A quick guide to transaction monitoring in banks

By 5 minute read

Modern businesses need to be able to adapt quickly and respond to incoming threats immediately. Nowhere is this truer in the financial sector than for banks.

While banks are vital for every economy, they are also the prime target for financial criminals. And this makes transaction monitoring in banks incredibly important.

Criminals are seeking a placement stage for their illicit money to start the money laundering process. Banks cannot avoid being targets for criminals so instead they must work hard to prevent themselves becoming recipients of dirty money. Detecting and preventing this illicit money from entering their systems is possible through transaction monitoring – a core anti-money laundering (AML) process and vital for banks. 

White paper: The use of AI in AML Transaction Monitoring

What is transaction monitoring? 

For banks, transaction monitoring is one of the primary ways that the business can detect potential instances of money laundering. This usually involves monitoring many transactions to build up a pattern of suspicious behavior, known as a typology, that reveals what the criminals are doing. From there compliance teams can file suspicious activity reports (SARs) with their local Financial Investigation Unit (FIU) for follow-up with law enforcement agencies.  

Manually interrogating transactions for this information is a waste of considerable time and resources. Thanks to automation and machine learning these transactions can be analysed quickly and investigated by compliance officers to determine whether they’re linked to criminal activity.  

Transaction monitoring in banks is constantly developing, this is due not only to increasing regulatory oversight from local regulators. But also, because financial criminals often change how they interact with the global financial system as a preventative measure to not be caught.  

While this makes transaction monitoring in banks more difficult, it also means that while the methods may change the end goal does not. Criminals are always trying to make illicit money appear legitimate. So, while transaction monitoring methods need to be updated and typologies may shift, the focus is always on identifying suspicious activity and detecting financial crime at play. 

Why do banks need transaction monitoring? 

The simplest answer to this is that transaction monitoring is a legal requirement for banks. The consequences of not doing so are severe. Global watchdogs wish to eliminate financial crime. Financial institutions such as banks are the first line of defence in preventing criminals from money laundering.  

Transaction monitoring also ties in heavily with sanctions screening. It’s a process that prevents sanctioned entities from being able to transact freely. This is done due to known or suspected criminal activity that cannot be punished by domestic laws. 

Transaction monitoring is important for banks because compliance with financial regulations is non-negotiable. Firms can face significant fines for not detecting and reporting any transactions tied to illegal activity. 

Ebook: How to Leverage AI for AML Compliance

How can banks improve their transaction monitoring?  

What can banks do to improve their transaction monitoring and ensure a successful AML program? Here are three things to consider: 

  1. Use a risk-based approach

FATF recommendations push for a risk-based approach for effective transaction monitoring.  

Using a risk-based approach means that a bank is operating with AML controls based on the organization’s perception of risk and the level of risk that its customers pose. This varies between customers and therefore requires firms to vary their controls in proportion to the risk posed.  

  1. Implement continuous improvement

Continuous improvement and optimization of the AML transaction process is required to stay on top of regulatory obligations.  

This begins with developing rules that will fuel the overall transaction monitoring process and ensure that the tool you’re using is backed by quality data sources. This way, you’re more likely to only receive alerts for instances that are suspicious. Doing this gives your analysts more room to focus on dealing with legitimate suspicious transactions rather than wasting time on false flags.  

  1. Use the right transaction monitoring solution

Using a transaction monitoring solution in banks takes a huge load off your compliance teams. The more powerful tools use the latest in automation technology and data analytics. This provides 360-degree coverage while eliminating challenges such as false positives. It also keeps up with the latest techniques being employed by criminals. 

When choosing a transaction monitoring solution for banks, it’s important to consider many factors. These include deployment speed, flexibility, whether it’s cloud-based, how customizable it is, and whether it enables you to fully outsource your transaction monitoring. 

Find the right transaction monitoring solution for your bank today. 

Ebook: How to set efficient AML Transaction Monitoring Rules