9 best practices for an efficient transaction monitoring system

Transaction monitoring can be a challenging compliance obligation: firms must collect and analyze large amounts of customer data to spot potential money laundering activities promptly and accurately. In practice, transaction monitoring involves scrutinizing customer accounts for a range of indicators, including:

• Unusual transaction frequency or volume.
• Transactions with high-risk countries.
• Transactions with sanctioned customers and countries.
• Transactions with politically exposed persons (PEPs).
• Adverse media stories involving customers.

Best practices might seem straightforward and obvious on paper. However, implementing them within an organization’s frameworks and risk appetite can be challenging.

Adding to this challenge is the fact that firms must also maintain transaction monitoring standards on an ongoing basis, managing changing levels of customer risk, emerging criminal threats, and the introduction of new anti-money laundering and combating the financing of terrorism (AML/CFT) legislation.

To avoid costly compliance penalties and the related reputational damage these cause, firms must be familiar with a range of transaction monitoring best practices.

9 transaction monitoring best practices

1. Use AI to automate parts of the transaction monitoring process

Thanks to advancements in automated monitoring software, routine work can now be automated – enabling firms to operate at scale, freeing up analyst and expert time to tackle the highest-risk cases and more strategic projects. In its 2021 report, the Financial Action Task Force (FATF) highlighted the importance of machine learning and automation in “improving data quality and analysis” and “detecting anomalies and outliers.”

Real-time monitoring, driven by intelligent automation, can ensure swift responses to emerging threats, allowing for proactive risk mitigation. Integrating advanced anomaly detection enhances monitoring efficiency and reduces the burden on compliance teams.  

For example, Holvi, a firm offering bank accounts for small businesses, sole traders, and freelancers, partnered with ComplyAdvantage to deploy AI-driven risk detection. The partnership enabled Holvi to prioritize the highest-risk transaction monitoring alerts, improving the team’s efficiency and productivity in day-to-day operations.

2. Implement an effective CDD and KYC process

A smooth onboarding process is crucial for any firm in terms of customer satisfaction levels and ensuring they have the information they need from customers before conducting business. Robust and detailed customer due diligence (CDD) and know-your-customer (KYC) processes are essential here. The more effective the CDD, the better able firms will be to use that information to set transaction monitoring parameters, spot discrepancies in account activity, and, ultimately, determine whether a customer is engaged in potential money laundering activity.

This is particularly vital in sectors such as FinTech, where firms often see time-to-market with new products as a key indicator of success. Rushing this process can lead to a lowering of the threshold needed to access a fresh product, which can heighten compliance teams’ workloads as they audit and remove bad actors retroactively. 

3. Adopt a risk-based approach to transaction monitoring

Adopting a risk-based approach to transaction monitoring is one of the cornerstones of an AML strategy for any firm, and transaction monitoring software can play a big part in this. Understanding and categorizing higher- and lower-risk customers is a key challenge, particularly in the context of the jurisdictions in which they operate and the products they offer.

Certain products and markets may have a greater number of high-risk customers, and best practice suggests that higher-risk customer groups should be subject to increased monitoring measures. In contrast, lower-risk customers should be subject to more simplified measures.

Transaction monitoring software can help by integrating innovative technology to organize customers, grouping them by the level of risk they present. This allows compliance teams to become more efficient, freeing up their time for other essential tasks.

Similarly, transaction monitoring software can help firms manage their overall regulatory priorities, setting their AML/CFT response to reflect the needs of their local compliance environment and making transaction monitoring software a best practice. 

4. Develop transaction profiles

In addition to developing accurate risk profiles, firms should build and maintain transaction profiles to better spot unusual transactions when they occur. 

Transaction profiles should be specific, including a comprehensive set of details, such as:

• Payment limits.
• Payment frequencies.
• Expected items.
• Amount descriptions

FIs can use these profiles to establish money laundering risk by identifying activity with high-risk countries, PEPs, or sanctioned individuals. Transaction profiles should be linked to customer files and, where possible, supported by relevant documentation.

Firms should periodically test the transaction profiles within their AML/CFT infrastructure by running alerts through their system. Such quality assurance testing helps to identify weaknesses in transaction monitoring systems and enhances the ability of AML teams to use transaction profiles effectively.

5. Review and optimize rules and alerts

Setting up rules and alerts is a basic AML practice for any firm – allowing the early detection of suspicious or fraudulent activities by establishing predefined criteria for expected behavior. As advice and regulations from law enforcement agencies and financial regulators change frequently, firms should ensure they have a strategy to continually review and optimize their existing rules – ensuring they can be as agile as possible when things change.

Rules may need to change at short notice, and organizations should ensure they have an AML system in place that can allow them to change at speed, safeguarding their business and its customers from new risks.

Transaction monitoring software can be particularly effective in achieving the necessary agility a firm needs. An example of this comes from an ongoing partnership, B2B payments infrastructure-as-a-service company, TransferMate, built with ComplyAdvantage to help its analysts stay on top of rapidly changing criminal behavior. 

TransferMate built a rule with ComplyAdvantage around the attributes that may indicate a potential case of child sexual exploitation. When the compliance team was later alerted to changes in the necessary customer profiles from law enforcement, they were able to react quickly by changing the parameters of the ComplyAdvantage product. This agility allowed them to adapt instantly, a process that could take up to six months with other providers.

