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Real time transaction monitoring featured illustration
Real time transaction monitoring featured illustration

Real-time transaction monitoring: Everything you need to know

Gergo Varga

Jan 28, 2023

According to the United Nations, $2 trillion is laundered every year. Financial institutions have been fined a staggering $2 billion in 2021, according to Nasdaq's 'AML Fines H1 2021 Report'. The numbers are staggering and a big reason why real-time transaction monitoring has become the cornerstone of compliance programs in the finance industry.

Real-time transaction monitoring is the process of identifying suspicious events such as payments or business agreements by using rules and data. These transactions are then flagged for manual examination. Real-time transaction monitoring is fundamentally critical for organizations that move money on behalf of clients or companies and is a critical part of any organization's anti-money laundering (AML) compliance program.

By flagging potentially suspicious transactions, real-time transaction monitoring helps organizations identify and report suspicious activities – such as terrorist financing, money laundering, and other illicit financial activities – to the appropriate authorities. As such, real-time transaction monitoring plays an important role in helping to prevent financial crime worldwide.

In this comprehensive guide to real-time transaction monitoring, we cover the following topics:

  1. What is real-time transaction monitoring, what are the types of transaction monitoring, and what it detects

  2. The challenges in real-time transaction monitoring today

  3. The pillars of real-time transaction monitoring

  4. How to pick the right real-time transaction monitoring solution

  5. Key takeaways

What is real-time transaction monitoring?

Real-time transaction monitoring helps organizations recognize and understand patterns of potentially criminal behavior, stop suspicious payments, or analyze them post-payment. Different types of real-time transaction monitoring techniques are used to improve the accuracy and speed of the enhanced due diligence (EDD) process, detect and prevent fraud, and analyze transactional data to detect money laundering.

Types of transaction monitoring

  • Real-time transaction monitoring not only allows you to detect crime as it happens but also blocks any suspicious payments in real-time. Consequently, this type of transaction monitoring is extremely valuable in detecting and preventing fraud.

  • Post-event transaction monitoring is used in less critical circumstances, where the payments do not create an immediate red flag. To reveal hidden patterns in completed payments, they are compared to money laundering typologies in post-event transaction monitoring.

  • Continuous transaction monitoring is used to check historical customer data to better understand patterns and irregularities in customer behavior. Oscilar allows you to generate data aggregations for weekly, monthly or continuous transactional behavior samples.

Transaction monitoring systems are usually built by extracting transaction information from an organization's internal databases and transaction records. This transaction data is then cleansed, normalized, and aggregated before being fed into the transaction monitoring system. The system uses pre-configured rules and models to identify potentially suspicious transaction patterns. A transaction when flagged as potentially suspicious is then forwarded to a financial crimes analyst for further review.

What can real-time transaction monitoring detect?

A thorough transaction monitoring program can detect:

  • Money laundering is the process of concealing the source of illegally obtained money. It is typically done in three stages: placement, layering, and integration. In the placement stage, the money is deposited into a business. In the layering stage, accounting techniques are used to cover up the origins of the money. In the integration stage, the money is used for other payments. Money laundering can have serious implications for businesses, as it can lead to financial penalties and other regulatory compliance issues.

  • Terrorist financing is the act of providing financial support to individuals or groups involved in terrorism. Most regulated businesses have a transaction monitoring program in place that includes a list of organizations that they monitor on an ongoing basis for terrorist activity. The Financial Action Task Force (FATF) Blacklist is a list of countries that are designated as non-cooperative in the global fight against terrorist financing. Businesses are required to take extra due diligence measures when dealing with customers from these countries. In addition, the US Patriot Act requires businesses to have procedures in place to prevent the financing of terrorism. These procedures typically include enhanced customer due diligence and increased monitoring of transactions.

  • Fraud occurs when one or more parties deliberately deceive another party. When it comes to finances, fraud usually involves things like identity theft, false insurance claims, credit card defaults, and more. Continuous transaction monitoring that analyzes historical user activity in the context of the current transaction is most effective in stopping fraudulent activity from taking place.

  • Bribery and corruption: Transaction monitoring is an effective way to detect potential bribery situations, as it can flag up specific indicators such as abnormal cash payments and expense payments made in round sums. By implementing transaction monitoring, businesses can comply with anti-bribery regulations, such as the Bribery Act 2010.

The challenges in real-time transaction monitoring today

Financial criminals always have the advantage: they use cutting-edge technology, have few restrictions, and plenty of resources. Unfortunately, this means that compliance teams are constantly playing catch-up. They often lack the manpower to investigate and prevent money laundering promptly. And that is not all.

When it comes to real-time transaction monitoring, organizations face even greater challenges, in part due to:

  • Outdated legacy solutions that lack continuous transaction monitoring that integrates historical user activity data and the current transaction data to flag suspicious activity, leading to more false positives or more manual reviews.

  • False positive alerts: Poor-quality data, together with inaccurate transaction monitoring rules, can produce a large number of false positive alerts. Organizations that find themselves in this situation have two options: hire large teams to keep up with the growing workload, or choose transaction monitoring tools to minimize operational risk and keep compliance costs in check. The latter option is often the more cost-effective choice, as it can automate many of the tasks associated with real-time transaction monitoring and alert response. In addition, it can help to improve the quality of data by providing tools for data cleansing and enrichment. As a result, false positive rates can be reduced, saving time and money.

