Compliance Insider: Transaction Monitoring for KYC Validation


Transaction monitoring is a critical aspect of Know Your Customer (KYC) compliance and, more specifically, Anti-Money Laundering (AML) procedures. All banks and financial institutions must have a transaction monitoring system in place to monitor all customer transactions to ensure that everything is above board and in compliance with regulations and to identify suspicious activities. Here’s your complete guide to how transaction monitoring works and why it matters.

Transaction Monitoring: The Basics 

Transaction monitoring is a process that allows financial institutions to monitor customer transactions and analyze them in the context of their historical information and account profile. Monitoring can be done in real-time and/or on a daily basis; analysis of a transaction may be done to identify a customer’s risk level, predict future activities or identify suspicious transactions to/from the customer. 


The “Why” Behind Transaction Monitoring

If you have ever received a phone call from your bank verifying a recent purchase made using your credit card, then you’ve been at the receiving end of transaction monitoring. This is just one of the many steps involved in the transaction monitoring process; monitoring your credit card activities to gather data and create a complete picture of normal behavior is another. If a credit card activity seems abnormal, which is typical in cases of credit card theft, your bank may get in touch with you and/or make a report to the authorities. 

Transaction monitoring is vital to detecting and preventing all types of fraudulent transactions, including money laundering. An effective transaction monitoring system (TMS) will enable an organization to spot financial crimes in their early stages or even before they occur, such as when transaction monitoring data is used to assess a customer’s risk level. A properly implemented system, therefore, promotes confidence in an institution’s credibility and integrity as it shows its commitment to preventing financial crimes. 

Establishing a transaction monitoring process that best suits an organization depends on a number of considerations, including the sector and geographic area serviced by the institution; the size of its client base; its corporate culture; and associated operational risks, among others. But for AML prevention, the Financial Action Task Force recommends a risk-based approach (RBA) to transaction monitoring

RBA involves the identification of a customer’s risk profile and the adjustment of transaction monitoring as appropriate. This means some customers may require a higher level of transaction monitoring compared to others. Transaction monitoring, therefore, is also key to a company’s customer onboarding process, as part of their KYC compliance. At Instnt, AI technology is at the core of AML/KYC compliance and risk management; with an AI-enhanced treasury management system (TMS), validation of a customer’s identity during the onboarding process becomes easier and more reliable for better fraud protection

Automated vs. Manual Transaction Monitoring

Transaction monitoring can be done manually or with the help of technology. Manual monitoring lends itself to a number of disadvantages, namely: 

  • Human error
  • Being time and labor-intensive

An automated transaction monitoring system is the far superior option but is also not perfect. Its downsides include:

  • Producing false positives wherein the system creates a large number of cases that don’t require a review which buries suspicious cases that warrant further analysis. This typically happens when TM software is not adaptive enough to differentiate unique groups of clients or the rules the software has to follow to identify different types of clients are not accurate. 
  • Vague or poor client segmentation also results in false positives and gaps in transaction monitoring. This occurs when client segmentation is not dynamic and details of client characteristics are too generic. Failure to update client segments in a timely manner is another contributing factor. 
  • Duplication of cases because of too many scenarios or rules. Increasing the number of scenarios or rules is necessary to keep the software up-to-date. But this may also result in the creation of overlapping cases which, in turn, creates an unnecessary burden on manual reviews. 

The rules used for a TMS that account for client risk are typically based on information from KYC processes. The automated system still requires a manual element, as suspicious cases will need to be reviewed to determine if a “hit” is a true positive so that appropriate action can be taken. But, using software streamlines the process of creating an audit trail of all client activities and identifying behaviors that may be indicative of a financial crime

An effective TM solution must be flexible and scalable so that an organization can easily adapt it to the constantly changing regulations on transaction monitoring. A TMS should also be enhanced with artificial intelligence technology to give it better insight and enable it to more accurately spot suspicious behaviors and patterns that a basic rule-based software is ill-equipped to identify.

AI-enhanced TMS is not yet a regulatory requirement for transaction monitoring, but many organizations around the world are adopting AI technology to ensure greater accuracy of results. With AI enhancement of  a rule-based TMS, the system will also be able to detect new patterns of behavior or unknown unknowns, that the software is not programmed to “see.” 

Instnt’s AI-enhanced transaction monitoring solution, for example, is designed to learn across geolocation, device intelligence, and user behavior, among others, to better ensure that a company’s KYC processes for customer onboarding are trustworthy.   

Transaction Monitoring and Suspicious Activity Reports

When a TMS detects suspicious activity and if the organization confirms the hit as a true positive after a thorough review, the institution is obligated to submit a Suspicious Activity Report (SAR) to the appropriate financial authority. An organization typically has 30 days to confirm a suspicious activity by a client and submit a SAR; the period may be extended to 60 days if more evidence is needed. 

Suspicious activities flagged through transaction monitoring and which would require the submission of a SAR include:

  • Unusual account activities or transactions
  • Withdrawals, deposits, wire transfers or purchases that go over a certain value
  • Domestic or international money transfers that go over a certain value
  • Unusual employee behaviors 
  • Compromised computer systems 

Changing the Game With Transaction Monitoring

Transaction monitoring is crucial to KYC and AML procedures and regulations and plays an important role in preventing financial crimes. Criminals are always changing their tactics and are quick to adapt to systems that are used to flag suspicious activities, so a rule-based TMS that uses KYC compliance data is still susceptible to error or inaccuracy. Enhancing a TMS with AI is the best solution. Instnt’s AI technology simplifies any TMS with a single line of code that can be seamlessly integrated into a website or app without causing any disruptions to your TMS. Request a demo today to get started.


About the Author

Instnt's fraud loss indemnification technology provides coverage of up to $100M for fraud losses stemming from synthetic, third-party, and first-party fraud. With Instnt's comprehensive fraud loss protection, businesses can confidently extend their services to a wider customer base, enabling them to embrace more opportunities and enhance revenue streams while maintaining a secure, fraud-free environment.