Financial Conduct Authority (FCA) of the UK has imposed a fine of £17m on Metro Bank in November 2024 for failing to monitor 60m transactions, which were worth £51bn. The bank has not reviewed transactions correctly despite being repeatedly warned. An effective AML compliance needs proper monitoring of transactions. Transaction monitoring in AML protects financial organizations from illegal activities such as “money laundering, terrorist financing, corruption, and fraud.” With time, financial crimes are increasing day by day, and criminals are using complicated ways to launder money.
Transaction monitoring is mandated by authorities as a legal requirement to ensure AML compliance. Let’s discuss transaction monitoring in AML and its importance in regulated business and financial institutions. According to FATF and other regulatory bodies, financial organizations must conduct a transaction monitoring process.
Significance of transaction monitoring in AML
Clients’ Transactions are being monitored by financial firms and businesses to detect financial risks in real time. Suspicious activities are also assessed in the transactions already processed through AML compliance procedures. Why do we have to review past transactions? This is to ensure any unusual activity is not missed by AML checks.
Those irregular, unusual, and suspicious patterns might be a sign of financial crime like “money laundering, fraud, terrorist financing.” Pattern of client transactions, such as deposit, transfer, or withdrawal, can deviate from a regular pattern or exceed the set threshold by the authorities. An alert is sent to authorities to investigate this matter. Effective AML software monitors transactions by using “advanced algorithms, artificial intelligence (AI), and machine learning (ML)”. Flagged suspicious activities in transactions need further investigation. A report is submitted to the relevant authorities for further investigation.
Positive impact of Transaction monitoring
Avoiding Fines and Reputation Damage
Regulatory entities, such as “FinCEN, the European Union’s Anti-Money Laundering Directive (AMLD),” mandate regulated businesses and financial institutions to monitor transactions. If an organization fails to follow or comply with these regulations as stated by regulatory bodies, it faces heavy fines, sanctions, and loses its integrity. Reputational damage impacts the business as clients lose trust and terminate their business relationship.
Mitigating Risks through the transaction monitoring process
Transaction monitoring assists in risk mitigation by identifying risks linked with illicit activities. It allows for identifying the risks earlier, safeguarding financial institutions from financial crimes.
Maintaining Trust and Reputation
Financial organizations that are unable to comply with transaction monitoring as an AML regulation may cause them reputational damage. Fines are imposed on those businesses, and adverse media are found on the internet, which shows a failure in AML compliance. This causes reputational damage, and clients are lost.
Strengthening Customer Due Diligence
Transaction monitoring in AML is an important component of KYC and CDD procedures. Client provides information during onboarding, which is verified through this process, and any variation is detected to prevent illicit activities.
Transaction Monitoring Process in AML
The following steps are for the Transaction Monitoring Process in AML
Streamlining Data Collection and Integration
Data from different sources is being collected and integrated into the system, such as profiles of clients, their account details, transaction-related data, and third-party data. It helps to picturize the detailed image of the client’s behavior and pattern, and financial organizations can detect associated risks.
Defining Thresholds in the transaction monitoring process
Certain thresholds and rules are established to detect suspicious transactions through transaction monitoring by regulators like FATF. Common red flags in transaction monitoring are when transactions exceeding a specific value are considered to be linked to financial crime. Funds are transferred quickly between two accounts, or cash deposits in an account for a small duration may indicate suspicious activity.
Real-Time and Retrospective Transaction Monitoring
Real-time transaction monitoring helps to identify and block unusual transactions so they can’t proceed further. Retrospective transaction monitoring allows to asses past transactions to detect patterns linked with financial crimes.
Optimizing Alert Generation and Risk Scoring
When a transaction is detected as suspicious in AML transaction monitoring, the system notifies it by generating an alert. A risk score is based on transaction depending upon the transaction amount, client profile and considering other factor. High-risk transactions are further assessed and reviewed.
Managing Investigations and Cases Efficiently
Flagged transactions and other details are investigated by compliance teams, and a Suspicious Activity Report (SAR) is submitted to the relevant authority.
Achieving AML Compliance through Robust Reporting
Maintain a record of suspicious activities and submit a report to the authorities within a certain time. Failure to submit an SAR leads to fines and legal actions.
Red Flags in Transaction Monitoring
- Multiple deposits of large funds in accounts and withdrawals in a short duration
- Transactions above or below the predefined threshold
- Rapid movement of funds across countries
- Transferring the funds to offshore accounts and high-risk jurisdictions
- Providing false statements about the sources of funds to hide the origin
- Breaking large transactions into smaller funds
- Failed to provide additional information
- Transaction including multiple third parties
- Use an unregistered business to obscure the origin
- Use of cryptocurrency as a payment method
- Sudden changes in customer transaction behavior
Click here to learn about the challenges in AML transaction monitoring and the best solutions for AML compliance.
