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Today we are going to talk about the importance of transaction monitoring and discuss some of the rules that can be used to develop the ongoing transaction monitoring program.

First, let’s start by understanding what transaction monitoring is.

In the context of AML, transaction monitoring is a process where Financial Institutions, Designated Non-Financial Businesses and Professions, and Virtual Asset Service Providers keep a close watch on a customer’s transactions, such as deposits, transfers, purchases, sales, and withdrawals.

It also involves checking the customer’s transaction history during the business relationship and consistency with the risk profile.

So, why transaction monitoring is a significant part of businesses’ AML/CFT programs?

That’s because transaction monitoring can help detect patterns of suspicious behavior and timely report and prevent financial crimes.

You can create transaction monitoring rules based on the risk appetite of your business and the red flag indicators relevant to your business operations.

Risk appetite suggests the level of risk your business is willing to take for doing business with a customer after implementing adequate AML procedures and controls.

At the same time, the risk indicators are the potential events or customer behavior that suggest the involvement of proceeds of crime or activities intended towards terrorist financing or money laundering.

The transaction monitoring rules are the parameters or logic used to detect suspicious or unusual transactions. These rules generally consider parameters like - customer profile, nationality, transaction value, etc.

Now, we are going to discuss four such rules.

Threshold-based
Rules wherein transactions exceeding a predetermined value, counted for individual or series of transactions, are closely monitored. You can define this threshold value based on the average value of customer transactions or industry trends.

Transaction-based
Transactions can be categorized into specific types, such as cash transactions, virtual currency transactions, credit card transactions, etc. Under this rule, the monitoring logic is defined considering the specific type of transactions, wherein special attention shall be paid to the particular nature of activities.

Location-based
Certain countries are known for their involvement in money laundering and terrorist financing activities or weaker regulations to counter these crimes. You can set a monitoring rule for reviewing transactions involving particular locations or jurisdictions.

Customer-based
In this transaction monitoring rule, you can closely monitor transactions with a particular customer or class of customers, such as PEPs or other customers categorized as “high-risk.” You can either consider monitoring all transactions of such customers or set a unique threshold limit for such customers.

These parameters are dynamic, and you must stay updated with the information that influences these parameters.

For instance, when more countries are added to the FAFT grey list, you must change the rule accordingly. Besides that, if there’s any change in the company’s AML policies and procedures that changes the risk appetite and red flag indicators, you’ll need to align the transaction monitoring rules accordingly.

By Transaction Monitoring, you’ll be able to establish the following about the transaction whether
1) The transaction is normal for the customer or similar customers, or is there any inconsistency
2) The transaction is reasonable to the nature and size of the customer’s business activities
3) The customer is legally and justifiably allowed to conduct such transactions.

It is critical for businesses to monitor transactions and identify suspicious activities. Monitoring transactions helps businesses combat money laundering, terrorist financing, and other financial crimes.
By setting up transaction monitoring rules, it becomes easier and more effective to find suspicious transactions. However, you must always stay updated and alter the rules per the changes in the AML policies and procedures and emerging risk typologies.

Hope you find this video insightful. Stay tuned for more updates on AML measures.

Timestamps:
0:00 Introduction on Transaction Monitoring Rules
0:20 What is Transaction Monitoring?
1:01 How to create transaction monitoring rules?
1:33 What are Transaction Monitoring Rules?
1:55 Threshold based rules
2:13 Transaction based rules
2:37 Location based rules
2:55 Customer based rules
3:17 When to update transaction monitoring rules
3:43 Why is transaction monitoring necessary?
4:22 Conclusion and regards

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