Transaction Monitoring Rules
Transaction Monitoring Rules
Transaction Monitoring Rules
1. Customer Profiling:
Establish a baseline of normal transaction behavior for each customer. This
involves analyzing historical transaction data to determine the typical
transaction amounts for each account holder.
Factors such as the customer's income level, spending habits, account type,
and transaction history are taken into consideration.
2. Threshold Setting:
Set thresholds or ranges for what constitutes "usual" transaction amounts for
each customer.
These thresholds can be based on statistical analysis, such as mean or median
transaction amounts, or they can be predefined based on the institution's risk
tolerance and regulatory requirements.
3. Real-Time Monitoring:
Monitor transactions in real-time as they occur, comparing each transaction
amount against the customer's established profile and thresholds.
Any transaction that falls outside the predetermined range or exceeds a
certain deviation from the norm triggers an alert for further investigation.
4. Alert Generation:
When a transaction is flagged as unusual, an alert is generated and sent to the
institution's compliance or fraud detection team for review.
The alert includes details of the transaction, such as the amount, date, time,
and the customer's account information, enabling investigators to conduct a
thorough analysis.
5. Investigation and Resolution:
Upon receiving an alert, investigators conduct a detailed review of the flagged
transaction.
They may verify the legitimacy of the transaction by reaching out to the
customer directly or by examining additional transaction data and account
history.
If the transaction is deemed suspicious, appropriate actions are taken, such as
freezing the account, conducting further due diligence, or filing a suspicious
activity report (SAR) with regulatory authorities.
Upon investigation, it is discovered that John's debit card was used for an
unauthorized purchase. The bank promptly blocks the transaction, freezes John's
account, and contacts him to verify the activity. John confirms that he did not make
the transaction, indicating potential fraud. The bank proceeds to investigate further,
possibly involving law enforcement or regulatory agencies as necessary.
1. Behavioral Analysis:
Financial institutions collect and analyze historical transaction data to establish
a baseline of normal behavior for each customer.
This analysis considers various factors, including the customer's spending
habits, transaction frequency, preferred channels (e.g., online, in-person),
typical transaction amounts, geographic locations, and time of day for
transactions.
2. Pattern Recognition:
Based on the behavioral analysis, institutions identify typical patterns or trends
in a customer's transaction history.
These patterns serve as a reference point for determining what constitutes
normal behavior for the customer.
3. Real-Time Monitoring:
Transactions are monitored in real-time as they occur, comparing each
transaction against the established patterns and norms.
Any transaction that falls outside the expected pattern or exhibits unusual
characteristics triggers an alert for further investigation.
4. Alert Generation:
When an out-of-pattern transaction is detected, an alert is generated and
routed to the institution's compliance or fraud detection team.
The alert provides details of the transaction, including the amount, type, time,
location, and customer information, enabling investigators to assess its
legitimacy.
5. Investigation and Resolution:
Upon receiving an alert, investigators conduct a thorough review of the
flagged transaction.
They may contact the customer directly to verify the transaction or examine
additional transaction data and account history for context.
If the transaction is deemed suspicious, appropriate actions are taken, such as
freezing the account, further verification steps, or filing a suspicious activity
report (SAR) with regulatory authorities.
Example: Let's consider a hypothetical example involving a credit card user named
Sarah. Based on Sarah's transaction history, the bank has established that she
typically makes small purchases at local stores during weekdays, with occasional
larger transactions for online shopping on weekends.
One day, a transaction of $2,500 is initiated from Sarah's credit card at an electronics
store located in another state during working hours. This transaction deviates
significantly from Sarah's usual spending pattern and geographic location, triggering
an alert based on the "Out-of-Pattern Transactions" rule.
Upon investigation, it is discovered that Sarah's credit card information was
compromised, and fraudulent charges were made without her knowledge. The bank
promptly blocks the transaction, contacts Sarah to confirm the activity, and issues her
a new credit card.
Methodology:
1. Behavioral Analysis:
Financial institutions analyze historical transaction data to establish a
baseline of normal behavior for each customer.
This analysis includes examining the frequency and timing of transactions,
such as the number of transactions per day, week, or month.
2. Threshold Setting:
Based on the behavioral analysis, institutions set thresholds or ranges for
what constitutes a typical frequency of operations for each customer.
These thresholds can be determined using statistical methods, such as
calculating the mean or median frequency of transactions, or they can be
predefined based on the institution's risk tolerance and regulatory
requirements.
3. Real-Time Monitoring:
Transactions are monitored in real-time as they occur, comparing the
frequency of operations against the established thresholds.
Any instance where the customer exceeds or falls below the expected
frequency of operations triggers an alert for further investigation.
4. Alert Generation:
When an unusual frequency of operations is detected, an alert is generated
and sent to the institution's compliance or fraud detection team.
The alert includes details of the transactions, such as the number, type,
time, and customer information, allowing investigators to assess the
situation.
5. Investigation and Resolution:
Upon receiving an alert, investigators conduct a thorough review of the
flagged transactions.
They may reach out to the customer directly to verify the transactions or
examine additional transaction data and account history for context.
If the transactions are deemed suspicious, appropriate actions are taken,
such as freezing the account, further verification steps, or filing a suspicious
activity report (SAR) with regulatory authorities.
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