Innovating AML Compliance: The Next Regulatory Imperative?

Shaun Creegan, Managing Director Risk and Compliance
Erick Christensen, Managing Director Risk and Compliance

Incorporating innovative approaches into anti-money laundering (AML) and financial crime prevention remains a key agenda item for the financial services industry, trade associations, advocacy groups and, increasingly, the regulators. At the recent SIFMA AML conference, we joined industry panelists on stage to discuss not only the obvious benefits of integrating leading technologies into AML compliance but why doing so could one day be a baseline expectation of regulators.

Federal and state regulators have expressed their willingness to embrace new technology and explore various enabling mechanisms, such as implementing sandbox environments for purposes of examining and vetting digital solutions. An interagency statement was issued by the Federal Reserve, the Federal Deposit Insurance Corporation, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), the National Credit Union Administration, and the Office of the Comptroller of the Currency at the end of 2018 supporting the use of new approaches to fight financial crime. On February 21, 2020, FinCEN named its first digital innovation officer to advance its engagement with emerging technology and financial innovation. 

It has long been the case that regulatory examinations tend to drive leading practices in the industry. It often begins this way: An examiner observes an approach or technology that is being used at “Institution A” effectively, and considers it to be a leading practice. While examining “Institution B,” the examiner questions why its management has not considered the same approach or technology as “Institution A.”

If these inquiries begin to take place around innovative technologies, it could motivate many financial institutions to adopt technologies such as artificial intelligence/machine learning, natural language processing, and robotic process automation for AML compliance practices. Soon, the use of these technologies for processes like entity resolution, identifying and linking vast account networks, faster closing of alerts and reducing false positives will be considered table stakes in the industry.

As one of the industry panelists stated: “It would be really interesting when regulators start expecting [financial institutions] to innovate as opposed to being hesitant.”

If the widespread adoption of innovative technologies does begin to take hold, the question remains: How can firms ensure they are ready to measure up to the potential new standard and move quickly to take advantage of value-added solutions? For many firms, embracing new technologies or optimizing existing ones means significantly improving data quality and governance. As another industry panelist put it, “you have to be a ruthless advocate for data.”

In most cases, the AML compliance function does not own the data. It is owned by the business, and the compliance team is the consumer. However, to enable compliance teams to effectively identify instances of financial crime, they need to be able to gather and identify necessary data points across multiple systems and transaction histories.

It will be an essential step for institutions to be able to pull this information together, populate disparate fields and cleanse existing data so that accurate information can be loaded into various systems for transaction monitoring, customer onboarding or customer risk scoring. Once the enhanced data is flowing through the proper systems, tools such as machine learning, natural language processing and robotic process automation will work more efficiently, and the outcomes will be significantly more insightful.

Bringing the right stakeholders to the table and building a strong business case are additional critical steps. It is important to communicate the pragmatic benefits to the business, whether it is an increase in precision (such as reduction in false positives) or increase in recall (such as being able to identify behavior that wasn’t easily identified before). Emphasizing the capability to add value, increase effectiveness and focus the investigators’ time on more valuable activities will be necessary to gain buy-in from stakeholders.

The panel also discussed how leading institutions are using a combination of both home-grown and third-party technologies, making the technologists within the organization another key stakeholder group. Many large firms have significant numbers of technology and operational teams in-house that are tasked with evaluating and examining a variety of vendors on a regular basis. When firms are deciding to apply a new technology to AML processes, both technology and compliance teams should be in the room to ensure the most productive conversation is occurring and the right tool is selected to enable compliance with stringent regulatory requirements. Looping in the regulators during this process, and along every step of the way, would also add tremendous value and help to ensure the outputs of the deployed technology will meet examination standards.

As regulatory expectations around innovation continue to evolve, AML compliance teams can make early progress by focusing on the enhancement, enrichment and governance of their data while continuing, or beginning, to have conversations with key business, technology and regulatory stakeholders about how to build a well-informed plan and innovation strategy.

To learn more, visit Protiviti.com/AML.

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