Transaction monitoring in banks: What you need to know

In an evolving financial landscape, new criminal methodologies and regulatory obligations change firms’ compliance obligations regularly. In order to detect and prevent money laundering in that regulatory environment, banks must work to understand their customers’ financial activity by implementing a suitable transaction monitoring solution as part of their wider AML/CFT framework.

What is transaction monitoring in banks?

Transaction monitoring is the means by which a bank monitors its customers’ financial activity for signs of money laundering, terrorism financing, and other financial crimes. The transaction monitoring process should allow banks to understand who their customers are doing business with and reveal important details about the transactions themselves: how much money is involved, where it is being sent, and so on. Transaction monitoring in banks is an important part of an AML/CFT framework because it enables them to keep pace with criminal methodologies and ensure that they are fulfilling their risk-based compliance obligations. 

With that in mind, to implement effective transaction monitoring, banks should seek to capture the following data: 

• The volume of money involved in customer transactions
• The frequency with which customers engage in transactions
• The senders and recipients of transactions funds
• The geographical origin and destination of funds involved in a transaction
• The correlation between a transaction and a customer’s expected financial behaviour
• The involvement of high-risk factors in a transaction, such as sanctions targets, politically exposed persons, or ‘black list’ jurisdictions.

Monitoring challenges

Transaction monitoring is an AML/CFT requirement in jurisdictions around the world and should be a compliance priority. Since the transaction monitoring process involves the collection and analysis of vast amounts of customer and transaction data it also presents a range of compliance challenges, which banks must account for when implementing their solution. 

Key transaction monitoring in banking challenges include:

• Anonymity: Online transactions allow a degree of anonymity that in-person transactions do not. That facility may enable high risk customers to conceal their identities when conducting transactions. 
• Speed: Money launderers may be able to exploit the speed of online banking services to move money between accounts and across different jurisdictions quickly – while evading AML/CFT controls put in place to alert banks to criminal activity.

• Scale: Banks need a transaction monitoring solution that can scale with their business. A reliance on manual monitoring and approval processes can become expensive, slowing down operations and frustrating the customer experience.

• Structuring: In order to avoid regulatory reporting thresholds, money launderers may seek to transact in specific amounts of money – just below those designated limits. Money launderers may use structured transactions across multiple different accounts to further conceal their criminal strategy. 
• Mules: Some criminals may attempt to have third-parties, or ‘money mules’, conduct transactions on their behalf in order to avoid AML/CFT measures and controls. Money mules may be vulnerable members of society that have been incentivized or coerced by criminal actors.

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Risk-based approach to transaction monitoring in banks

• Following Financial Action Task Force (FATF) recommendations, banks should take a risk-based approach to transaction monitoring compliance. In practice, risk-based transaction monitoring requires banks to perform assessments on individual customers, and then deploy a compliance response proportionate to the risk they present. Transactions involving higher risk customers may be subject to more stringent transaction monitoring measures while lower risk customers may require simpler measures. Risk-based transaction monitoring depends on banks being able to build accurate risk profiles for their customers. Accordingly, a transaction monitoring solution should be supported by the following measures and controls: 
  • Customer due diligence: In order to gauge transactions against risk profiles, banks should establish and verify their customers’ identities by conducting appropriate due diligence. The customer due diligence (CDD) process requires banks to collect identifying information including names, addresses, dates of birth, and company incorporation details. 
  • Sanctions screening: Banks should use sanctions and watchlist screening software to ensure they are not facilitating transactions with sanctioned persons or entities.
  • PEP screening: Politically exposed persons (PEPs), including elected and government officials, pose a higher AML/CFT risk. Accordingly, banks should screen their customers to check their PEP status. 
  • Adverse media monitoring: The risk level associated with a particular transaction may also be informed by a customer’s involvement in adverse media stories. Banks should monitor for adverse media stories from screen, print, and online sources, to ensure their risk profiles remain as accurate as possible. 

Transaction monitoring software

The amount of data involved in the transaction monitoring process, means that manual transaction monitoring is unfeasible and, given the likelihood of human error, risky. With that in mind, banks should seek to implement a suitable software platform to facilitate their transaction monitoring process. 

Automated monitoring tools not only add speed, efficiency, and accuracy to transaction monitoring in banks, but bring added smart technology benefits including risk categorization and prioritization algorithms designed to aid the remediation of money laundering alerts. Transaction monitoring software may also incorporate machine learning systems that are capable of spotting suspicious activity based on customers’ past behavior, and of adapting quickly to new criminal methodologies.

Further reading:

• Our AML Guide for Digital Banks explores how digital-first banks can build an effective AML compliance program