What is Transaction Monitoring Software?
Transaction monitoring software is a specialized platform or tool that’s used by financial institutions to analyze customer transactions for signs of potentially illicit or suspicious activity.
This software generally plays a critical role in helping financial institutions mitigate financial crime risks, comply with regulatory obligations, and safeguard the integrity of the financial system.
How does Transaction Monitoring Software work?
Transaction monitoring software uses advanced algorithms, rules-based logic, and often machine learning techniques to detect anomalies and patterns from potentially suspicious activities within the vast volumes of transaction data processed by financial institutions. This data might contain information that indicates money laundering, terrorist financing, fraud, or other financial crimes.
Here's a simplified overview of how this software typically works:
Data Aggregation/Collection: Transaction monitoring software collects transaction data from various sources within the financial institution. This data includes banking systems, electronic payment networks, and other transaction channels, and details such as transaction amounts or types, dates and times, involved parties, and geographic locations.
Rules-Based Detection: Transaction monitoring software applies a set of predefined rules and thresholds to the transaction data, flagging potentially suspicious activities. These rules are based on industry best practices, regulatory requirements, and the financial institution's risk appetite. For example, a financial institution might create rules that red flag transactions of certain amounts, transactions involving high-risk countries, or get alerts for patterns indicative of money laundering techniques, structuring or smurfing and transactions above certain thresholds.
Machine Learning and AI: Many transaction monitoring solutions such as NICE Actimize’s Suspicious Activity Monitoring (SAM), incorporate machine learning and artificial intelligence techniques to enhance detection capabilities. In addition to rule-based detection, this software often incorporates machine learning algorithms to uncover subtle, complex, or evolving patterns of illicit behavior.
Machine learning algorithms can analyze large volumes of transaction data to identify those patterns that may otherwise be difficult to detect using traditional rules-based approaches. Machine learning models are trained on historical transaction data to recognize normal behavior patterns and deviations from the norm to reveal suspicious activity, and they continuously learn and adapt over time as they encounter new data and feedback from analysts.
Alert Generation: Alerts for further investigation are triggered by the software when a transaction activates a rule or suspicious activity is identified by machine learning models. Alerts typically include details about the transaction, the rule triggered, and any additional context or risk factors.
Alert Investigation Workflow: Compliance teams can investigate and resolve alerts from the workflow transaction monitoring software. This includes gathering additional information using other tools, conducting customer due diligence processes, and assessing the level of risk associated with the alerted transactions.
Alert Resolution: Compliance professionals review the alerted transactions to determine their validity and assess risk level. These investigations may involve gathering additional information from internal and external sources, conducting customer due diligence, and assessing transactional context. Based on their findings, an alert may be escalated for further review, cleared as a false positive, or escalated for regulatory reporting.
Reporting and Compliance:
When suspicious activity is confirmed, financial institutions are required to report it to the appropriate regulatory authorities and take necessary action: steps can include filing suspicious activity reports or implementing enhanced due diligence measures.
For more information on NICE Actimize’s transaction monitoring software, go here.