Strong, accurate, and efficient transaction monitoring systems are a necessity — no matter where in the world a financial institution is located.
When developing and implementing a transaction monitoring system, it is crucial to have a thorough understanding of the importance of such a system, the national and international regulations that set the standard framework for a system, and the components that make it effective.
In this article, we discuss all things transaction monitoring, from who needs it to who regulates it. Keep reading to learn more about KYC Hub’s transaction monitoring solutions.
What Is Transaction Monitoring and Why Do We Need It?
Transaction monitoring is the practice of monitoring all transactions carried about by customers. The transaction monitoring process involves assessments of customer information, interactions, and activities to gain an accurate and complete picture of a customer’s transactional behaviors. Activities like money transfers, account deposits, and fund withdrawals are all monitored as part of this process.
One of the key reasons why transaction monitoring is so crucial is that it allows banks, credit unions, and all other financial institutions to access and analyze customer behavior in real time, thus enabling them to identify suspicious activity and instances or attempts at fraud.
As the financial and banking industry continues to grow in size and customer density, it is more important than ever to have strong transaction monitoring models that can handle large volumes of customer transactions.
Who Needs Transaction Monitoring
Any business operating within the banking and financial services industry needs transaction monitoring.
This includes:
- Banks and credit unions
- Payment companies
- Investment managers
- Digital payment gateway providers
- Digital exchanges (stocks, cryptocurrencies, etc.)
- Online FinTech’s
In a nutshell, if it’s a financial institution of any kind, transaction monitoring is a necessity.
What are the Main Global Regulations Surrounding Transaction Monitoring?
Global compliance can be a tricky task to accomplish, especially when it comes to transaction monitoring. However, maintaining complete compliance — both domestically and internationally — is necessary for any business dealing with monetary transactions.
Compliance regulations largely have to do with anti-money laundering (AML), making AML compliance one of the top priorities for financial institutions. There are several different regulators around the world to be aware of, each with its own rules and expectations for compliance.
When discussing global AML compliance and regulation, there is no bigger regulator to be aware of than the Financial Action Task Force (FATF). This organization is intergovernmental and spans most of the world. The main purpose and goal of the FATF are to set a global standard for AML compliance, as well as to monitor the implementation of regulations for more than 200 participating nations.
FATF compliance requires financial institutions to:
- Implement Know Your Customer (KYC) models and identification systems
- Maintain thorough and accurate records of customers, especially those labeled as high-risk
- Maintain a regular system of monitoring for all accounts looking for any suspicious activity
- Report suspicious activity to the relevant national authority
- Perform all due diligence measures recommended by the FATF
- Enforce sanctions against individuals and entities that fail to comply with FATF standards
Along with the FATF, several additional organizations that are more nation-specific set regulations for AML and transaction monitoring. It is essential for any institution that operates globally to familiarize itself with the various AML regulations found in other parts of the world, as conducting business in these locations requires additional compliance on top of national obligations.
Here is a breakdown of some of the other regulators found across the globe:
- The European Union Anti-Money Laundering Directives: The EU Anti-Money Laundering Directives regulate AML legislation for all members of the EU. New versions of the directives are published every few years to address the current state of money laundering, financial terrorism, and criminal risks within the financial and banking industry.
- The Financial Conduct Authority (FCA): The FCA is an independent organization based out in the United Kingdom that regulates AML monitoring for the country. In addition to regulation, the FCA is also responsible for supervising UK-based financial institutions to ensure they are following proper compliance procedures, as well as authorizing them to operate in the UK.
- The Financial Crimes Enforcement Network (FinCEN): FinCEN is the main AML regulator found in the United States, administering a set of regulations known as the Bank Secrecy Act (BSA). Among the regulatory requirements that the BSA imposes on U.S.-based financial institutions, three of the most important include an internal AML compliance program, proper AML reporting (including suspicious activity reports and currency transaction reports), and detailed record keeping of all suspicious activity.
- Hong Kong Monetary Authority (HKMA): The HKMA is the primary regulator of the banking industry in Hong Kong. This includes a key piece of regulation called the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. The compliance for Hong Kong AML programs includes developing a risk-based approach for AML, independent audit schedules, employee training programs, and an appointed compliance officer.
- Monetary Authority of Singapore (MAS): The regulatory duties of the MAS include conducting and enforcing money policy, supervising the activities of financial institutions, and assessing the international financial status of the nation. Key components of the MAS AML regulation include performing due diligence, implementing KYC programs, and reporting and monitoring suspicious activity.
- Australian Transaction Reports and Analysis Centre (AUSTRAC): In Australia, AUSTRAC is the financial intelligence agency responsible for addressing money laundering, fraud, and other financial crimes. This organization’s AML regulation falls under the Anti-Money Laundering and Counter-Terrorism Financing Act, with key components of compliance including detection, monitoring, and reporting obligations.
Characteristics of a Good Transaction Monitoring System
To build a strong and compliant transaction monitoring system, the first step is to have a clear understanding of what the characteristics of a good system are.
These characteristics include:
- Automation: With an ever-increasing volume of customer transactions — especially in the wake of the growth in digital payments — an automated monitoring system is highly necessary to keep up with monitoring, reporting, and record-keeping obligations. The primary purpose of an automated system is to offer vital support in the identification of suspicious activity. Automation not only supports greater efficiency but heightened operational scalability as well.
- Continuous Monitoring: As part of building and implementing an automated transaction monitoring system, a key component to focus on is enabling continuous monitoring. Continuous monitoring allows for automatic and ongoing internal audits that help to collect and assess data from various processes, account data, and customer transactions. According to Deloitte, continuous monitoring also helps to assess the effectiveness of controls, execute timely risk-related decisions, and boost the cost-effectiveness of the system.
- Introduction of New Scenarios: Scenarios are crucial elements of any strong AML and transaction monitoring system, as they help financial institutions systematically assess customer behaviors. However, when new scenarios are not introduced or existing scenarios are not updated, this can lead to many false positives, ultimately resulting in a delayed investigation process. Moreover, the introduction of new or updated scenarios helps to identify redundant scenarios through a constant information feedback loop and enables more clear measurements of success.
- Ease of STR Generation: Suspicious Transaction Reporting (STR) is a major component of all AML and transaction monitoring regulations around the world. The use of automation and continuous monitoring — as well as the improved support provided via new scenarios — makes it far easier for a financial institution to generate accurate and timely reports. By introducing new technologies that enable these activities, faster and more secure STR generation can be achieved through automatic data collection, form completion, and report submission.
- AI-Enabled Pattern Recognition: The stark reality of transaction monitoring is that financial crimes are becoming more difficult to detect by the human eye. By contrast, artificial intelligence (AI) offers a more robust capability for recognizing patterns that may be obscure to humans. This works by employing AI to identify and categorize unstructured data, allowing this data to be sorted into highly specific classifications — leading to more accurate identification of patterns.
Key Takeaways
To implement a transaction monitoring system that meets the needs of modern financial institutions, it is essential to embrace technological support.
At KYC Hub, our transaction monitoring system enables institutions to identify suspicious activity with speed while also reducing the risk of false positives. We utilize a hybrid approach that consists of varied rules, deep learning algorithms, behavioral cues, and fine segmentation.
The key components of our transaction monitoring solution include:
- Advanced AML supported by our Smart Data Hub
- Configurable scenarios
- Instantaneous payment screening
- Case management and investigation
Get started with KYC Hub today by contacting our sales team.
