What is Transaction Monitoring in AML? How does it work?
- azakaw
- 1 day ago
- 8 min read
Updated: 10 hours ago
Financial institutions, fintechs, crypto businesses, and other entities that deal with funds process millions of transactions every day. Some of those transactions may hide suspicious activity (for example, money laundering or terrorism financing). That’s where transaction monitoring comes in.
In this guide, we’ll explain what transaction monitoring is, how it works, and why it’s essential for AML compliance, particularly for banks, fintechs, crypto platforms, and other regulated entities.
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What is Transaction Monitoring in AML?
Transaction monitoring is the process of analysing customer transactions, such as payments, deposits, withdrawals, transfers, etc., to identify anomalies or suspicious activity that might be a sign of money laundering or other financial crimes.
In AML compliance, this is an ongoing process: it starts in onboarding and continuously tracks customer behaviour, comparing each transaction against risk profiles, legal thresholds, and unusual patterns.
Why is transaction monitoring important?
Transaction Monitoring is the basis of Anti-Money Laundering (AML) programmes and helps organizations to:
prevent crimes,
comply with regulations,
avoid penalties and/or fines,
safeguard customers,
mitigate risks,
maintain trust among customers and financial institutions.
Related article: Punishment for money laundering in the UAE
What is the role of transaction monitoring in financial compliance
Transaction monitoring is probably the pillar of financial crime prevention, as it enables institutions to:
Detect unusual activity early,
Investigate potential red flags,
File STRs/SARs to regulators on time,
Demonstrate compliance with AML/Counter-Terrorism Financing (CFT) obligations.
Transaction monitoring also integrates with Know Your Customer (KYC), Know Your Business (KYB), and sanctions screening, thus forming a complete compliance framework.
Who needs transaction monitoring?
Any business handling financial transactions or virtual assets that is under AML regulation must implement transaction monitoring, namely:
Banks and financial institutions,
Digital banks and neobanks
Fintechs and payment processors,
Crypto exchanges and blockchain platforms, also known as Virtual Asset Service Providers (VASPs),
Fund and asset management firms,
Money Service Businesses (MSBs),
Casinos and gambling businesses
Insurance companies
Real estate firms
Accounting and legal firms
High-value dealers and remittance companies (money transfer businesses).
How does transaction monitoring work?
Transaction monitoring works by using automated systems and rules to analyze customer transactions, such as payments and transfers, to detect suspicious activity like money laundering or fraud.
The process involves flagging transactions that deviate from a customer's normal behavior or breach pre-defined thresholds, which then prompts further investigation or reporting.
In short, an effective AML transaction monitoring is a mix of data analysis, risk scoring, and alert management made to detect and report suspicious activity.
Data points monitored
Systems collect and analyse multiple data points, such as:
Transaction amount, type, and frequency;
Sender and receiver identities;
Geographic location of the parties involved;
Timing, velocity, and purpose of the transaction;
Customer risk level and previous behaviour.
Real-time vs post-transaction monitoring
Real-time monitoring detects and blocks suspicious activity before it reaches completion, which is crucial for actions like online payments and crypto transfers.
Batch (post-transaction) monitoring analyses completed transactions in groups and identifies long-term patterns.
Risk scoring and behaviour baselining
Each customer is assigned a risk score based on their profile, business type, and transaction history.
The system establishes a baseline of normal behaviour, and deviations (for example, sudden high-value transfers) trigger alerts for review.
Alerts, escalation, and case handling
When a transaction breaches a rule or appears abnormal:
The system generates an alert.
Compliance analysts review it (either manually or automatically).
If suspicion remains, it’s escalated and may result in a Suspicious Transaction Report (STR/SAR) filed with the FIU.
Alerts are logged and tracked through case management systems for audit and documentation.
What red flags trigger transaction monitoring?
Sudden spikes in transaction value or volume,
Transfers to or from high-risk jurisdictions,
Round-number or repetitive payments,
Use of multiple accounts to split transactions,
Rapid movement of funds between unrelated entities.
Examples of transaction monitoring in action
Let’s look at how transaction monitoring works in practice.
How a suspicious transaction is flagged
Let’s imagine that a customer who usually makes small domestic transfers suddenly sends multiple international wires in 24 hours, each in the amount of €9,800 (just under the €10,000 reporting threshold).
This pattern, known as structuring or smurfing, triggers an alert because it might indicate that AML rules are being broken.
What happens after an alert
As soon as a company’s compliance team is flagged, they review relevant data related to the situation in question: customer history, customer documentation, etc.
If the compliance team is still suspicious, they file and report a suspicious activity through the national reporting platform.
What types of transactions are monitored?
Transaction monitoring covers a wide range of financial movements:
Domestic and international wire transfers,
Cryptocurrency transactions and wallet activity,
Payments involving high-risk or sanctioned countries,
Peer-to-peer payments and prepaid cards,
Suspicious layering or integration patterns, since they're typical of money laundering.
Why is transaction monitoring critical for AML compliance?
Legal and regulatory requirements
AML frameworks around the world require ongoing monitoring as part of compliance programmes.
We leave some examples below:
U.S. Bank Secrecy Act (BSA) and FinCEN rules;
United Kingdom’s Financial Conduct Authority (FCA)
Singapore’s Monetary Authority of Singapore (MAS) regulations.
Institutions have to demonstrate that their systems detect, analyse, and report suspicious activity effectively.
Transaction monitoring in different jurisdictions
The core principles of transaction monitoring are the same on a global level.
