programs. This group includes institutions you would expect, such as banks and credit unions, but also insurance companies, gaming companies, real estate agents, and cryptocurrency exchanges.
Today’s best-in-class AML transaction monitoring tools use artificial intelligence to reduce fraud while saving time and money. Here’s what you need to know about transaction monitoring and why it forms a crucial part of AML.
What is transaction monitoring?
Transaction monitoring is the process of tracking and analyzing financial transactions to identify suspicious activity that could indicate money laundering, terrorist financing, or other financial crimes.
It is essential for financial institutions to comply with regulations and avoid fines. Financial institutions are required by AML/KYC laws to monitor transactions for signs of money laundering, terrorist financing, and other illegal activities. If a financial institution fails to detect and report suspicious activity, it can face significant fines.
Transaction monitoring in AML
The Bank Secrecy Act (BSA) and the PATRIOT Act are two of the strongest pieces of legislation that govern AML in the United States. These laws require financial institutions to implement a variety of measures—including transaction monitoring— to prevent money laundering.
The BSA was originally passed in 1970 and requires financial institutions to:
- Identify and verify the identity of their customers.
- Keep records of all financial transactions.
- Report suspicious activity to the Financial Crimes Enforcement Network (FinCEN).
The PATRIOT Act expands on the BSA by requiring financial institutions to:
- Implement a risk-based approach to AML compliance.
- Develop and implement a written AML compliance program.
- Provide training to employees on AML compliance.
- Conduct independent audits of their AML compliance program.
[Read more: KYC / AML Laws]
The specific requirements for transaction monitoring vary depending on the type of financial institution and the jurisdiction in which it operates. However, all transaction monitoring programs must be designed to identify and report suspicious activity.
How does transaction monitoring work?
On a high level, transaction monitoring starts with a risk assessment during which the client—the bank, real estate company, or fintech startup—determines the level of risk associated with the products or services it offers to its customers. This risk assessment should also account for current and historical factors, such as industry and location.
Based on this risk assessment, the client can then create AML policies and procedures for the institution. These include risk rules—those that determine what suspicious activity is for different customers and products. For instance, a rule that limits the number of transactions a customer makes over a duration of 30 minutes can help flag suspicious behavior like several ATM withdrawals in a short time.
Transaction Monitoring Techniques
Once the rules are established, transaction monitoring uses a variety of techniques to identify suspicious activity, including the following:
Data mining
Transaction monitoring systems use data mining techniques to identify patterns and anomalies in financial transactions. This can help to identify transactions that are outside of the norm and may be indicative of suspicious activity.
Rule-based filtering
As outlined above, transaction monitoring systems can create rules that define what constitutes suspicious activity. Transactions that match these rules are flagged for further review.
Human review
An IT or cybersecurity expert is often needed to confirm that a transaction is truly suspicious.
It’s becoming more common to integrate machine learning and artificial intelligence into transaction monitoring to help with these tasks. These technologies can speed up and scale the process, sharing real-time risk scores and alerts for every transaction.
What are the benefits of transaction monitoring?
The immediate benefit of transaction monitoring is that it can help to identify suspicious activity that could indicate money laundering, terrorist financing, or other financial crimes. This includes activities such as:
- Large or unusual transactions
- Transactions that are inconsistent with a customer’s known business
- Transactions that are sent to or received from high-risk countries or individuals
- Transactions that are associated with known criminal activity
While some of these activities are easy to spot, others are more difficult and can be easy to miss. Transaction monitoring tools help reduce the labor and time spent looking for potential instances of fraud. A tool like Transaction AI is shown to achieve four times more accurate fraud detection, achieve a 53% reduction in the number of fraud case investigations, and deliver a 66% decrease in time spent investigating fraud.
Transaction monitoring also helps institutions maintain trust with consumers. It can help to prevent financial institutions from being used to facilitate criminal activity. By monitoring transactions for unusual or suspicious activity, financial institutions can help to protect their customers from being scammed.
Finally, transaction monitoring can help to comply with regulations. By implementing a comprehensive transaction monitoring program, financial institutions can demonstrate to regulators that they are taking steps to prevent financial crimes.
How can Fraud.net help?
Fraud.net’s Transaction AI harnesses your customer data with billions of insights from unique data sources available only to Fraud.net users so businesses can better detect anomalies and manage fraud. The platform shares real-time risk scores and alerts for every transaction, enabling your team to stop fraud and/or money laundering before it occurs.
Transaction AI is part of a suite of several AI-powered risk intelligence solutions designed for each stage of the transaction lifecycle. Use it alone or combine it with others for customized or complete protection.
Learn more about Fraud.net’s solutions by signing up for a demo today.