Summary
Today, complex criminal activities and financial malpractice are major challenges that businesses face, particularly those in the financial services sector.
In light of the many new approach vectors cybercriminals are using, transaction monitoring has become more than just a good practice – it’s a vital shield against fraudulent transactions.
In addition to shielding businesses from potential financial losses, transaction monitoring also ensures adherence to the regulatory requirements set forth by financial regulators. This includes the regulations set by the Financial Conduct Authority (FCA) in the UK.
Why Is Transaction Monitoring Important?
Today, complex criminal activities and financial malpractice are major challenges that businesses face, particularly those in the financial services sector.
In light of the many new approach vectors cybercriminals are using, transaction monitoring has become more than just a good practice – it’s a vital shield against fraudulent transactions.
In addition to shielding businesses from potential financial losses, transaction monitoring also ensures adherence to the regulatory requirements set forth by financial regulators. This includes the regulations set by the Financial Conduct Authority (FCA) in the UK.
What Is Transaction Monitoring?
Transaction monitoring is the process of scrutinising and analysing financial transactions to detect and prevent fraudulent activities. Essentially, transaction monitoring acts as a business’s immune system, raising alerts over suspicious activities and fighting off threats.
Transaction monitoring is a vital component of Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT), both of which require transaction monitoring to detect illegal financial activities.
» MORE: Anti-money laundering: What is KYC verification?
Why Is Transaction Monitoring Important?
Transaction Monitoring Is A Shield
Transaction monitoring is important because, without it, businesses and financial institutions are vulnerable to illegal financial activities, ranging from terrorist financing to basic fraud.
What happens when a business lacks a robust transaction monitoring system and inadvertently becomes an attractive target for money launderers?
The answer is serious consequences for the business, such as regulatory penalties and potentially irreparable damage to its reputation.
Unfortunately, with certain tools and strategies, it is indeed possible for money launderers to use a well-meaning business to move illicit funds.
Identify and Improve Business Operational Issues
Beyond the security aspect, transaction monitoring is helpful in identifying operational issues with a business and enhancing its customer service.
For instance, repeated transaction failures might indicate a bottleneck in the payment processing workflow, prompting a review and enhancement of the process.
» MORE: Payment security for merchants
Who Needs Transaction Monitoring?
Transaction monitoring is particularly crucial for banks, payment processing companies, credit unions, and any other entity that facilitates financial transactions.
In many jurisdictions, transaction monitoring is not just a sound business practice but a legal requirement. The regulations enforced by the Financial Conduct Authority (FCA) in the UK, for instance, mandate businesses to maintain efficient transaction monitoring systems.
What If A Business Doesn’t Have Transaction Monitoring?
Businesses that ignore the regulations in their respective jurisdictions could face significant penalties, including fines, revocation of operating licences, and in extreme cases, prison sentences.
There Are Various Approaches to Transaction Monitoring
Transaction monitoring isn’t a one-size-fits-all affair. Various factors influence the extent of the monitoring, such as the size of the business, the volume and complexity of transactions, and the inherent risk level of the industry sector.
To stay efficient, a business can adapt its transaction monitoring efforts to its specific risk profile, allowing it to focus its resources on areas where it is most vulnerable.
With that said, UK regulators want to see a risk-based approach to anti-money laundering.
For example, a bank with a high volume of cross-border transactions may choose to focus its monitoring efforts on international wire transfers, an area often exploited for money laundering.
Effective Transaction Monitoring and What It Looks Like
Businesses today have a fair amount of flexibility when it comes to transaction monitoring. But ideally, businesses will want to use a combination of manual and automated processes for maximum efficiency and effect.
While manual monitoring is time-consuming and susceptible to human error, the human element can sometimes spot discrepancies that an automated system might miss.
At the same time, automated transaction monitoring tools offer significant advantages in terms of speed, efficiency, and the ability to analyse large volumes of data.
Both strengths are needed for comprehensive transaction monitoring.
» MORE: Security compliance and how Pixxles protects your business
Evolving Transaction Monitoring Technologies
Over the years, the transaction monitoring landscape has changed significantly, thanks to advancements in technology.
Businesses have moved from simple manual scrutiny of transactions to sophisticated digital platforms capable of handling large-scale, real-time transaction analysis.
In fact, AI and machine learning are now integral to (and inseparable from) transaction monitoring, as these technologies can process and analyse staggering volumes of transaction data very quickly.
Comprehensive Transaction Monitoring – What Steps Are Followed?
Before we get into specific transaction monitoring steps, let’s explore what comprehensive transaction monitoring looks like.
Broadly speaking, a comprehensive transaction monitoring system includes end-to-end anti-money laundering measures, dynamic rule building, and strategic use of automation.
