If you’re a bank or financial institution, it’s important to be aware that instances of online money laundering are on the rise. 

However, with the help of suitable transaction monitoring software, banks and financial institutions can help prevent fraud and stay compliant with AML regulations. 

Let’s look at the basics of transaction monitoring as well as key features to look out for.

The new face of money laundering

According to the UNODC, money laundering losses amount to 2% to 5% of the world’s GDP. 

It is also becoming an increasingly online pursuit for criminals, catching onto new trends like the increased popularity of cryptocurrencies and blockchain – a report by Chainalysis found that cryptocurrency money laundering rose by 30% in 2021. This is possibly due to the increased anonymity in cryptocurrency transaction processes.

Naturally, these developments make it harder and harder for banks and financial institutions to catch money launderers, meaning that they need the latest technology to keep up with these increased risks. It’s not just banks and financial institutions either eCommerce sites are also seeing a rise in fraudsters targeting their operations as well as their customers. 

Fortunately, with the help of modern AML technology, you can catch online money launderers more easily. Transaction monitoring software in particular helps banks and financial institutions spot suspicious transactions and fulfill their legal obligations.  

Read on to find out why it’s important to stay compliant with AML regulations, how transaction monitoring software works as a solution to money laundering, and how to get the most out of features currently on the market. 

Transaction monitoring vs AML

To develop a good understanding of the differences between transaction monitoring and AML, it’s first important to know that AML stands for Anti Money Laundering.

Although related, there are some key differences between the two terms to look out for. Transaction monitoring is part of AML, but AML goes beyond this to include measures such as identity verification of each customer at onboarding, as keeping certain information about them up to date at regular intervals.

How does transaction monitoring software work?

During any financial transaction – deposit, withdrawal, payment and so on – a customer creates data on the bank or financial organization’s system. This is even the case when they transact offline, in person, as the transactions are still subject to these regulations. 

Behind the scenes, in the bank’s digital infrastructure, transaction monitoring software feeds this data through risk rules. These risk rules are based around flagging suspicious actions such as the following:

• suspicious account activity and nature of the transaction
• high value transactions (the threshold is different for each country)
• high value cross-border transactions
• cash withdrawals and deposits of a large sum
• the source of inbound and outbound funds is unknown

Separating this information out from regular customer behavior, transaction monitoring software puts the data from these suspicious transactions, withdrawals and deposits into what is known as a SAR file, or Suspicious Activity Report. The file is designed in such a way so that financial analysts and regulators can review it. 

There are online systems in place that allow you to file a SAR if you need to, and transaction monitoring software options on the market that do this automatically for you. 

So, how do you know when you need to file a SAR? If your customer’s transaction doesn’t match that of a customer’s usual behavior nor their stated purpose, then this is cause for suspicion. An example of this might be that a customer declares their purpose for a bank transfer is to purchase a house but then, contrary to this, the money is left untouched in their account for a suspiciously long time.

Even when the transaction does match a customer’s usual behaviors, you still ought to also check if your customer has been involved with any sanctions lists, politically exposed persons (PEP) lists and other blacklist mandates.

When customer behavior looks out of the ordinary, you can consider whether they have made a high value transaction or withdrawn a large sum of money. If there’s a reasonable explanation, such as moving house, or going on holiday, then this isn’t usually cause for concern. 

Most financial organizations have defined workflows for gathering evidence from their customers on the source of funds, for example, when the software does flag such cases. They either employ workflow software for this, as explained in a guide to automation by Integrify or integrate the process into their AML/transaction monitoring platform. If there’s no reasonable explanation, then this is flagged as a potential case of money laundering and usually results in a SAR.

As you can see, it’s a process of elimination, which helps to find the best possible story to explain a suspicious transaction. After all, a number of transactions can look suspicious to a bank but for legitimate customers, there are logical explanations that often have to do with a change of life circumstances, for instance. 

Transaction monitoring software usually flags suspicious behavior instantly, meaning that if you’ve got software, you don’t have to manually check every single customer transaction, deposit or withdrawal to see if it’s a case of money laundering. A manual strategy is completely unrealistic – even for challenger banks and neobanks, which tend to be smaller in scale.

Ultimately, transaction monitoring is broad in its scope, covering all aspects of a customer’s credit behavior, transaction activity, currency exchange or wire transfer activity. However, as elaborated in an explainer on transaction monitoring on the SEON website, transaction monitoring software solutions tend to also address other AML requirements, such as identity verification and KYC – and beyond, sometimes including customer monitoring and onboarding checks, transaction velocity monitoring, and so on, all of which are fraud prevention measures.

