Transaction Monitoring (TM) is an essential component of customer due diligence and helps the entity develop a holistic understanding of the client-entity relationship. It is considered as a powerful tool to detect any suspicious activity or transactions, and hence financial crimes.

Transaction Monitoring is a proactive step. Entities can detect crimes even before their occurrence in the initial stages. This control procedure helps the entities detect patterns of suspicious activities, which may arise due to customers and suppliers behavior. The timely detection saves the entities from financial, legal and reputational repercussions.

The level of sophistication of the transaction monitoring process is determined by the complexity of the firm and its size. The key is to have complete and up to date customer information, which will enable the firm to identify anomalies in customer transactions.

Definition of Transaction Monitoring :

In layman terms, Transaction Monitoring means keeping regular watch on transactions. This involves checking of customer’s transaction history, account details, profile and other interactions. This kind of scrutiny enables the identification of possible risks associated with customers and possible prediction of their future behavior.

Real-time transactions can be tracked during their occurrence in order to block them and hence prevent fraudulent activities. Further, we can also check transactions to identify any set patterns after their occurrence. Conducting periodic transaction monitoring can help monitor customer’s behavior in terms of irregularities. Therefore, as a part of transaction monitoring the Financial Institutions, DNFBPs & VASPs must conduct frequent checks of their regular transactions.

Significance of Transaction Monitoring :

  • The transaction-monitoring framework leads to a safe business ecosystem in the country and builds trust between existing and new partners.
  • It gives confidence to regulators & stakeholders of the organization by showing seriousness of the entities towards detection of financial crimes.
  • It allows the entities to adopt a risk-based approach, wherein the monitoring is done based on set rules defined considering the customer’s risk profile developed and the nature of transactions executed by the customer.
  • The customer monitoring should be based on risk profile. For high risk customer, we should adopt an advanced level of transaction monitoring.
  • It is mandatory for entities to track suspicious customers, suppliers or transactions. Implementing transaction-monitoring system can help detect suspicious & fradulent transactions.

Essential features of Transaction Monitoring :

  • TM identifies transactions for further review.
  • Trained personnel review the flagged transactions.
  • The review results in appropriate actions being taken, such as further escalation of flagged transaction.
  • Transaction Monitoring can be in real time (as and when the transactions are occurring) or even post event where customer transactions over a period are assessed and can be useful in identifying trends in customer activity.
  • Setting rules : This means to identify specific transaction types or trends such as comparing transaction activity between similar types of customers thereby identifying anomalies, identifying where dormant accounts are reactivated, changes in frequency and size of the transactions.

Best Practices to implement Transaction Monitoring :

  • Follow the regulations : Companies should understand the importance of local and national regulations regarding AML/CFT laws and other financial crimes. Having up-to-date knowledge of all the rules & regulations would help in identifying suspicious transactions efficiently and optimizing TM rules.
  • Knowing your industry & products/services : Knowledge of your industry sector and products/services is necessary to ensure effective transaction monitoring. Companies should be aware of the industry-specific risks, customer demographics and the weakness in products & services. This deep understanding can help them create effective monitoring rules.
  • List down TM rules for your organization : Prepare a list of possible Red flag indicators specific for your industry and products/services. Considering the red flags, create Transaction monitoring rules which must encompass a range of simple and complex scenarios to detect possible suspicious transactions.
  • Documentation : Document all the information, analysis and insights. This will help in developing precise, comprehensive scenario.
  • Do not oversimplify the Risk scenarios : Remember one size never fits for all. Therefore, create detailed, but to-the-point factors to identify risky patterns of transactions.
  • Avoid too many risk scenarios : Add relevant context to each risk scenario and try to avoid overlapping. This will increase the quality of alerts and reduces the employees’ workload.
  • Use Automated tool for transaction monitoring : Use of AI based transaction monitoring system will generate more insights and can identify red flags more effectively than simple logical rules. Automated tools can track any pattern of suspicious behavior more effectively than manual monitoring.

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