Transaction Monitoring

Transaction monitoring is a process used by banks and financial institutions to track and identify suspicious activities that might be related to money laundering, fraud, terrorism financing, or other financial crimes. 

Analysing customers’ fund management behaviour is a common practice. Banks and financial institutions use transaction monitoring systems to determine whether the money has been acquired legally or illegally and whether it’s been used benevolently or maliciously. These reviews are often conducted automatically through software, although human analysts also play a crucial role. 

Understanding the importance of this procedure and its systems provides insights into why they are fundamental for financial security.

Importance and Current Role

Modern systems, powered by machine learning and AI, utilise real-time and retrospective monitoring to detect red flags. They look for large transfers from high-risk regions or sudden changes in transaction patterns involving PEPs (Politically Exposed Persons) or known criminals. By analysing this data, software and analysts help institutions meet regulatory requirements to protect themselves against financial crime.

How it Works

Transaction monitoring applies unique algorithms and pre-defined rules to spot unusual or suspicious actions. Activities that differ from consumers’ typical behaviour, like making large cash payments or sending odd requests, may trigger alerts. These warnings are further reviewed to decide whether a Suspicious Activity Report (SAR) should be submitted to the relevant authorities for further investigation.

What Are Suspicious Activity Reports

Suspicious Activity Reports (SARs) are an essential financial tool to notify law enforcement of potentially suspicious clients and their activities, which may result in various criminal doings.

The primary goal of SARs is to detect and report suspected law violations or suspicious activities observed by regulated financial institutions, such as those governed by the U.S. Bank Secrecy Act (BSA). Suspicious Activity Reports often play a vital role in supporting law enforcement in launching or enhancing investigations into terrorist financing, money laundering and other illegal activities. These reports are generated through transaction monitoring systems, which are critical for spotting and managing potential financial threats.

Transaction Monitoring Systems

A Transaction Monitoring System (TMS) is essential to financial institutions’ AML and frameworks to prevent fraud. These systems track operations like customer payments in real-time or batch processing to reveal suspicious activities that may indicate illegal financial behaviour.

The software monitors customer transactions and gives banks a complete view of activity. It combines real-time data with historical records and account details. The system tracks deposits, withdrawals, payments and wire transfers, helping spot unusual patterns that might suggest fraud and suspicious activity.

Different software providers offer unique solutions, but some common features found in AML include:

• Know Your Customer (KYC) 

• Automated Workflows 

• Investigation Tools 

• Document Management 

• Anti-Money Laundering Training 

• Policy Dissemination 

• Customer Due Diligence Checks 

• Entity Resolution 
• Alert-Based Case Management 

What can Transaction Monitoring Detect?

Transaction monitoring systems are important for recognising bank fraud schemes. They help uncover different fraud attacks, including the most common ones, such as:

Credit and Debit Card Fraud

Abnormal card usage, especially multiple transactions in different locations in a short time, may indicate fraud. Transaction monitoring assists with discovering patterns early, indicating card cloning or other types of criminal activities.

Money Mule Detection, Money Laundering, Smurfing

While transaction monitoring detects money laundering, it also reveals schemes like money mules and smurfing.

When large sums of money are split into smaller transactions to avoid detection, it is called smurfing. Analysing these patterns and linking seemingly unrelated operations is what transaction monitoring does.

Money mules, large cash deposits or frequent transfers to high-risk countries tend to raise concerns. These transactions are marked for closer investigation.

Social Engineering and Phishing Scams

Scams like phishing are identified through transaction monitoring, which spots behaviours that deviate from the norm. When flagged, these operations are studied, allowing financial institutions to reveal and respond to social engineering fraud.

Detecting Account Takeover and Synthetic Identity Fraud

Sudden changes in account activity, such as large withdrawals or unusual spending behaviour, often work as a sign of an account takeover. Transaction monitoring detects these shifts and flags them. Synthetic identity fraud, which uses fake credentials, is identified by finding abnormalities across various accounts.

Types of Transactions Monitored

Monitored transactions typically include: 

• Deposits 

• Withdrawals 

• Wire transfers 

• Bill payments 

• Credit/debit card purchases 

The scope of monitoring may also extend to virtual currencies such as Bitcoin, especially in jurisdictions with more strict regulatory frameworks. These transactions are vital in detecting suspicious financial behaviours, mainly through AML transaction monitoring. 

What can AML Transaction Monitoring Detect?

AML (Anti-Money Laundering) transaction monitoring works by analysing transactions in real time or periodically to spot any unusual patterns related to money laundering or other illegal financial behaviours.  

Key activities detected contain: 

• Suspicious international transfers, especially to high-risk jurisdictions. 

• Unusual or large cash payments (deposits/withdrawals). 

• Various account activity without any evident economic purpose. 

• The constant movement of money between countries of multiple accounts with no reason specified. 

• High-risk consumer transactions, including those made by PEPs (Politically Exposed Persons).  

The above helps institutions comply with regulatory requirements and fight financial crimes. Beyond AML, transaction monitoring also serves important functions in other industries.

Transaction Monitoring Outside AML

Transaction monitoring isn’t limited to AML (Anti-Money Laundering) compliance. It’s a critical tool across different industries. Keeping track of real-time transactions helps detect unusual behaviour like unauthorised payments or account takeovers. 

Retail, communications, and insurance industries also benefit from transaction monitoring. It ensures that financial flows are secure and business processes align with all policies and security standards. Transaction monitoring has expanded to include cryptocurrency to address new challenges and risks related to digital financial operations.

Cryptocurrency Transaction Monitoring

Monitoring cryptocurrency transactions is essential for managing risks, ensuring compliance, and preventing fraud in the digital currency world. Despite the cryptocurrency’s pseudonymity, various tools and techniques now exist to track and analyse transactions. These methods make it easier to detect suspicious activities. 

Some typical approaches to monitoring digital transactions are:
 

Detection of Anomalies: 

• The system triggers automatic alerts for further investigation when transactions exceed certain thresholds. 

• Algorithms detect deviations from typical transaction behaviour, flagging activities that don’t align with usual patterns for certain addresses and users. 

Artificial Intelligence and Machine Learning: 

• Adaptive models evolve constantly, taking information and learning from new data to spot and eliminate potential threats. 

• Machine learning examines the behaviour of transactions to identify patterns linked with fraud and other suspicious activities. 

Pattern Analysis in Transactions: 

• If transactions are made at unexpected times or outside of regular hours, irregular time patterns may indicate unusual behaviour. 

• An abnormal quantity of transactions can signal potentially fraud-related or unlawful activities, especially when there are significant increases in volume over a short time. 

Blockchain Analysis Tools: 

• To better understand the whole user’s transaction history, the address clustering method assists with grouping addresses that may be under the control of the same entity. 

• Unusual patterns can be detected by transaction tracking, which involves blockchain explorers and other analysis tools. 

Monitoring of Addresses: 

• Based on the address history of participating in questionable activities, address risk scoring assigns a corresponding risk level. 
• Watchlists track addresses connected to crime, sanctioned organisations or hacks, with transactions regularly cross-checked against these lists.

Transaction Screening vs Transaction Monitoring

Even though transaction screening and transaction monitoring are two fundamental tools to fight financial crime, which share common features, they still have different goals.

Transactions screening evaluates each transaction by comparing it to risk databases, watchlists or sanction lists. This process effectively identifies transactions connected to money laundering, which is why it plays a central role in AML (Anti-Money Laundering) procedures.

Transaction monitoring, instead of focusing on individual transactions, continuously analyses whole transaction data, searching for unusual patterns or behaviours.