Transaction Monitoring in AML: The Importance of Monitoring in Anti-Money Laundering Compliance

According to the United Nations, money laundering of up to $2 trillion globally has taken place. Yet, 90% of these money laundering cases went undetected. Well, this is one of the reasons many fintech firms are likely to integrate AML regulations into their corporate sectors.

In the past, transaction monitoring in AML was the central part of its compliance, which is the ability to recognise any suspicious activity in the transaction process. However, this could prevent fintech companies as well as their customer from losing millions of dollars. Besides, it also helps organisations from being involved in money laundering scandals.

In this KYC AML Guide, you will know about what is transaction monitoring in AML and the importance of implementing it in various fintech institutions.

What is Transaction Monitoring in AML?

AML transaction monitoring involves ongoing monitoring of financial transactions to recognise any fishy activity such as money laundering, financial fraud, identity theft, or financial crimes. Generally, this procedure uses automated systems to investigate transaction data in real-time and identify any red flags during the process.

The purpose of monitoring transactions is to prevent financial fraud and terrorism and maintain the reputation of the financial institution. This monitoring is meant to detect the irregularities and patterns that might be signs of money laundering or other crime.

Significance of AML Transaction Monitoring

As discussed above, the main purpose of monitoring transactions in AML is to help financial organisations fight against financial threats and money laundering challenges such as weapons trading, corruption, human trafficking, and so on. Yet, any corporation encountering such threats must meet some legal regulations to secure its networks.

In addition, when it comes to the gateways through which transactions are monitored, they are also set by several regulations. Nonetheless, transaction monitoring in AML is important in numerous ways:

• It determines any suspicious activity during the process of the transaction.
• It saves transaction records and submits them to SARs.
• It connects these transactions with the user identity.

What Does Transaction Monitoring in AML Exactly Do?

Essentially, translation monitoring in AML is used by numerous financial institutions to detect all activities associated with customers’ bank accounts. This process involves keeping track of all purchasing patterns and transaction flow in and about the accounts.

The major threats and risks that AML monitoring transactions detect include:

Terrorist Financing

Terrorist financing refers to the provision of funds or other resources to people or institutions that carry out acts of terrorism. It may include activities such as money laundering, counterfeiting, smuggling, and other illegal activities used to generate funds and support terrorism. The funds raised through these illegal activities might then be used to purchase weapons, recruit and train terrorists, and carry out other activities associated with terrorism.

Nonetheless, organisations that support this act are severely monitored through transaction monitoring in AML and every country has its list of institutions that are suspected to be involved in such activities.

The purpose of creating this list is to encourage other countries to generate better financial standards and sustain them to remain compliant with KYC and AML.

Corruption

Usually, people in higher designations, such as politically exposed persons, demonstrate negative behaviour and make poor decisions on the basis of their deception. This act is known as corruption. Corruption usually includes:

• Offering bribes under the table.
• Accepting bribes
• Exchanging gifts to make specific decisions
• Money laundering

Drug Trafficking

Drug trafficking continues to be a growing concern globally. It involves all aspects of drug production and distribution. Despite stringent laws with severe penalties against drug trafficking, it remains a persistent issue in many regions and is a primary driver of money laundering by criminal organizations.

Money Laundering

Money laundering is the act of hiding the proceeds of illegal activities by making it appear as if it came from a legitimate source. It is used in crimes such as drug trafficking, terrorism, and fraud rings, and is crucial to these criminal organizations.

The term "dirty money" or “black money” is used to describe the funds obtained through illegal activities, while the act of laundering makes the money "clean" or “white” for reuse.

This process of laundering involves three distinct stages: placement, layering, and integration. In the first stage, the criminal places the "dirty" money into a financial institution. Next, they use various techniques to conceal the source of the funds.

Finally, the "clean" money is then integrated into the financial system and can be used for further illegal activities.

Identity Theft

Identity theft occurs when a person gains unauthorized access to another person's personal information, such as their name, social security number, or credit card number. This information can then be used to commit various fraudulent activities, such as altering the victim's bank account information, transferring funds, or making purchases.

To detect and prevent identity theft or identity fraud, financial institutions often employ transaction monitoring systems that keep track of account activity. If there are signs of suspicious activities or abnormal purchases, the transaction monitoring in AML system will trigger alerts and notify the financial institution.

The account owner may also be notified depending on their bank notification settings. The purpose of transaction monitoring is to quickly identify and stop any fraudulent activity, protecting the account holder's personal information and financial assets.

Which Industries Need AML Transaction Monitoring?

Usually, institutions that are involved in transferring money tend to conduct transaction monitoring in AML. This practice keeps these firms protected against any kind of fincrime. Monitoring transaction practice majorly is required by:

• Banking and financial services
• Broker-dealers
• Cryptocurrency exchanges
• Gaming and gambling
• Insurance companies
• Legal Professionals
• Money service businesses

Typically, any industry that tackles a significant amount of money and is obliged to remain compliant with AML regulations needs transaction monitoring.

Final Words

Transaction monitoring in AML is a crucial aspect of financial regulation aimed at preventing money laundering and other financial crimes. It involves ongoing monitoring of financial transactions to detect any suspicious activity, such as money laundering, financial fraud, and identity theft.

Additionally, the process uses automated systems to investigate transaction data in real-time and identify red flags, which helps financial institutions maintain their reputation and prevent any legal issues. Industries that handle a large amount of money and need to remain compliant with AML regulations, such as banking and financial services, cryptocurrency exchanges, and insurance companies, among others, need to conduct transaction monitoring.

Generally, monitoring transactions is essential for financial institutions to stay protected against financial threats and keep their customer's assets secure.