6. Maintain proper documentation and record-keeping

The transaction monitoring process is a precursor to submitting suspicious activity reports (SARs) and ultimately commencing criminal investigations. Given the potential legal consequences, guidance for effective AML transaction monitoring should include the need for adequate documentation and record-keeping of all internal monitoring activities.

Documentation requirements should cover all aspects of the monitored transactions, including the reasons they were selected for scrutiny, which specific components of the transactions were considered suspicious, and any additional contributions, such as notes or guidance from the firm’s compliance officer and senior management employees. 

Documentation and record-keeping to create a clear, comprehensive audit trail will be vital to the legal process should a money laundering investigation occur.

7. Encourage a culture of risk awareness

Transaction monitoring and risk-based AML, in general, are predicated on an awareness of the danger that firms face. Accordingly, transaction monitoring best practices suggest that firms should encourage a culture of risk awareness in their AML teams and throughout their organization. 

Practically, that might mean establishing a list of money laundering red flags pertinent to the firm’s customers and industry sector and offering AML employees feedback in dealing with more complex transactions or transaction patterns. Transaction monitoring training should also be a consideration: firms should develop a training program focused on the specific risks they face and a schedule for delivering that program to employees.

8. Analyze and reassess previous transactions

When a firm detects potential money laundering, it should seek to review that activity with as much contextual information as possible. Accordingly, AML transaction monitoring best practices should include a requirement to reassess previous and related transactions when suspicious activity is detected. 

Reviewing previous transactions with new insight and information can reveal patterns of behavior that were previously concealed or, in the case of related transactions, reveal the full extent of the suspicious activity. Ultimately, this kind of post-analysis helps firms build their understanding of current and emerging money laundering methodologies.

AML/CFT teams should have full access to past data to facilitate analysis of previous and related transactions. 

Firms should move away from a siloed approach to data storage and towards a consolidated strategy, in which teams from all departments may access the information they need from a centralized source to expedite essential processes such as transaction monitoring.

9. Ensure governance

Transaction monitoring is only helpful to firms and effective in combating money laundering if compliance is governed effectively. 

From implementation to contact with the financial authorities senior employees should be involved, to address issues and ensure the process is as smooth and consistent as possible.

It is best practice for senior employees to inspect the transaction monitoring policies their firm puts in place, establish clear communication channels, and ensure AML/CFT teams have the resources and expertise they need to do their jobs. 

Those senior employees should also be responsible for implementing effective reporting systems to ensure that SARs are issued appropriately and promptly to the relevant authorities.

Common transaction monitoring challenges

By identifying and understanding common transaction monitoring challenges, institutions can strategize and implement solutions that enhance their ability to detect and mitigate potential risks effectively. 

• False positives: FIs globally grapple with the challenge of false positive alerts. Although these alerts impose substantial costs and inefficiencies, institutions are in a delicate balance – the sensitivity of monitoring and screening measures cannot be compromised due to the potential repercussions, including financial penalties, damage to reputation, and consequences for regulatory non-compliance. Beyond the financial burden, false positives contribute to negative customer experiences, adding extra administrative hurdles. While firms can never fully eliminate false positives, transaction monitoring can streamline and improve the accuracy of the process, setting guidelines to identify and prioritize certain cases. With the effective implementation of the right software, firms could lower false positives by 70 percent.

• Risk assessment: Each organization’s risk appetite differs, with institution-specific risks that must be factored into transaction monitoring. Transaction monitoring software can significantly assist this, offering customizable risk profiles and alerts – this adaptability can be crucial in maintaining effective vigilance and compliance.

• Resources: Maintaining transaction monitoring programs effectively can demand copious amounts of resources, which, in itself, creates further financial overheads. By implementing software solutions, compliance teams can free up their time to remediate genuine false positives and carry out other strategic tasks.

AI-powered transaction monitoring solutions

As the nature of transactions continues to evolve, so does the intelligence of the software FIs can use to monitor them – with options available on the market that harness the power of AI to streamline the process and prioritize alerts to increase efficiency, and ensure that genuine alerts can be remediated promptly.

Digital bank, Holvi, partnered with ComplyAdvantage to bring in a suite of products to streamline and improve its processes. Including the application of ‘smart alerts’, an AI-powered solution that helps analysts prioritize the highest-risk transaction monitoring alerts. Holvi’s Head of AML & AFC operations, Valentina Butera, said of the partnership: 

“The implementation of Smart Alerts was the smoothest implementation of tech that we have ever experienced. We did not experience any downtime or any interruption of business operations – not even for a second.”

Alongside a smooth implementation, FIs looking to deploy a new transaction monitoring solution should consider the following:

• Customizable rulesets that can be tweaked and tailored based on an organization’s specific parameters – ensure a new vendor offers support to enhance effectiveness and an easy-to-use interface.
• A solution dynamic enough to scale with an increase in transaction volumes, as well as the ever-changing nature of financial crime risks. Allowing organizations to scale up without having to switch providers every few years.
• As mentioned, proactive customer support is vital for ease of implementation, as well as ensuring an ongoing partnership to optimize performance over time.
• Ensure new software has AI-driven alert prioritization, so the highest-risk activities can be investigated as soon as possible.
• A segmentation engine powerful enough to successfully apply a risk-based approach.