Transaction monitoring is an important aspect of anti-money laundering (AML) and counter-terrorist financing (CTF) compliance as it involves continually monitoring customer’s transactions including withdrawals, deposits, and transfers to detect any suspicious activities which may be linked to financial crime such as money laundering and terrorist financing.

With the evolving changes in technology, it is very easy for financial crime to penetrate through the bank system and go unnoticed. When this happens, there is financial loss by both individuals and institutions ranging from small-scale fraud to large-scale cyberattacks, reputational damage for banks, increased regulatory scrutiny, and money laundering leading to economic instability, regulatory penalties and reputational damage for banks and increased crime rates as financial crimes often fund other illegal activities such as terrorism. Hence transaction monitoring for AML is mandated by the Bank Secrecy Act. 

As a result, banks, organizations, businesses and other financial institutions such as FinTechs have to employ traditional transaction monitoring solutions to monitor their customer’s transactions to fish out suspicious transactions from the legit ones.

This post will discuss transaction monitoring in a simple yet detailed way, explaining the concept of transaction monitoring in AML compliance, the 5 major challenges in transaction monitoring, and how automated transaction monitoring solutions can help overcome these challenges.

History of AML Transaction Monitoring System

Traditional Transaction monitoring systems for AML that have been used over the years include:

1. Risk-based Systems

a. Threshold-based alert systems that flag transactions that exceed pre-defined thresholds for amounts, frequency, or other parameters. For instance, a transaction exceeding $10,000 might trigger an alert.

b. Pattern-Based Alerts that identify suspicious patterns in transaction data like large inflows or outflows within a short period.

c. Customer Profile-Based Alerts that compare transactions to a customer’s historical behavior and flag deviations. For example, a customer whose transaction history has always been in small amounts suddenly makes large payments.
 

2. Manual Review Process 

a. Investigator workstations that provide analysts with tools to review flagged transactions, conduct investigations, and generate reports.

b. Case Management System Platforms that help to track investigations, assign tasks, and collaborate among teams.

No doubt, while all of these transaction monitoring for AML works and are essential for anti-money laundering (AML) compliance, however, they are limited in efficiency and accuracy. They come with challenges that sadly cannot stand with or combat the growing financial crime and fraudulent activities in the ever-changing complex financial environment.

What are the 5 Major Challenges in AML Transaction Monitoring?

1 Data Quality Challenges in Transaction Monitoring:

Industries like the gambling industry are known to have large volumes of transactions that can overwhelm the systems, thus making it difficult to identify or detect suspicious transactions. Also, incorporating data from many sources can be very complex and time-consuming. Of importance is the data quality. Inaccurate or incomplete data can hinder effective analysis of transaction details leading to false positives or negatives.

How to Solve Data Challenges in Transaction Monitoring

Employing AI in AML transaction monitoring can help overcome this transaction monitoring challenge, however, businesses and organizations must provide accurate and consistent data quality from a single source. The data must also be carefully collected and validated to minimize inaccuracy.

As a business, you can enhance the quality and usability using AI-powered transaction monitoring solutions. This ensures that the insights derived from complex algorithms are transparent and understandable to users.

2. False Positive in Transaction Monitoring

What does a false positive in transaction monitoring mean? This means that legitimate or genuine transactions are mistakenly flagged as suspicious or illegitimate transactions.

Not only can false positives consume valuable resources and time allowing you to focus and investigate harmless transactions, but it can also destroy customer relationships. Your customers see you as incompetent as a bank or organization and take their business elsewhere. 

How to Solve False Positive Issues in Transaction Monitoring

False positives can be reduced through risk scoring. Risk scoring algorithms can help determine the level of risk associated with a transaction. Advanced risk scoring algorithms analyze the data transactions more accurately thereby distinguishing between legitimate and illegitimate transactions.

3. Constant Changes or Variations in Regulations

Transaction monitoring AML/CFT regulations are subject to constant changes and variations, thereby making it difficult to stay compliant. 

How to Solve the Challenge of Constant Regulatory Changes in Transaction Monitoring

First, banks, businesses or organizations must understand the basic AML regulations required of them and ensure compliance with these regulations. Next, staying updated on AML regulatory requirements by building strong relationships with regulatory bodies through efficient transaction monitoring solutions can help resolve this. 

Youverify helps businesses stay compliant through their elaborate transaction monitoring solution.
 

4. Increasing Technology Aided Financial Crimes

Advancements in technology have negatively impacted financial criminals in bypassing detection. Financial crimes keep increasing in scale and to tackle this, businesses and financial organizations need to stay ahead of these evolving crimes using technology-powered transaction monitoring and screening solutions.

5. Operational Challenges in Transaction Monitoring

The COVID-19 pandemic has made fintech companies and neobanks gain popularity and growth over the past few years. Consequently, concerns have been raised about inadequate AML compliance in Fintechs and Neobanks, as financial criminals may take advantage of these banks. This has however led to regulatory bodies coming up with strict AML rules and fines for defaulting fintechs and banks, ensuring that they comply with AML  rules.
 

How to Monitor Transactions in AML: How Does Transaction Monitoring Work?

Having known the challenges in transaction monitoring and how to overcome them, we can now answer the question, how does transaction monitoring work?

Transaction monitoring works by identifying discrepancies or any slight deviation from a customer’s transactional behavior or pattern; and then flagging this discrepancy or deviation as a suspicious transaction. Simply put, it involves looking for red flags in transactions.

The use of automated systems for transaction monitoring helps to ensure that transactions are accurately monitored and analyzed. It usually involves conducting a risk assessment of each customer based on their known profile such as business nature, location, and transactional history.

Overcoming Transaction Monitoring Challenges with Youverify TM Solution

You can automate your transaction monitoring and screening with one solution- Youverify’s flagship product. With this transaction monitoring solution, you can identify and block high-risk transactions with advanced AI and machine learning algorithms before they get approved. Want to know how to go about this? Schedule a FREE demo with our transaction monitoring expert today.