Emerging Technologies and Strategies to Overcome Transaction Monitoring Challenges

Transaction monitoring is a critical function for financial institutions to combat financial crimes, such as fraud, money laundering, terrorist financing, and more.

Traditional transaction monitoring systems often struggle to keep pace with the evolving landscape of financial crime, leading to inefficiencies and vulnerabilities.

However, with emerging technologies and innovative strategies in transaction monitoring, banks and financial institutions can overcome these challenges and enhance their compliance efforts.

In this blog, we have discussed some recent advancements and emerging technologies that can help overcome the challenges inherent in transaction monitoring.

1. Artificial Intelligence (AI) and Machine Learning (ML)

AI and ML algorithms are transforming transaction monitoring with their capability of analyzing vast amounts of data, identifying complex patterns, detecting anomalies, and adapting to new threats in real time.

These technologies can significantly improve the accuracy and efficiency of transaction monitoring. They can also help:

• Reduce false positives and enable faster detection of suspicious activities.
• Identify subtle anomalies and deviations from normal behavior that may indicate fraudulent activity.
• Analyze historical data to predict future risks and proactively identify potential/new or emerging threats.
• Automate routine tasks to free up human analysts who can focus on more complex investigations.

One compelling example of this is a Machine Learning-Based Fraud Detection System implemented by a US-based commercial lender. This system enabled the institution to flag up to 100% of fraudulent transactions, showcasing the power of AI and ML in preventing financial crime.

2. Big Data and Advanced Analytics

The ability to analyze massive datasets is crucial for effective transaction monitoring. With big data and advanced analytics, banks and financial institutions can:

• Gain deeper insights into customer behavior
• Identify emerging trends
• Detect suspicious patterns across multiple channels and platforms

Further, it can also help in:

• Real-time analysis of transaction data that helps in making immediate detection and response to suspicious activities.
• Analyze a wider range of data points to develop/create more accurate risk profiles for customers and transactions.
• Automate the generation of compliance reports and ensure timely and accurate reporting to regulatory authorities.

For example, an AI/ML-Based Data Analytics Solution enabled a US-based commercial lender to achieve 93% accuracy in predicting delinquent and written-off customers, improving their risk management capabilities significantly.

3. Embracing RegTech Solutions

Regulatory technology (RegTech) solutions are automating and streamlining compliance processes. It makes transaction monitoring more efficient and cost-effective by:

• Automating Know Your Customer (KYC) and Anti-Money Laundering (AML) checks while reducing manual effort and improving accuracy.
• Screening transactions against sanctions lists, watchlists, and other databases in real-time for compliance with regulatory requirements.
• Provide comprehensive audit trails and reporting capabilities for regulatory compliance and internal audits.

For a deeper dive into how RegTech is reshaping compliance in the financial services industry, check out our blog: Regulatory Technology (RegTech) for Compliance in the Financial Services Industry.

4. Blockchain Technology

Blockchain technology is emerging as a powerful tool for monitoring and tracking cryptocurrency transactions and detecting illicit activities. With this, banks and financial institutions can analyze blockchain data to trace the flow of funds, identify suspicious patterns, and assess the risk associated with cryptocurrency transactions.

For example, Ripple, a provider of enterprise blockchain solutions for cross-border payments, uses blockchain technology to enhance its AML capabilities by providing a secure and immutable ledger of all transactions.

Below are some additional advantages of blockchain analytics when it comes to virtual currencies.

• Provides greater transparency into cryptocurrency transactions
• Makes it more difficult for criminals to hide their activities.
• Help banks and financial institutions conduct due diligence on cryptocurrency businesses and individuals to mitigate the risk of money laundering and terrorist financing.
• Enables real-time monitoring of cryptocurrency transactions for rapid detection and response to suspicious activities.

Strategies to Overcome the Transaction Monitoring Challenges

In addition to adopting emerging technologies and advancements, financial institutions can also implement the following strategies to improve their transaction monitoring efforts.

1. Adopt a Risk-Based Approach

A risk-based approach (RBA) as outlined by FATF is essential for effective transaction monitoring. By focusing on high-risk customers and transactions, organizations can allocate resources more efficiently and reduce false positives.

This involves the following key steps:

• Customer Risk Profiling
  Develop comprehensive risk profiles for customers based on their transaction history, behavior, and other relevant factors.

• Transaction Risk Scoring
  Assign risk scores to transactions based on their characteristics, such as amount, location, and counterparty.

• Tailored Monitoring Rules
  Implement monitoring rules that are tailored to the specific risks associated with different customers and transactions.

2. Enhanced Due Diligence

Enhanced Due Diligence (EDD) is a comprehensive set of KYC/AML procedures that financial institutions follow to assess and manage risks associated with high-risk customers. EDD goes beyond standard due diligence, providing a deeper understanding of a customer’s background, financial activities, and potential risks. It is crucial for compliance, preventing financial crime, and safeguarding reputations.

Key components of Enhanced Due Diligence include:

• Identifying High-Risk Customers
• Detailed Financial Background Checks
• Understanding the Ultimate Beneficial Ownership
• Adverse Media Screening
• Nature and Purpose of Business Relationships

It includes four stages, including Customer Identification Program (CIP), followed by Customer Due Diligence and EDD triggers, collection and analyses of extensive information, and risk assessment.

To learn more about Enhanced Due Diligence processes and their importance, check out our previous blog on Enhanced Due Diligence (EDD) in banking and financial services.

3. Collaboration and Information Sharing

The growing collaboration between bad actors is leading to sophisticated fraud and increased attacks.

Banks and financial institutions must also establish a secure platform to share information and collaborate for identifying and reporting suspicious activities to local law enforcement and regulatory authorities. This collaborative approach can help them exchange information and safeguard against evolving fraud techniques.

For example,

• Invest in secure, cloud-based collaboration tools.
• Adopt industry standards like SWIFT’s Financial Crime Compliance solutions for secure information exchange.
• Use APIs to integrate fraud alert systems between financial institutions and law enforcement.
• Participate in initiatives like public-private partnerships (e.g., FinCEN in the U.S.) for regular exchange of intelligence.

Further, banks can use the information sharing platform and publicly available reports by various regulatory bodies, stock exchanges, international organizations, and independent entities to effectively combat money laundering. These include:

• Public databases
• Annual reports
• International body reports
• FATF lists.
• Reputable media sources
• Third-party databases
• Reports by national/supranational risk entities.

4. Continuous Training and Upskilling

A skilled, well-trained, and knowledgeable team is the backbone of transaction monitoring and compliance. Therefore, investing in continuous employee training and upskilling is crucial for engaging talent and building operational expertise.

For instance, a Custom-Built Digital Learning Platform enabled a US-based mortgage lender to scale employee training with 75% less effort, demonstrating how innovative learning solutions can drive efficiency.

However, banks often encounter resource constraints in terms of logistics, time, and costs as continuous training and upskilling the workforce requires substantial time, resources, commitment, and patience.

But with digital learning or e-learning solutions, financial institutions can transform their talent and knowledge base effectively. To learn more, check out our previous blog on boosting workforce training in the banking and financial service industry.

Conclusion

Transaction monitoring is becoming increasingly complex in today’s rapidly evolving financial landscape. However, by embracing emerging technologies and adopting shared strategies, financial institutions can overcome these challenges and enhance their compliance efforts.

Banks and financial institutions can consider deploying an enterpriser-grade AI/ML-powered solution, such as ALFA, to reduce false positives and the costs involved with manual human intervention.