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Transaction Monitoring: Why It’s Important and 3 Key Components

afranczyk - August 15, 2022

What is AML Transaction Monitoring?

Anti-money laundering (AML) transaction monitoring tools help monitor transactions above a certain threshold to detect suspicious activities, raising flags before organizations accidentally help criminals launder money. Transaction monitoring is a core component of the AML process.

Government entities define transaction thresholds that require an AML check, but organizations can implement continuous AML transaction monitoring for all transactions. AML regulations also require checking customers and transactions against sanctions lists, suspicious accounts for international crime and terrorism, and potentially exposed persons (PEP).

Why Is Transaction Monitoring Important?

Financial institutions are required to monitor transactions for anti-money laundering activities as defined by the government relevant to their operations. In the US, for example, financial institutions must comply with rules by the Bank Secrecy Act, and the European Union (EN) requires organizations to comply with the Fifth Anti-Money Laundering Directive.

While regulations differ significantly, they all require financial institutions to report suspicious activity accurately and promptly. AML transaction monitoring tools enable financial institutions to comply with this requirement without wasting time manually (and ineffectively) attempting to monitor and flag potentially fraudulent transactions.

AML transaction monitoring tools streamline this process using algorithms that help catch specific factors in real-time. These tools can maintain compliance with regulations, ensuring financial institutions do not miss fraudulent transactions (which can result in losing thousands of dollars in penalties). Once the tool flags a transaction, it notifies staff members who can follow up further and file the appropriate reports.

Anti-Fraud vs. Transaction Monitoring

Financial institutions can apply transaction monitoring to discover various criminal activities, including but not limited to money laundering. AML transaction monitoring is a specific use case of this practice. Anti-fraud transaction monitoring is the application of similar processes and concepts more broadly to any fraud.

Another key difference between anti-fraud and AML transactions monitoring is that AML compliance personnel are responsible for mitigating AML issues. However, many departments can take charge of mitigating fraud losses. Chief risk officers (CROs) oversee anti-fraud departments, while a chief compliance officer (CCO) manages an AML transaction monitoring department.

Anti-fraud departments and AML transaction monitoring departments may perform similar duties but are usually structured differently. Both can determine patterns that may lead to fraud and money laundering. However, each has its own system to investigate and notify financial institutions, using different methods and rules to generate red flags.

The Process of Transaction Monitoring Tools

A transaction monitoring tool monitors all data points related to a certain transaction and feeds this data through risk rules. Next, the tool automatically flags or blocks various suspicious actions, including unusual transactions and account activities.

The tool can also flag and block transactions exceeding a certain threshold, international or domestic transfers above a specific value, unknown sources of inbound and outbound funds, and large cash withdrawals or deposits (called transaction velocity).

Once a transaction monitoring tool flags suspicious data, it compiles the information into a suspicious activity report (SAR). The tool formats SAR in a certain way that ensures financial analysts and regulators can review it.

SARs are highly useful for AML, but authorities also employ these reports for criminal investigation and taxation purposes. You can easily submit a SAR using a free online system like the US’s BSA E-Filing System or the UK’s NCA website. Some transaction monitoring tools can automatically file SARs for you.

Components of a Successful AML Transaction Monitoring Program

An AML transaction monitoring program typically includes several components that work together, including:

A Risk-Based Approach

Most AML regulations recommend and enforce a risk-based approach to combat financial crimes effectively. It involves implementing AML controls based on the organization’s perception of risk and its customers’ risk levels, which may vary.

This approach requires organizations to break down their risk-based approach into two parts:

  1. A risk assessment
  2. Implementing the due diligence process relevant to the customer’s risk level.

Organizations using this approach can achieve more control when mitigating financial terrorism and effectively reinforce money laundering protocols and procedures.

Flexible Rules Building

Rules are a core component in transaction monitoring, but they require ongoing work to effectively detect suspicious activity. A transaction monitoring tool can help by providing independent and flexible rule-building and testing. This feature helps prevent lengthy timescales, ineffective monitoring, high levels of false positives, and high operating costs.

Continuous Optimization of Rulesets and Workflows

Rulesets and workflows are not set in stone—organizations need to optimize them continuously. The first step is selecting the relevant rules and preparing the data intended to fuel the overall transaction process.‍ Ideally, you should collect quality data using a comprehensively built environment. When segmenting the transaction process, implement or upgrade the system.

Organizations can combine detection rules with segmentation practices to ensure they receive alerts only on patterns at risk for fraud. This practice can help prevent false positives and negatives that waste company time and resources and result in missing true suspicious activity.

Monitoring Transactions with PathLock

The Pathlock Security Platform enables organizations to take a risk-based adaptive approach to ERP security. The platform allows you to implement Dynamic Multi-Factor Authentication at the transaction level, creating a logged record of sensitive transactions. Using an attribute-based access control (ABAC) security model, every authentication request is first analyzed for level of risk, and MFA challenges are deployed accordingly. Security teams can also centrally enforce strict identity and device zero-trust policies across multiple ERP applications.

Schedule a demo to find out how Pathlock’s enterprise MFA solutions can enhance your fraud prevention and detection capabilities.

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