According to the United States Department of the Treasury, an estimated $300 billion worth of funds is laundered every year through the United States alone. Globally, this figure balloons to somewhere between $800 billion and $2 trillion, depending on the year.
Failure to detect and prevent the laundering of such vast sums of money has tremendous costs — in the form of lost tax revenue for governments as well as potentially massive fines for the financial institutions unknowingly facilitating the transactions.
As just one example, consider the fact that in 2021, FinCEN fined Capital One $390 million for failing to meet the requirements of the Bank Secrecy Act between 2008 and 2014. This included failure to identify and report suspicious transactions worth millions of dollars, amongst other failures.
Clearly, financial institutions have a substantial incentive to ensure that their platforms and services are not used to launder money. Transaction monitoring is one piece of that puzzle.
But what exactly is AML transaction monitoring, and how does it tie in with the rest of the anti-money laundering playbook? Below, we define AML transaction monitoring, highlight the different types of businesses required to monitor customer transactions, and answer other common questions about this integral process.
What is AML transaction monitoring?
AML transaction monitoring refers to the processes a business implements to monitor customer transactions in order to identify suspicious activity that may be tied to money laundering activities or other financial crimes.
The end goal of transaction monitoring is for a business to prevent, to the best of its abilities, criminals from using its platform or services to launder money. Likewise, transaction monitoring helps establish a “paper trail” that regulators can use in their investigation to follow the money and build a case.
This makes transaction monitoring a crucial part of the AML playbook for businesses subject to anti-money laundering regulations.
How does AML transaction monitoring work?
In order to identify suspicious activity that may be potentially linked to money laundering or other crimes, banks and other financial institutions are required to monitor the transactions their customers make using their services. These transactions are then automatically evaluated against internal rules that are designed to gauge how risky a transaction is.
When suspicious activity is detected, certain details of the transaction must be recorded and a suspicious activity report (SAR) must be filed with the appropriate regulator within the designated time frame.
Other reports also become necessary when a customer completes a transaction with certain characteristics (such as surpassing a set amount). This includes currency transaction reports (CTRs), foreign bank and financial account reports (FBARs), and more. Each country has its own financial intelligence unit (FIU) responsible for reviewing and investigating these reports.
Banks consider a number of risk signals when evaluating transactions for suspicious activity. These include:
- Geography: Where is the transaction being initiated? Where is it being completed? Are either of these locations in a high-risk country or jurisdiction as defined by the FATF or other regulators?
- Amount: How large of a transaction is it? Is it large enough to trigger record-keeping requirements ($3,000 for payment orders in the United States)? Even if it doesn’t surpass that amount, is it a lesser amount that appears designed to skirt transaction monitoring requirements? For example, does it appear that the customer is making one or multiple transactions right below the threshold — a process known as structuring, or smurfing?
- Velocity: Has the customer dramatically increased how much they are spending or how many transactions they are completing compared to their average activity (for example, their daily or weekly averages)? Has the customer initiated a large number of transactions in a short period of time — for example, in the past 30 minutes or hour?
- Recipient: Has the customer initiated or attempted a transaction where the recipient is considered high-risk? For example, a known bad actor, someone on a watchlist or sanctions list, or a politically-exposed person?
What businesses are subject to AML transaction monitoring requirements?
Broadly speaking, any business deemed a financial institution under the Bank Secrecy Act (and related laws) is subject to AML transaction monitoring requirements.
This includes banks, credit unions, insurance companies, broker/dealers, fintech companies, investment companies, cryptocurrency exchanges, casinos, online gaming facilitators, and credit card companies, amongst other types of businesses.
What kind of transactions are monitored in AML?
AML regulations require that virtually any transaction completed through a financial institution must be monitored for suspicious activity. This includes cash deposits and withdrawals, other deposits, check cashing, money orders, traveler's check sales, fund transfers, ACH activity, currency transactions, wallet-to-wallet crypto transfers, and more.
That said, different types of transactions are subject to their own reporting requirements.
For example, if a customer deposits an aggregate of more than $10,000 in cash in any single day, it will trigger the need for a currency transaction report (CTR). Fund transfers of at least $3,000, on the other hand, do not trigger the need to file a report. But under the $3,000 placement rule, these transactions do trigger recordkeeping requirements. And suspicious activity reports (SARs) are not triggered solely by dollar amount, but also take other factors into consideration — such as how a recent transaction compares against the account’s usual behavior.
Why is AML transaction monitoring important for organizations?
It’s important for financial institutions to have adequate transaction monitoring processes in place for one simple reason: It’s required by law.
Failure to adequately monitor transactions or to file required reports in a timely manner can translate into serious repercussions. While these repercussions differ on a case-by-case basis, they can include fines and legal action — against both the business and the individuals in charge.
But regulations aside, the fact still remains that no business wants to (knowingly or unknowingly) aid bad actors in committing financial crimes such as money laundering or tax evasion. Doing so can harm an institution’s brand and reputation, and may even drive some customers to competitors who have not experienced such a scandal.
Transaction monitoring is just one piece of the AML puzzle
When choosing an AML tool, it’s important to remember that transaction monitoring is just one piece of the puzzle. Other important components of your AML program include customer due diligence (CDD) and a robust customer identification program (CIP), amongst other activities. The ideal transaction monitoring solution will be one that plays well with other parts of your AML/KYC toolkit.
The ideal solution will also be one capable of capturing all of the events your users may initiate within your platform. This includes transactions, yes. But it also includes other high-risk moments that may be indicative of fraud, such as when a user changes their contact information, payment details, or linked accounts. The more information and events you are able to capture, the better the case you will be able to build when suspicious activity is detected.
Here at Persona, we understand that an excellent AML program requires managing many moving pieces. That’s why we've designed flexibility and customizability into our suite of identity tools.
Leverage our Verifications tool to design the CIP program that is right for your business. Use Reports to enrich your understanding of who your customers are. When suspicious activity is detected, Cases empowers your team to review all of the information you’ve collected to make an informed decision as to next steps. And Graph, our link analysis tool, helps you understand how different accounts on your platform are all linked together — making it possible to uncover entire networks of fraudsters or bad actors working together.