Transaction Monitoring

Regulators require companies to adopt a risk-based approach to AML compliance, which applies to the monitoring process as well. Businesses need to adjust the level of due diligence and apply enhanced due diligence (EDD) measures for high-risk customers and their transactions. 

The key difference between enhanced and standard due diligence is that standard due diligence is applied to all customers, while enhanced due diligence is used specifically for high-risk customers who need additional scrutiny.

In general, the key customer due diligence (CDD) processes include verifying all clients or customers, establishing risk profiles, and continuously monitoring them to detect and report suspicious activities.

Many financial institutions and companies with high transaction volumes use automated transaction monitoring software because it brings the biggest benefits: accuracy and efficiency. While human insights are still vital, AML automation helps analyze vast amounts of data to detect patterns. For example, when an account exceeds a certain threshold, the software flags it so that compliance teams can further investigate the issue and prevent fraud.

The FATF, or the Financial Action Task Force (FATF), recommends using the risk-based approach in order for the company to tailor the extent of its transaction monitoring process according to the internal AML risk assessment and the risk profiles of the company’s individual customers. This also includes ongoing due diligence and continuous transaction monitoring, which should be at least triggered by certain high-risk transactions. This means simplified due diligence (SDD) is appropriate when the risk is considered low, allowing the frequency of transaction monitoring to be reduced to set thresholds.

This process ensures compliance with legal requirements and is one of the key components of the AML framework, especially for detecting and preventing fraud after the initial customer onboarding process. 

The primary reasons why companies prioritize having a robust transaction monitoring process are:

• Better suspicious activity detection 
• An essential requirement for a compliant AML program
• Better risk management and due diligence management
• Updated information on ever-changing customer risk profiles

Businesses typically use software that allows them to set up custom rules for their monitoring needs. They are based on various AML risks that the company needs to acknowledge. For example, large transactions above a certain threshold, structuring or smurfing, swift movement of funds between accounts, and transactions from high-risk countries — are all important red flags when monitoring clients.