Transaction monitoring is the monitoring of customer transactions, such as purchases, transfers, deposits, and withdrawals, in real-time or after they’ve been processed by a bank or financial institution.
Transaction monitoring has always formed a core part of anti-money laundering (AML) and financial crime compliance, however, in the digital age where it’s easier than ever to access financial products and move money around, fast, accurate, real-time transaction monitoring has never been more important.
What is post-event transaction monitoring?
The transaction monitoring process can be conducted in a variety of ways, with two of the more common being real-time and post-event transaction monitoring. In other words, transactions can either be monitored both beforehand and afterwards.
Real-time transaction monitoring enables firms to detect financial crime as and when it happens and block suspicious transactions in real-time. This type of monitoring is particularly useful for detecting and preventing fraud.
In contrast, post-event transaction monitoring involves periodic (often weekly or monthly) reviews and is used in less critical situations where, although payments might not raise an alarm immediately, over time patterns may arise that point to unusual activities. With post-event transaction monitoring, completed payments are usually compared against money laundering typologies to uncover hidden patterns for further investigation.
How is post-event transaction monitoring carried out?
Modern-day post-event transaction monitoring makes use of software tools for automated monitoring and accompanying rules that are designed to examine customer activity on a profile basis and alert compliance teams with high confidence when something is amiss. This then enables compliance experts to manually look into potential instances of money laundering and other financial crime.
Firms are responsible for defining their own rules, and they should differ according to customer profiles and key metrics such as income levels. Before defining your rules, consider these factors:
- False positives: Rules that haven’t been clearly defined can cause false positives to occur. This might cause compliance teams to overlook red flags which could lead to your firm falling out of compliance. As such, engineer your rules so that they create as few false positives as possible.
- Compliance teams: Consult your compliance experts before defining any rules. They’re likely to know the most about your customer profiles than any other team, which means more thorough and robust rule setting.
- Tech tooling: Before defining any rules, you should add a robust AML and transaction monitoring tool to your tech stack. Ideally, this tool should enable automated monitoring, help you to predict threats, and allow you to easily build and deploy your own rules into your workflows.
Defining business rules for transaction monitoring is in many cases mandatory, and various factors must be taken into consideration. These include:
- The type of customer (e.g., private individual and business customers)
- Segmented customer target groups
- Customer risk profiles created during due diligence
- Transaction country of origin
- Product (e.g., savings, finance, real estate)
- Distribution channels (e.g., in branch or online)
- Nature and frequency of transactions
- Previously dormant accounts
- Unusual transaction value
Why is post-event transaction monitoring important?
All financial firms need to be carrying out post-event transaction monitoring as part of a wider real-time transaction monitoring process. Not only is it good practice but it’s also required by many European and national regulations, such as the EU Anti-Money Laundering Directives and the UK Money Laundering Regulations.
In addition, according to the Financial Action Task Force recommendations, which set out the risk-based approach for AML and terrorist financing, firms that suspect or have reasonable grounds to suspect that funds are the proceeds of criminal activity or are related to terrorist financing, it should be required by law to report this promptly to relevant regulators or financial authorities.
As such, many countries now mandate the disclosure of potential money laundering and terrorist financing among a myriad of other financial crimes. The only way for firms to identify such crimes is to carry out regular and thorough transaction monitoring using best-in-class technology and automation.
Post-event transaction monitoring tools
Financial institutions process millions of transactions every day. The sheer volume of transactional activity means that it’s impossible to control them all, a truth that most firms are slowly beginning to realize as the digital transformation continues to widen access to financial services and radically change consumer relationships with it.
At the same time, firms must also protect themselves from financial crimes and malicious threat actors. With the right real-time and post-event transaction monitoring tool like Sentinels, firms can control their customers’ transactions based on defined rules. If a rule is breached by a customer, the alarm will automatically be raised and enable compliance teams to step in and take control.
Sentinels makes real-time and post-event AML transaction monitoring a faster, simple, painless, and more accurate process by providing firms with constant 360-degree automated coverage. Backed by state-of-the-art artificial intelligence and machine learning, our tool streamlines compliance workflows to allow efficient and confident decision-making.
If you’re interested in how a tool like this could support your compliance team, request a free demo of our transaction monitoring solution today.