Why is AML Transaction Monitoring Important?

Transaction monitoring is a key component of the anti-money laundering (AML) program that all financial institutions must have in accordance with the Bank Secrecy Act (BSA). Transaction monitoring’s primary purpose is to identify and report suspicious fraudulent activity, which is becoming increasingly common. In 2022, 2.4 million consumers reported financial fraud to the Federal Trade Commission (FTC) for losses totaling $8.8 billion. This is up from $3.3 billion in reported total fraud losses in 2020—a staggering increase.

To conduct adequate transaction monitoring today, your institution faces an uphill battle on multiple fronts. The most effective way to shield yourself from money laundering and other financial crimes is to understand what’s driving this latest set of challenges. Using this information, you can combine technology and best practices to improve your transaction monitoring efforts.

Want to learn more about creating an effective AML compliance program? Read our complete AML Compliance Guide.

Why Has AML Transaction Monitoring Become So Challenging?

Change is constant, but the COVID-19 pandemic and the increasingly digital business landscape have dramatically accelerated its pace, making transaction monitoring more challenging than ever for financial institutions.

The Current (and Future) Consumer Mindset

Heading into 2020, consumers were slowly but surely moving toward digital-first consumerism. Once the pandemic hit, almost every consumer—even those who were previously unwilling—made a full-fledged leap in that direction. In fact, McKinsey says it took just 90 days into the pandemic for the level of e-commerce adoption to match that of the entire previous decade.

In response to this elevated e-commerce demand, many traditional retailers and modern e-tailers started competing for their share of this expanded customer base by offering premium subscription services, including insider access to free shipping and greater discounts. That, in turn, further convinced consumers of the ease and advantages of a digital-first lifestyle.

Fraud Opportunities

In the physical world of yesteryear, financial fraudsters had to interact with another person, such as the sales clerk, and present a debit or credit card. In the digital realm, the inherent obstacle created by that personal interaction and physical card is eliminated.

Furthermore, criminals no longer have to steal or fake a debit or credit card to use for e-commerce scams. They simply compromise the consumer’s bank account credentials through social engineering tactics. Once in, they slowly take over the account, changing a notification here, updating a contact number there, until they eventually lock out the legitimate account owner. This type of activity is far more difficult to detect than a random, uncharacteristic charge at a big box store or major e-commerce site.

What’s at Risk When You Ignore These AML Challenges?

Financial institutions who don’t fully understand these challenges and haven’t adjusted their transaction monitoring efforts face an elevated level of risk in these critical areas:

Anti-Money Laundering Fines

Not effectively assessing or mitigating AML risks can increase the chance of non-compliance. This comes as federal regulatory agencies place a greater emphasis on compliance with AML regulations and doling out harsh civil money penalties. For example, this included a $390 million BSA/AML-related fine in 2021 and a $140 million one in 2022. Businesses should continue to expect increased focus on AML compliance as regulators leverage the tools at their disposal from the AML Act.

Organizational Profitability

Financial institutions not effectively mitigating their fraud risk are setting themselves up for a significant hit to their bottom line. According to PwC’s 2022 Global Economic Crime and Fraud Survey, 52% of companies with global annual revenue of more than $10 billion experienced fraud in a 24-month period, and 18% of those companies had $50 million or more in financial impact from their most disruptive fraud incident.

One unnecessary fraud-related cost that institutions struggle with is the extra staff needed to analyze alerts stemming from a high percentage of false positives. Another is the expense of reissuing cards to all customers after a merchant breach when their transaction monitoring system can’t pinpoint impacted customers.

Staff Productivity and Motivation

Those working in fraud prevention often get burned out when they are constantly working through a backlog of false-positive alerts rather than investigating actual cases of fraud. As a result, these employees seek greener pastures at other firms, likely for more pay, given today’s increased demand for highly qualified compliance professionals.

How Can Financial Institutions Overcome AML Transaction Monitoring Challenges?

Although these global trends in AML transaction monitoring sound discouraging, there is an antidote that can keep financial institutions on the right side of AML regulations and better protected from fraud losses.

The Hallmarks of an Effective Transaction Monitoring System

Transaction monitoring systems have evolved to meet the demands of today’s fraud environment. Your institution can meet these demands by leveraging a transaction monitoring system that incorporates the following functionality:

• Artificial intelligence and machine learning: Modern systems leverage machine learning models to help identify suspicious activity by analyzing behavior patterns to generate alerts when customer behavior deviates from expected patterns. AI and machine learning technology learns from your analysts to become an extension of your institution’s team, which can ease AML/BSA team burnout by streamlining reporting workflows and daily tasks. Further, AI models reduce false positives and use context from investigators and customers to optimize results and automatically close cases, providing detailed decisioning for auditing and process transparency.
• System integration: The effectiveness of your AML compliance program depends on your ability to create an accessible, holistic view of customers. This means grabbing all the scraps of information in each of its various systems, including every name, physical address, transaction, IP address, sign-on, purchase location and transfer associated with a particular customer. In order to access all that information, your transaction monitoring system must be fully compatible with and seamlessly connected to those other systems.
• Behavioral analytics: All of that information adds up to millions of data points, even for smaller organizations. The human eye might be able to detect an obvious fraud, but it cannot recognize patterns of suspicious activity or relationships using multiple data points for every transaction. But transaction monitoring systems that use machine learning and behavioral analytics can make those connections quickly and accurately across very large volumes of customer data and transactions to stop the initial fraudulent act and any subsequent acts.
• Time-to-detection: The most effective transaction monitoring systems allow your institution to set a desired timeframe for detection, including a real-time option, and a desired timeframe for transfer to an internal or outsourced staff member to evaluate, resolve or escalate the alert for further investigation.
• Risk mitigation: Your transaction monitoring system must effectively monitor and mitigate your real-world risk, encompassing the types of products your offer, customers and footprints you serve and channels your customers use.

The Key Elements of Effective Transaction Monitoring Internal Controls

Your transaction monitoring system must be supported by effective internal controls, which include these best practices:

• Comprehensive risk assessment: As tempting as it is to quickly peruse your institution’s last BSA/AML risk assessment and rubber stamp it for this year, that doesn’t help gain a better understanding of your existing risks, which is the whole point of this exercise. Your institution needs to take the time to evaluate current key risk areas and assess the ability of your controls to limit and mitigate them.
• Clear and definitive policies and procedures: Based on the findings from the risk assessment, your institution should update its policies and procedures for stronger financial crime prevention.
• Thorough documentation: In addition to a written risk assessment and subsequent policies and procedures, your institution should document the functionality of its transaction monitoring systems, including the rules and behavioral analytics it uses and the other systems it integrates with, as well as how your institution applies that functionality to comply with policies and procedures.
• Program validation: Finally, your institution should test its transaction monitoring system and internal controls to ensure they work as expected to combat financial crime.

What Is Anti-Money Laundering Compliance without Transaction Monitoring?

Identity verification, suspicious activity reporting and sanctions screening are all vital parts of AML compliance. Still, your program is incomplete without robust transaction monitoring, which takes full advantage of today’s advanced functionality such as machine learning, easy-to-use case management systems and behavioral analytics. Without these tools, your institution is left with more risk, more work for its compliance staff and more friction that negatively impacts the experience of legitimate customers.

You can learn more about how to use transaction monitoring to create a modern AML program by reading our AML Compliance Guide.

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