The answer to how transaction monitoring works is simple: an effective transaction monitoring system relies on well-defined transaction monitoring rules tailored to the business, its risks, and its legal obligations. Generic definitions of what is transaction monitoring are not enough; the system only works when the rules are aligned with the specific AML/CTF requirements and the business model.
What Is a Transaction Monitoring System?
A transaction monitoring system reviews customer activity against risk indicators, legal reporting thresholds, red flags, and business-specific patterns. AML/CTF laws, financial market conduct rules, exchange regulations, sanctions laws, and prescribed transaction reporting requirements all influence what must be monitored. To make transaction monitoring work in practice, a business must define its own processes rather than rely on vendor descriptions.
Applicable Transaction Monitoring Rules
Transaction monitoring rules should be built on the reporting entity’s legal obligations. For example, prescribed transaction reporting thresholds differ between jurisdictions, and definitions such as “international transaction” or “reportable transfer” vary across regulators. Before setting up a system, a business must understand what must be detected, who must report it, and how supervisory expectations differ. Over-compliance does not mitigate missing what is actually required.
Business-Focused Considerations
Transaction monitoring also has commercial implications. Banking partners, custodians, and other counterparties may impose expectations that go beyond legal requirements. A transaction surveillance system that does not meet these expectations can create account closures or operational restrictions. Choosing the right software matters, but understanding obligations and risks matters more.
How Transaction Monitoring Rules Work in Practice
Effective rules integrate with one another to detect both prescribed transactions and suspicious activity. For example, if a reporting threshold is $1,000 and a customer repeatedly transacts just below it, a rules-based system should detect structuring even if no individual transaction triggers reporting. Rules must define timeframes, amounts “just under” thresholds, and higher-risk patterns for certain clients or destinations. Data from false positives should be used to refine the system over time.
Risk Assessment and Risk Appetite
A transaction monitoring framework depends on the business’s AML/CTF risk assessment and risk appetite. This includes understanding delivery channels, customer types, products, inherent risks, and internal resourcing constraints. If the client base is too large or high-risk for available monitoring resources, risk-based decisions may restrict certain customer categories. The rules must reflect what the business can realistically manage.
Strategic Monitoring Decisions
Businesses must decide how proactive their response settings are. This includes whether transactions are paused pending review, how long the business waits for SOF documents, whether real-time screening is feasible on weekends, and how SAR/STR decisions are made and escalated. Operational capacity must match the sophistication of the monitoring system.
Setting Up Monitoring Rules and Alerts
Using clear risk criteria, transaction monitoring rules are configured to detect suspicious behaviour or regulatory triggers. Alerts must be routed to staff with enough experience and resourcing to investigate them properly. A rule-based system without investigative capacity is not effective.
Ongoing Maintenance and Syncing
Transaction surveillance systems require periodic and event-driven recalibration. Expansion into new jurisdictions, changes in customer profiles, or updated AML/CTF rules all require updates. Systems must stay synchronised with accounting and record-keeping tools so that historical transaction data remains accurate for regulatory reviews or audits.
