U.S. Bank Regulators Encourage Innovation in the Fight Against Financial Crime

Carol Beaumier, Senior Managing Director Risk and Compliance – New York

In welcome news to the banking industry, the U.S. federal banking regulators (Board of Governors of the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and the National Credit Union Administration), along with the Financial Crimes Enforcement  Network (FinCEN, and collectively the Agencies) issued a joint statement on December 3, 2018, encouraging banks to consider innovative approaches – which may include artificial intelligence and digital identity technologies – for strengthening  their AML compliance programs.  While individual regulators have voiced their willingness to consider innovative approaches in one-on-one meetings with banking organizations, this public announcement by all of the key federal regulators is a significant step forward, providing U.S. banks the advocacy we have seen from regulators in other regions of the world for some time.

The key to retaining the Agencies’ support, as emphasized in the interagency release, is exploring innovative approaches in a controlled and deliberate way, which includes:

  • Appropriate due diligence of third-party partners
  • Pilot programs, which may include using sandboxes, for testing the efficacy of the innovative approach and its sufficiency for augmenting or replacing existing processes
  • Thorough consideration of attendant compliance requirements, such as privacy

Not specifically addressed in the release, but likely also of importance to the Agencies are:

  • Understanding the functionality of any new technologies, how these technologies will be implemented and how they will be validated
  • “Right-sizing” the solution to the institution, recognizing that innovation is not a “one size fts all” proposition

And to all of the points above, bank management and boards of directors would undoubtedly add:

  • Convincingly being able to explain the expected ROI

The bank regulators encourage early engagement and promise an exchange of ideas through which they will share and clarify their supervisory expectations.  For its part, FinCEN is launching an innovation initiative, which will include outreach to the industry, technology vendors and other invested parties. FinCEN is also indicating that it is willing to consider exceptive relief under 31 CFR 1010.970 (reporting and recordkeeping requirements) to facilitate the testing of new approaches. Collectively, the Agencies are soliciting industry feedback on how they can best support innovation. The feedback may be submitted electronically at FRC@fincen.gov.

For banking organizations that have been reluctant to consider innovative changes to their AML programs or were uncertain about how regulators would accept these changes, there is a clear path forward now. But, any bank that chooses to take that path must also be committed to undertaking the level of evaluation and testing the regulators expect. Reckless adoption of new technologies could have implications not just for individual institutions, but for the industry as a whole.

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