Local implementation, however, can vary:
UAE / Abu Dhabi: goAML system managed by the FIU,
Saudi Arabia: SAMA AML regulations,
Bahrain: Central Bank of Bahrain AML framework,
Kuwait: Central Bank of Kuwait (CBK) aligned with FATF standards,
Qatar: QCB and QFCRA guidance,
Oman: Central Bank of Oman directives,
USA: FinCEN and BSA,
UK: FCA expectations under MLR 2017,
Europe: EU AMLDs and local FIU variations,
Singapore: MAS AML/CFT guidelines.
Audit and reporting obligations
To ensure full compliance, entities must:
Retain transaction monitoring records,
Provide data to auditors or regulators,
File STRs/SARs immediately after identifying red flags.
What are the consequences of non-compliance?
If institutions are not able to keep an adequate AML transaction monitoring, they can face:
Multi-million-dollar fines,
Regulatory sanctions or license suspension,
Damage in reputation and loss of client trust.
Examples of non-compliance
HSBC was fined for weak transaction monitoring systems
FCA fined HSBC £63.9 million for “deficient transaction monitoring controls”. They found “serious weaknesses” in three key parts of HSBC’s transaction monitoring systems over eight years (2010–2018).
Two of the weaknesses were not being able to test or update parameters and issues with data completeness.
Binance was charged for AML breaches across multiple jurisdictions
Binance was investigated by FinCEN and the Office of Foreign Assets Control (OFAC) for violations of the BSA and sanction laws, and pleaded guilty to federal charges such as money laundering and unlicensed money transmitting, settling with these regulators in November 2023.
The violations from Binance included failures in suspicious transaction reporting and implementation of AML programmes.
Challenges in transaction monitoring
Despite advanced technology, AML transaction monitoring is quite an intricate process that has its challenges:
False positives and “alert fatigue”: excessive alerts, some of them not actual red flags, overwhelm and wear out compliance teams.
Data quality issues: inconsistent/incomplete data delays or actually prevent analysis.
Evolving methods: criminals constantly adapt their methods and exploit new technologies.
Balancing compliance and user experience: rules that are too strict can end up disrupting legitimate customers.
Resource constraints: smaller companies don’t always have trained compliance staff.
Multiple jurisdictions: worldwide operations need to be aligned with multiple regulatory frameworks.
Transaction monitoring software and tools
What are transaction monitoring systems (TMS)?
A Transaction Monitoring System (TMS) is a software that automates the detection of suspicious transactions, applies risk-based rules, and supports compliance reporting.
These systems are very important when the goal is to scale AML programmes efficiently.
Key features of a Transaction Monitoring Solution
Rules and thresholds that are easily configurable,
Behavioural analytics and risk scoring,
Machine learning and anomaly detection,
Case management and audit trails,
Real-time dashboards and reporting,
Integration with KYC, KYB, and sanctions screening.
Effective AML connects onboarding data (KYC/KYB) and sanctions lists with transaction monitoring, allowing for a 360° view of customer risk.
Examples of leading AML software solutions
azakaw is one of the software solutions in the market that offer automation, AI-driven analytics, and integration with broader compliance systems.
AI and machine learning in monitoring
AI-powered monitoring by azakaw creates a system more accurate by:
Reducing false positives,
Detecting patterns that were not identified before,
Adapting to new money-laundering methods.
The future of transaction monitoring
Just like the crimes related to money laundering, AML systems are evolving quickly.
You can probably expect in the future:
Predictive analytics that will identify risks before they occur,
Blockchain analytics that will enhance crypto monitoring,
RegTech innovation that will improve efficiency and transparency,
Cross-border data sharing that will support AML enforcement all over the globe.
FAQs
Is transaction monitoring mandatory for AML compliance?
Yes. Transaction monitoring is a mandatory requirement under all major Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) regulations.
FATF, FinCEN (U.S.), FCA (UK), and EU regulators require financial institutions, fintechs, and crypto platforms to monitor customer transactions continuously.
What’s the difference between AML and transaction monitoring systems?
AML refers to the overall regulatory framework and strategy designed to prevent financial crime. This means policies, procedures, and controls, among others.
Transaction monitoring is one core operational component of an AML programme that specifically focuses on tracking and analysing financial transactions to identify suspicious patterns that might indicate money laundering.
How does transaction monitoring differ from sanctions screening?
Transaction monitoring detects behavioural red flags that might indicate money laundering.
On the other hand, sanctions screening is used to check whether individuals, entities, or jurisdictions are listed on sanctions or watchlists.
Can small businesses or startups implement AML transaction monitoring?
Yes, and they are encouraged to do so. Even smaller fintechs and startups are required to follow AML regulations and have to demonstrate adequate transaction monitoring.
RegTech solutions like azakaw can help them with this, and they offer AML software with modular pricing, preconfigured rule sets for quick deployment, API integrations with KYC and payment systems, AI-powered risk scoring that scales as the business grows, among other features.
What do regulators look for in a transaction monitoring program?
When assessing AML programs, regulators evaluate the design and the effectiveness of transaction monitoring systems.
They typically check for risk-based approach, coverage, reporting, governance and documentation, system testing and tuning, alert handling, and data integrity.
Conclusion
By combining intelligent systems and skilled compliance teams, organisations worldwide can detect financial crime early on, thus protecting customers and maintaining trust from them.
Investing in effective transaction monitoring today protects your business tomorrow.
AI-driven analytics, blockchain intelligence, and cross-border collaboration will redefine what robust and effective transaction monitoring looks like.
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