Which rules do I need to be compliant with?

There can be damaging repercussions to not complying with AML legislation.

These include fines, business disruption and potential damage to your reputation as an institution. For repeat offenders, extreme cases can even result in removal of the organization’s banking license. 

Different countries have different thresholds for when it’s right to flag and scrutinize a transaction. For instance, the US has a transaction threshold of $3,000.

AML is a set of requirements that banks and financial institutions have to comply with. Banks and financial institutions therefore have to have AML strategies in place to make sure that they achieve this successfully. 

How to choose transaction monitoring software

Now that you have an understanding of what transaction monitoring software is as part of your AML approach, you can look at choosing the best transaction monitoring software for your bank or financial institution’s needs. 

There are many pluses of doing so, such as increased efficiency in detecting money laundering, and compliance peace of mind. This software can also help you to rank the suspiciousness of user behavior, allowing for a degree of prioritization. In the case of high risk operations and regulatory environments, transaction monitoring software can be adjusted to more strict rulesets. 

Despite its efficiency and outright necessity, a transaction monitoring software option can still be costly. It can also take up a lot of your valuable business time and often requires a full risk management team even if the software’s helping you process more data than usual. You might be looking at outsourcing this solution to a third-party or deploying a specialized, onsite solution – which will have to be managed primarily by your own team. Keep in mind that, in addition to the AML solution, the fraud/risk team who operates and maintains this software can also be on-site or off-site as well. 

Whatever your solution, every bank is probably trying to increase efficiency while remaining complicit with AML requirements. 

In reality, there’s no one-size-fits-all transaction monitoring software solution, especially as organizations have additional pain points and mandates to address. But, fortunately, there are a lot of options out there. 

1. Organizations are well advised to start the process with their legal and compliance consultant, to fully map out the legal landscape that applies to their activities. 
2. Then, you may want to continue with listing your adjacent and additional risk prevention needs as an organization – meaning those features that transaction monitoring software sometimes has, and you may be interested in.
3. From there, consider whether it’s going to be in-house or outsourced software, the size of your team of fraud analysts, the level of automation you desire, and your overall risk tolerance, and you’ll be able to create a shortlist to investigate further.
4. Investigate your shortlisted software, including getting quotes and hands-on demos, when available.

Key transaction monitoring software tips 

In terms of key features, we suggest looking at how flexible the product is (in terms of rules setting), a user experience that is seamless with an UI that’s functional and easy to navigate. 

• In terms of flexibility, the more your transaction monitoring software can create advanced statistical models that enable easier detection of obscure money laundering methods, the better. 
• Preconfigured rules are also very useful to have, as it means that you don’t have to have an engineer to set up new rules, which could be often as the requirements of your business change. 
• Software that allows for flexibility where the growth of your business is concerned can be useful, as it will be able to handle an increased transaction volume. 
• User friendliness is also something one might want to consider. Is the software intuitive and easy to use, while providing sufficient functionality to your in-house team? Also, does it negatively affect your customer journey compared to other compliant software? 
• Keep your eye out for customizable rulesets and scoring methods – this makes the tool you deploy adaptable to different regulations as they change or as you expand to other locales. If there are any criminal or legislative changes, your AML compliance team can set new parameters. 
• Data transparency and granularity is also key. Some transaction monitoring software allows your team to manually review customer activity according to criteria created for high risk activity. This is especially useful if you want to bring in your own expert team to review human activity. Human judgment can play a useful part in spotting money laundering, especially if automatic transaction monitoring software processes themselves haven’t quite caught up with new money laundering methods.

In 2022, efficient AML software has never been in higher demand, largely due to the exponential growth in challenger banks and fintech startups. 

Per Statista, 38% of personal loans in the US are granted by fintechs rather than legacy institutions, while fintech revenue is projected to reach $190 billion by 2024. But money laundering is equally on the rise. 

When it comes to transaction monitoring, there’s no one-size-fits-all. Put the above tips to good use to choose the software that’s right for your organization.

About the Author

Gergo Varga has been fighting online fraud since 2009 at various companies – even co-founding his own anti-fraud startup. He’s the author of the Fraud Prevention Guide for Dummies – SEON Special edition. He currently works as the Evangelist at SEON, using his industry knowledge to keep marketing sharp, communicating between the different departments to understand what’s happening on the frontlines of fraud detection. He lives in Budapest, Hungary, and is an avid reader of philosophy and history.