Transaction monitoring is a compulsory AML/CTF obligation. It detects unusual, complex, or high-risk transactions that were not identifiable during onboarding. Regulators expect reporting entities to identify, review, escalate, and report suspicious transactions, and to conduct EDD where required. Failure to monitor transactions properly leads to breaches, penalties, de-banking, and loss of access to financial services.
Transaction monitoring is part of ongoing customer due diligence. Customer risk levels must be updated when transactions indicate higher ML/TF exposure. Monitoring outputs must trigger reviews, EDD, sanctions/PEP rescreening (where relevant), and reporting obligations such as SMRs, STRs, SARs, and PTRs, depending on the jurisdiction.
The key reasons why transaction monitoring is important are:
- Required by all AML/CTF legislation globally
- Detects activity that onboarding cannot reveal
- Identifies large, unusual, and complex transactions
- Supports accurate ML/TF risk ratings
- Triggers EDD, internal escalation, and reporting obligations
- Prevents regulatory penalties, licence issues, and de-banking
- Protects against fraud, mule activity, and misuse of accounts
- Required to maintain correspondent banking relationships
How to Do Transaction Monitoring Effectively
- Risk Assessment: Monitoring rules, thresholds, and alerts must be based on the reporting entity’s ML/TF risk assessment. Expected activity, SOW/SOF expectations, jurisdictional exposure, payment methods, and customer profiles define what is “normal” and what is a red flag.
- Defined AML/CTF Procedures: Procedures must specify triggers, escalation steps, documentation requirements, EDD expectations, and reporting timelines. FATF and local supervisor guidance form the baseline for rule design.
- Monitoring System: A monitoring system (manual, automated, or hybrid) must analyse transaction data, identify anomalies, and generate alerts. Reporting entities -not vendors - are responsible for the adequacy of the system.
- Compliance Review: Alerts must be reviewed by trained AML personnel. If suspicion is formed, reporting must occur within the required statutory timeframe. Delays or incomplete reviews constitute breaches.
- Ongoing Adjustments: Monitoring rules must be updated based on changes in customer behaviour, new ML/TF typologies, regulator expectations, audit findings, and internal risk assessments.
Consequences of Inadequate Monitoring
- Missed suspicious transactions
- SMR/STR/SAR breaches
- Administrative penalties, enforceable undertakings, or licence suspension
- Removal of banking access
- Inability to open accounts with counterparties
- Reputational damage and independent audit failures
Real-Time Monitoring & Escalation
Real-time monitoring identifies high-risk transactions immediately. Effective escalation requires:
- Defined thresholds and triggers
- Skilled AML staff to conduct reviews
- Ability to perform rapid EDD and SOF checks
- Clear task ownership
- Documented decisions for audit purposes
Sector-Specific Factors
Different sectors require different monitoring rules:
- Retail-facing entities → fraud, identity theft, mule patterns.
- Wholesale/investment entities → large cross-border flows, high-risk jurisdictions.
- Crypto exchanges → anonymity-enhancing behaviour, chain-hopping, mixers.
- Remitters/MSBs → rapid in/out flows, third-party payments.
“Large” or “complex” must be defined relative to the business model.
Identifying Gaps
A risk assessment must identify:
- System limitations
- Missing data fields
- Alert types that cannot be automated
- Need for manual reviews
- Training gaps and staffing shortages
These gaps must be addressed in the AML/CTF Program.
