Transaction Monitoring: Risk vs. Cost

One of the biggest dilemmas in AML compliance is the trade-off between cost and risk. Investigating every alert from transaction monitoring systems is expensive, but ignoring alerts can expose firms to regulatory, and reputational consequences. 

The Cost of Investigating Alerts 

Investigations require staff, technology, and documentation. Some organisations argue that investigating all alerts is too costly. 

Typical costs include: 

• Hiring and training compliance analysts
• Slower processes when investigation volumes surge
• Technology upgrades to handle large data volumes

The Risk of Ignoring Alerts 

While avoiding investigation saves short-term costs, it carries far greater risks: 

• Regulatory penalties: Fines for failing to investigate suspicious activity
• Missed criminal activity: Allowing money laundering or terrorism financing to go undetected
• Reputational damage: Loss of trust from customers and regulators

In many cases, regulators view ignored alerts as wilful negligence, compounding the penalties. 

Regulatory Penalties 

In 2025, regulators have imposed significant penalties for AML failures and more specifically for transaction monitoring. For example: 

• Revolut (Lithuania): The Bank of Lithuania fined Revolut €3.5 million for deficiencies in its AML framework. Regulators pointed to gaps in transaction monitoring and oversight of customer activity, stressing that even fast-growing fintechs are expected to maintain controls proportionate to their scale and risk exposure.  

• Barclays (UK): The UK Financial Conduct Authority (FCA) imposed a £42 million fine on Barclays for failures in monitoring high-risk clients. The bank had not adequately acted on red flags or reassessed customer risks, showing that established institutions are equally accountable for maintaining robust monitoring.  

These cases make clear that regulators expect firms of every size to detect unusual activity, escalate risks, and document actions, or face significant penalties. 

Striking the Right Balance 

Instead of choosing between cost and risk, firms must focus on optimising their transaction monitoring strategy. 

• Risk-based prioritisation: In accordance with national law, allocate resources to alerts that represent the greatest potential impact, such as high-risk customers, jurisdictions, or transaction patterns. 

• Technology adoption: Leverage advanced tools, including AI-driven models, to streamline alert handling, cut down on false positives, and free investigators to focus on genuinely suspicious activity. 

• Continuous review: Regularly recalibrate thresholds, rules, and typologies to ensure monitoring remains effective, balancing strong detection with operational efficiency. 

Long-Term Outlook 

In the coming years, regulators are expected to focus increasingly on the real-world effectiveness of monitoring frameworks rather than their policies on paper. Firms should anticipate: 

• Closer scrutiny of how alerts are investigated, escalated, and documented. 
• Stronger expectations for the use of advanced technology, including AI, to improve efficiency and reduce false positives. 
• Ongoing pressure to demonstrate that thresholds and rules are risk-sensitive and subject to regular review. 

Institutions that invest early in adaptive systems and skilled investigators will be better prepared to manage rising alert volumes and satisfy supervisory demands. 

Conclusion 

While investigation costs are real, ignoring alerts can devastate a business. Effective transaction monitoring involves finding the right balance: automating where possible, applying human judgment where necessary, and always keeping regulatory expectations in sight. 

FAQs

What is transaction monitoring?

Transaction monitoring is the process financial institutions use to track customer transactions, such as deposits, withdrawals, transfers, and payments, in real-time or retrospectively. The goal is to detect unusual or suspicious activity that may indicate fraud, money laundering, terrorism financing, or other financial crimes.

Why is transaction monitoring important for AML compliance?

It is a key requirement under Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) laws worldwide. Regulators expect institutions to have systems in place to identify and report suspicious transactions via Suspicious Activity Reports (SARs) or their equivalent. Effective transaction monitoring helps prevent financial crime, protect customers, and avoid regulatory penalties.

What types of suspicious activity can transaction monitoring detect?

Common red flags include:

• Large, unusual, or frequent cash transactions
• Rapid movement of funds between multiple accounts
• Structuring or “smurfing” to avoid reporting thresholds
• Transfers to high-risk countries or entities
• Sudden changes in a customer’s usual transaction behaviour
• Multiple failed login or transfer attempts (possible account takeover

How does transaction monitoring integrate with KYC and AML programs?

Transaction monitoring works alongside Know Your Customer (KYC) procedures and other AML tools to provide a complete view of customer risk.

• KYC verifies customer identity at onboarding.
• Ongoing monitoring continuously evaluates behaviour and transactions over time.

Together, they help identify high-risk customers and activities, ensuring compliance and reducing exposure to financial crime.

What are the biggest challenges in transaction monitoring?

• False positives: Too many alerts that turn out to be non-suspicious, which can overwhelm compliance teams.
• Data silos: Incomplete or unconnected customer and transaction data across systems.
• Evolving financial crime tactics: Criminals adapt quickly, requiring continuous system updates.
• Regulatory complexity: Different jurisdictions have unique rules and reporting obligations.
• Scalability: As institutions grow, monitoring systems must handle higher volumes of data without compromising accuracy.