  • Operational costs: As businesses increasingly rely on compliance with regulations to avoid penalties and maintain customers' trust, the costs of compliance have come into sharp focus. A recent study found that the average cost of compliance for a small business is $12,000 per year, while the cost for a large enterprise can be as high as $16 million. Not surprisingly, compliance costs are one of the top concerns for companies. When faced with a growing number of false positives, it's essential to have someone on hand to resolve the alerts and clear the alert backlog. However, increasing headcount to deal with compliance issues can quickly drive up operational costs, triggering a vicious circle that is difficult to escape.

  • Regulatory consequences: The regulatory environment is constantly evolving, and organizations must be prepared to adapt their compliance programs accordingly. Regulatory consequences can be severe, ranging from financial penalties to reputational damage. To avoid these consequences, it is essential to have a well-run compliance program in place. However, simply complying with the regulations is not enough. Organizations must also be proactive in fighting crime. This means having systems and controls in place to identify and report suspicious activity. By taking these measures, organizations can reduce the risk of regulatory consequences.

  • Customer friction: Customer friction is detrimental to business growth. The absence of a smooth, frictionless experience for your customers runs the risk of losing them to the competition. Oftentimes, real-time transaction monitoring tools lead to more false positives, thereby affecting customer friction negatively.

Balancing the challenges of maintaining compliance and fighting financial crime, while providing the best experience for your customers is a tough balance that organizations strive to strike. To stop crime from happening and catch criminals when it does happen, compliance teams must have access to the latest real-time transaction monitoring tools and technology.

The pillars of real-time transaction monitoring

A real-time transaction monitoring system is a vital piece of security infrastructure for any organization that deals with money. By using rules and data to flag suspicious transactions for manual review, a transaction monitoring system can help prevent terrorist financing, money laundering, and other malicious financial crimes.

There are two main components of real-time transaction monitoring: rule-based detection and data-driven detection.

Rule-based detection uses pre-defined rules to identify potentially suspicious transactions. These rules can be based on factors such as the amount of money involved, the destination country, or the type of business involved.

Data-driven detection uses historical transaction data to identify patterns or anomalies that may indicate criminal activity. This data can be used to create models that identify specific behaviors associated with criminal activity. For example, a model might look for patterns in payments made to certain countries or payments made by certain types of businesses.

Once a transaction has been flagged as potentially suspicious, it will be subjected to further manual review. This review may involve contacting the customer or business involved in the transaction, checking for red flags such as links to known criminals or terrorist organizations, or reviewing the transaction history of the involved parties.

How to pick the right real-time transaction monitoring solution

Given the complexity of transaction monitoring, the right real-time transaction monitoring solution is the cornerstone of a company's ability to fight financial crime.

Here are the most important capabilities to look for in a transaction monitoring solution:

  1. Ability to handle high transaction volume and complexity: If you process a large number of transactions each day, you'll need a transaction monitoring system that can handle that volume of data. Similarly, if your transactions are complex (e.g., involving multiple currencies or jurisdictions), you'll need a system that can handle that complexity.

  2. Apply firewall rules: By blocking high-risk countries, firewall rules act as a safeguard against fraudulent transactions and help companies to comply with sanctions. Nearly all business-grade firewalls can block cases of fraud originating from a particular domain, IP address, or geolocation. This process can be done manually as you identify suspicious activity or proactively. For example, add countries where you don't sell your products to the block list ahead of time.

  3. Leverage Machine Learning: Machine learning has proven to be one of the most effective tools in combating financial fraud. These platforms are built to scale your business and constantly monitor the threat landscape to prohibit new and evolving attacks. While manual fraud investigation is certainly beneficial, AI-powered technology works 24x7, with minimal or no human involvement.

  4. Prioritize frictionless experiences: It's possible to minimize false declines while monitoring transactions. Adopt real-time transaction monitoring tools that offer challenges that enable a frictionless customer experience. Accurately applied challenges prioritize the customer experience by reserving an extra layer of authentication for only the very small number of transactions that truly pose a high risk.

  5. Reporting and analytics: A real-time transaction monitoring system is only as good as the data it provides. Make sure to choose a system that offers reporting and analytics features that will help you draw trends from your historical and real-time transaction data.

Real-time transaction monitoring: Key takeaways

Real-time transaction monitoring is a critical tool for organizations that move money on behalf of customers or businesses. It helps prevent terrorist financing, money laundering, and other malicious financial crimes. Real-time transaction monitoring can also be used to detect and investigate suspicious activity, and to comply with anti-money laundering regulations. There are several challenges that transaction monitoring systems face today, including the increasing complexity of transactions, the need for real-time monitoring, and the challenge of false positives.

A new approach to real-time transaction monitoring is needed that takes into account the changing landscape of financial transaction trends. This new approach should be able to handle the complexity of today's transactions, provide real-time monitoring, and reduce false positives. When choosing a real-time transaction monitoring system for your business, there are numerous factors to consider, including transaction volume and complexity, integration with other systems, leveraging firewall rules, applying machine learning and reporting, and historical + real-time analytics capabilities.

By using the right real-time transaction monitoring solution, organizations can protect themselves from financial crimes, and penalties and improve security and safety for their customers or clients. If you are looking for a partner to help you reduce false positives, build a strong and efficient compliance program, and combat financial crime, book a demo to see Oscilar's Real-Time Transaction Monitoring solution.

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