The Current Role of Transaction Monitoring in AML

What is transaction monitoring and why is it needed?

Transaction monitoring (TM) refers to the monitoring of customer financial transactions, which includes assessing historical and current customer information and interactions to provide a full picture of a customer’s activity.

The importance of a firm’s need to monitor transactions is set out in both regulation and industry guidance. Specifically, firms need to be able to trawl out unusually large and/or complex transactions and figure out whether this activity is in line with what they know about their customer. Any transactions that contradict what you know about the nature and purpose of your customer relationship should be escalated for further investigation, though in many cases some additional interaction with your customer can lead to discounting all concerns.

The requirement to monitor and report suspicious transactions has been around for almost 28 years ever since the first AML directive was implemented. In those early days, the approach to transaction monitoring was to manually interrogate every transaction completed by a customer and once satisfied, only then would it be approved. In theory, this still remains the most effective way to do this, however not such a practical one given the sheer volume and velocity of customer transactions and the resource this would require to review.


The use of automated transaction monitoring systems

Today, it is advanced transaction monitoring software that helps financial services firms analyse data efficiently and automatically identify unusual patterns of behavior. This allows firms  to focus attention on high risk and anomalous transactions.

So, what are the options when it comes to transaction monitoring models and how does a firm choose what is right for them?


Transaction Monitoring Models

There are a number of transaction monitoring systems on the market that propose to resolve the issue. In a nutshell, most of them provide:

  • Seamless integration with existing datasets;
  • Intelligent approach to datasets, through feedback and fine-tuned calibration of transaction monitoring rules; and
  • Real-time and retrospective analysis.


Alternatively, there is also the option of building a bespoke model that addresses the specific concerns of your firm. All products have one thing in common, the promise of a seamless experience. If that is the case, then where do the issues arise?


Where do the issues arise?

Thematically, the approach to a TMS is only reviewed following an external audit or some form of investigation by the regulators. As a result of infrequent TMS review, our experience with firms, and the feedback they have presented us, highlight three main issues that arise:

  • One size fits all;
  • Too many false positives; and
  • Too many rules/scenarios.

One size fits all: The first issue is self-explanatory and is an inherent defect of the off-the-shelf products available. No one can expect a merchant acquirer with a small dedicated client base of corporate entities to have the same experience as a small start-up offering competitive exchange rates to holidaymakers. Transaction monitoring based models depend on the manipulation of data. The manipulation is only possible if the rules applied are capable of producing an influential number of alerts.

Too many false positives: The number of cases highlighted by the TMS that do not warrant review. This in turn increases operational costs, creates a backlog and risks delaying legitimate cases being investigated.  

Too many rules: This issue is closely correlated to the previous one. When the current TM system is generating too many false positives, incorporating a new set of rules, or developing the current crop of rules further, this will surely result in less false positives. The problem is, the more complex the rules become, the harder it is to extract useful information out the business end.

Lastly, bespoke, in-house solutions can also present issues. Firstly, there is the issue of cost. Second, in-house solutions require training and specialist maintenance. Unlike off-the-shelf products, there is no customer service available!


Do you need to review your approach to transaction monitoring?

Organisations should seriously consider reviewing their holistic approach to transaction monitoring if costs are to be reduced and effectiveness increased. The issues above require focus, patience and most importantly a plan. Only by committing to an evolving plan of continual improvement will firms ensure that they are in control of their transaction monitoring and not the other way round.


Regbite: The Role of Transaction Monitoring – 11 April 2019

For a deep dive into the role of transaction monitoring, the key issues firms are facing and how they are mitigating these issues, feel free to join us at our next Regbite: The Role of Transaction Monitoring on 11th April 2019 in 99 Bishopsgate, London. Click below to sign up for your place today.


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