Financial institutions need to protect their products and services at all times. They are at risk of money laundering activities or terrorist financing. To prevent these issues, financial companies need to use transaction monitoring software. The process of transaction monitoring is vital to anti-money laundering (AML).
Why Is Transaction Monitoring Necessary?
Financial institutions may hire or get solutions for the best cybersecurity services companies. However, there is still room for suspicious transactions and laundering. Therefore, transaction monitoring is always necessary. It helps to detect potential anomalies and prevent the loss of millions of dollars to criminals. If there is a money-laundering scandal and if a financial company gets involved, then the processes that follow are not only time-consuming and expensive but can also hurt the company’s reputation. Therefore, the use of transaction monitoring to keep a financial institution safe from those involved in financial crime is one of the reasons why it is important.
For financial institutions, the AML and CTF regulations are essential. Companies must adhere to all rules set. By implementing transaction monitoring, they can prove that all rules and regulations are being maintained. Transaction monitoring also indicates that a particular financial institution is doing its best to prevent criminal activity. New and existing partners, especially banking partners, will have more faith in the institution.
Some factors are tied up with the AML and CTF regulations and often affect transaction monitoring. These include:
- The type of operations conducted by a financial institution
- The geographical locations of the institution
- All distribution channels involved
- Type of transactions and the volume of each transaction
- All customer profiles, related activities, and products
- Third parties and intermediaries, and the extent to which financial institutions use them
- The scalability and complexity of transaction monitoring systems and the financial business
Every organization has to deal with a certain degree of risk. It is important to understand which areas are risky when going into the business. Transaction monitoring is a risk-based approach. Financial companies can analyze risk factors and determine what might pose a potential threat to clients through this process. Risks are usually related to the customers. Through transaction monitoring, financial institutions can analyze a customer’s country of residence, condition of employment, and other such factors. After assessing the risk of a particular customer, financial institutions can decide what type of monitoring is necessary and for how long. The degree of transaction monitoring will depend on the risks involved concerning a customer. Certain financial companies are based in high-risk zones and offer particularly valuable products. These institutions will have to use transaction monitoring on all customers, no matter what the risk analysis says about them.
Automated Transaction Monitoring vs. Manual Transaction Monitoring
Financial institutions that invest in cybersecurity and compliance services and transaction monitoring need to decide what type of monitoring is most beneficial. Due to the widespread technological advancements and automation of various business processes, automated transaction monitoring is the best option for all financial companies. However, manual transaction monitoring is possible if a company uses traditional methods and on-premise architecture. But financial institutions need to keep in mind that manual transaction monitoring is time-consuming, costly, and can often involve multiple errors. A manual transaction reporting system is also intensive. On the other hand, an automated monitoring system will not make any errors.
As of now, in an automated transaction monitoring system, the entire process is not automated. There is an aspect that stays manual and is yet to be completely automated. If any suspicious activity gets detected through automated transaction monitoring, it will be flagged immediately. But what happens next involves manual action or human intervention. Professionals will need to check what might be flagged and determine if it is an actual threat. Therefore, manual processes are essential, especially to determine that the software for automated transaction monitoring is functional.
For transaction monitoring software solutions, scalability and flexibility are important. Manual transaction monitoring is not very scalable. It also has its limitations and is, therefore, not flexible at all. However, automated transaction monitoring is scalable and flexible. To understand the scalability and flexibility of automated transaction monitoring software, one can check the recent regulations. Apart from this, automated transaction monitoring is also instrumental in creating audit trails. Audit trails help establish a clear path for all activities so that they are transparent and can be tracked at any time.
Transaction Monitoring and Suspicious Activity Reports (SARs)
Like several other companies, financial institutions receive various types of data that need to be processed and managed. Therefore, these institutions invest in IT infrastructure managed services. However, laundering activities can compromise all the sensitive data. Therefore, financial companies must invest in regular Suspicious Activity Reports or SARs. A SAR is generated if any suspicious transaction activity is detected. Once the activity is reported, the report is sent to the concerned authorities. A SAR is usually filed in case of the following events.
- When there is any unusual account activity or transaction
- A deposit or withdrawal of a large amount of cash
- If transactions exceed a certain amount
- Money transfers, whether domestic or international, going over a certain amount
The use of SARs in transaction monitoring helps to determine all kinds of suspicious activity. Customers do not only do suspicious activities, but the employees of a financial company may be involved in questionable and often criminal activities. After the activity is detected, financial institutions take about 30 days to evaluate the situation and decide whether to file a SAR or not. If there is a need for further evidence, the investigation may take up to 60 days.
Financial crimes occur quite often, and therefore, companies need to be equipped to protect their products and services. Suppose a transaction monitoring system is in place. In that case, a financial institution will accurately predict and prevent anomalies, reduce risks, and keep its reputation intact. Financial institutions that ensure transaction monitoring are reliable and, therefore, can receive the support of multiple partners.