What is Transaction Monitoring and why is it important?

Every day, millions of transactions take place all around the world. These transactions are tracked in order to have a clear picture of the customer’s activities. Transaction monitoring is the practice of keeping track of the client’s activities. Let’s take a look at what a transaction monitoring system is and why it is necessary.

Understanding Transaction Monitoring

Transaction monitoring is the process of keeping track of customer activities, which includes analyzing previous and present customer data and interactions to provide a full picture of their transactions.  Transfers, deposits, and withdrawals are all examples of this. The majority of financial organizations will utilize software to analyze this data automatically.

Transactions can be tracked manually or automatically. Manual testing is performed to check compliance with business logic, whereas automated testing validates the transaction at the code/technical level. The system of transaction monitoring has progressed to the point that firms are required to follow it. In reality, authorities from a variety of countries continue to levy stiff penalties on companies that fail to appropriately monitor transactions.

According to the Financial Action Task Force (FATF), financial institutions should alter the scope and depth of their transaction monitoring in accordance with their institutional risk assessment and individual client risk profiles. The FATF also recommends that continuing transaction monitoring/customer due diligence be done on a regular basis or when specific transactions occur.

Why is transaction monitoring essential for AML regulatory compliance?

It is a must for any organization that falls under the scope of the money laundering rules to conduct transaction monitoring. To identify unknown questionable behavior and provide analysts with critical knowledge, transaction monitoring can follow a basic, traditional rule-based method or be supplemented with artificial intelligence.

As criminals’ tactics of money laundering improve, effective transaction monitoring necessitates a careful balance of processes, technology, and human knowledge to properly differentiate harmless transactions from suspect ones.

To account for client risk, the TMS will often employ information from know your customer (KYC) processes. The risk measurements are then utilized in conjunction with rules/scenarios to identify specific account-based behaviors that should be investigated and maybe disclosed.

How does the transaction monitoring system work?

Transaction monitoring software allows financial organizations to keep track of consumer transactions. These programs may keep track of current transactions as well as evaluate past data and consumer profiles. The client may then be analyzed, including future activity forecasts and risk levels.

It’s worth noting that a low-risk customer may not require as much transaction monitoring as a high-risk one. Depending on their location and the goods and market sectors they provide, certain clients will require a higher-risk strategy.

So, let’s take a look at why transaction monitoring is so vital in today’s digital world.

Why is Transaction Monitoring important?

To begin with, transaction monitoring is a vital initial step in every financial institution’s anti-money laundering and counter-terrorist financing protocols. With this, transaction monitoring helps an organization to comply with various AML/counter-terrorist financing requirements (CTF) for filing Suspicious Activity reports (SARs) and other reporting obligations. Being able to recognize a suspect transaction might prevent crooks from laundering hundreds of millions of dollars. A money-laundering controversy is the last thing any company wants to be involved with. 

Furthermore, having transaction monitoring in place provides trust to regulators and financial partners. It demonstrates that a financial institution takes anti-money laundering and counter-terrorism financing regulations seriously and undertakes all possible ways to avoid unlawful activities. This builds confidence among new and/or existing partners.

Transaction monitoring can also be used by financial organizations to take a risk-based strategy. Client risk may be managed by determining and controlling it. A client’s risk is determined by a variety of criteria, including their work type, country of residency, and so on.

What are Suspicious Activity Reports?

SARs (Suspicious Activity Reports) are an important component of the transaction monitoring process. When a suspicious transaction is identified, it is the financial institution’s responsibility to notify the concerned authorities. Suspicious activity is reported in most countries by submitting a SAR, which is submitted to the relevant financial body. Financial institutions must understand when and how to submit SARs because of their relevance in combating criminality.

Summing up

In today’s environment, when millions of transactions are made every day, constant monitoring of clients has become critical. It will aid not just in the prevention of any kind of criminal operation, but also in the prevention of terrorist financing. Failure to adopt such a system may result in a financial institution’s image being harmed, as well as severe fines and other penalties. 

Each company must choose and establish the most appropriate transaction monitoring strategy for its business model and strategy. Financial crime may be prevented by culture, education, and training. Enforcement actions may be costly to businesses in terms of money and reputation, but failing to safeguard the vulnerable can have far-reaching consequences for both financial institutions and society.
Paypound values are committed to high anti-money laundering / countering terrorism (AML/CFT) compliance and require all the employees, management, and subsidiaries to adhere to these standards to combat money laundering or terrorism financing. The primary purpose of Paypound’s AML & KYC policy is to establish the general framework to fight against money laundering (ML) and terrorist financing (TF). Paypound has robust measures to control and limit ML/TF risk, including dedicating the appropriate means.

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