End-to-end anti-money laundering means a business covers all stages of the process, from data collection, through analysis and detection, to reporting and auditing.
Dynamic rule building, meanwhile, allows businesses to continuously adjust their monitoring parameters based on the latest threats or regulatory changes.
Additionally, the strategic use of automation allows businesses to keep pace with vast amounts of transaction data.
With these elements in place, businesses have a much better chance of successfully executing the following steps.
Step 1. Data Collection
The initial step in any transaction monitoring process is data collection. In this stage, businesses gather and record data from a wide range of transactions.
This may include everything from cash deposits and withdrawals, fund transfers, credit card payments, and even ATM usage.
Depending on the business’s requirements, the scope of data collection can be very broad.
Step 2. Risk Assessment
The next step is risk assessment, during which businesses evaluate risk based on several factors like industry, location, transaction size, and customer behaviour.
Step 3. Rule Setting
Here businesses set specific rules based on best practices in their industry, regulatory requirements, and their unique risk profile.
Step 4. Alerting Via A Review System
With a robust alert and review system in place, businesses notify their relevant personnel when red-flag events occur.
Step 5. Compliance Team Review
When a transaction triggers an alert, it is put on hold until the compliance team can investigate further.
Step 6. Suspicious Activity Reporting
If the compliance team identifies a transaction as suspicious, a Suspicious Activity Report (SAR) should be filed with the relevant regulatory authority.
» MORE: The rise of UK cybercrime: How to protect your eCommerce business
What Can Transaction Monitoring Detect?
Transaction monitoring can detect a number of illegal financial activities. These include the following.
Fraud
Transaction monitoring helps identify suspicious patterns associated with credit card fraud, identity theft, and other types of fraud.
Terrorist Financing
Transaction monitoring can help trace and thwart terrorist financing.
Drug Trafficking
Transaction monitoring can detect drug trafficking by identifying associated patterns and anomalies, such as unusually large cash deposits or hyper-frequent small transactions.
Money Laundering
Sophisticated monitoring tools can detect the subtle signs of money laundering, such as structured deposits designed to avoid detection.
Bribes
Transaction monitoring can detect unusual payments that may suggest bribery or corruption.
Identity Theft
Transaction monitoring can detect identity theft by flagging sudden changes in spending patterns, high-value transactions, or transactions from unfamiliar locations. These could indicate unauthorized use of an individual’s financial information.
Operational Issues
Transaction monitoring helps identify operational inefficiencies and compliance oversights by analysing transaction patterns and failures.
Transaction Monitoring Red Flags
Identifying red flags can help businesses effectively prevent and combat financial fraud. Here are some common warning signs.
- Unusual Transaction Amounts
One of the primary red flags in transaction monitoring is unusual transaction amounts. For instance, a business might identify exceptionally large transactions or recurring transactions that run just below a reporting threshold. These could potentially warrant further investigation.
- High Frequency of Transactions
If a customer who usually performs a limited number of transactions suddenly starts to make many transactions within a short period, it could indicate illicit activities. This approach is known as structuring, a method used to evade detection by breaking down large amounts of money into a series of smaller transactions.
- Geographical Red Flags
Transactions originating from or destined for high-risk jurisdictions with lax financial regulations can be a red flag. Additionally, transactions that involve countries not usually associated with a customer’s profile are a cause for concern.
- Rapid Movement of Funds
Money rapidly moving between accounts, especially across multiple banks or countries, can be indicative of money laundering, where the goal is to obscure the money’s origin.
- Inconsistent Business Transactions
For business accounts, transactions that are inconsistent with the industry or type of business can be a red flag. For instance, if a domestic retail business suddenly receives a large number of international wire transfers, this may signal potential illegal activity.
- Change in User Behaviour
Any significant deviation from a customer’s usual transaction behaviour can be cause for concern. This might include changes in transaction amounts, frequency, or method.
- Overcomplicated Transactions
If a transaction, or series of transactions, appears overly complex or unnecessarily convoluted, this might be an attempt to evade standard transaction monitoring. Money launderers often use complex transaction networks to confuse the trail of money.
» MORE: Ecommerce fraud: Credit card testing & bin attacks explained
Future Transaction Monitoring Trends
As technology continues to advance, it is expected to bring about significant changes in transaction monitoring.
With the rise of cryptocurrencies, blockchain technology might play a larger role in transaction monitoring, offering unprecedented transparency and security.
Similarly, AI and machine learning technologies are set to become even more integral to transaction monitoring, although what this entails for the future is somewhat uncertain.
Contact Pixxles
Pixxles is a payment provider that is authorized by the Financial Conduct Authority, meaning we are directly accountable to you the customer and to the Regulator.
To learn more about us, see our Why Pixxles page. You can also call us at +44 208 126 4154.
