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Friday, Oct 02, 2020

Maximising AI and Machine Learning to Drive AML and KYC Compliance

Maximising AI and Machine Learning to Drive AML and KYC Compliance

The game of cat and mouse between the regulators and banks against money launderers has now moved to a new level – all thanks to the emergence of AI and machine learning technologies.

AI and machine learning technologies have been around for some time, but have recently started coming into prominence in the world of financial services. Banks and financial services companies are under constant regulatory pressure to implement ever more stringent regulations to curb the flow of illegal money through their counters.

Know your customer or KYC is a process that helps banks and financial institutions identify their customers and evaluate any potential risks or malicious intent that might jeopardise a company’s reputation and credibility – and the conduct of business in compliance with the laws of the land. As for anti-money laundering (AML), governments are constantly evolving regulatory restrictions and monitoring requirements, for example for the EU’s Fifth Anti-Money Laundering Directive (5MLD) and regular updates to the US Patriot Act and Sanctions regulations.

Currently, the processes for both anti-money laundering (AML) and Know Your Customer (KYC) are often both tedious and time consuming. Many banks and financial institutions still rely on a combination of part-automation and part-manual process as they go through heaps of data to monitor for suspect transactions and ensure compliance to regulations. These emergent AI and ML technologies offer a more intelligent approach to automating banks’ monitoring and compliance capabilities.

Streamlining AML with AI and ML

The financial services industry plays an important role in governments’ efforts worldwide in controlling and preventing fraud and eliminating the infusion and circulation of illegal money into formal financial systems. Thus, banks and financial services companies find themselves constantly on the treadmill of upgrading their systems and processes to monitor and comply with extant and emergent regulations. Against this backdrop, those looking to avoid detection are trying even more innovative ways to slip through the monitoring net.

What’s more, a report from Lexis Nexis found that after compliance with regulation, a need to improve business results was the second most cited driver – for 21% of respondents. A majority said that the manual and semi-automated nature of current AML compliance efforts slows down processing timelines and impacts business productivity. Nevertheless this has been a necessity thanks to punitive penalties to banks that let such a transaction slip through.

Given such a high price for failure, banks have taken a very conservative approach to dealing with suspect and potentially suspect transactions. This has led to large volumes of false positives in addition to the genuine ones, and unravelling these has become one of the largest concentrations of manual effort for banks. In an increasingly fast-paced world, where customers expect services in record time, this has the disadvantage of reduced processing speeds, missed SLAs and poor customer experience.

Banks employ significant numbers of operations personnel trained in monitoring transactions, picking out potentially suspicious ones and working through each to decide if they are false positives or indeed suspicious transactions needing to be stopped. This is often based on a combination of a set of well-defined rules and the experience and expertise of the operations personnel trained to pick-out the suspicious ones from the rest. The operators use a combination of a deep knowledge of the client, their business and associated transaction flow patterns to spot those that don’t conform to the normal pattern.

The arrival of automation

Banks have also leveraged automation to augment and amplify human efforts in sifting, sorting and using deterministic approaches to this monitoring effort – and such automation have largely been rule-based and non-intelligent (i.e. no ability to learn) and non-adaptive (using that learning to drive better conclusions). Coupled with this is also the risk of the ‘human-fatigue factor’ inherent in largely manual operations, that may cause a few suspicious transactions to slip through the net.

This is precisely where AI and machine learning can help the banks. These technologies enable banks to implement ‘intelligent automation’ that can learn – either through self-learning or by being taught by a human supervisor to determine if a transaction is suspect or a false positive. There is also ‘adaptive automation’ that can apply such learning, adapt its rules and then improve its classifications for future.

Most banks are conducting proofs-of-concept and pilots to test the efficacy of using these technologies. These experiments involve using these approaches to develop algorithms that are run on large quantities of past real-world data and trained using supervised learning techniques, letting an experienced human operator to teach them the right from the wrong conclusions. Training using large quantities of real-world data enables these algorithms to narrow the deviation from the correct outcomes of such transactions, processed earlier by human operators.

In some scenarios unsupervised learning approaches can also be used to learn from past transactional data and the associated outcomes. It is important therefore that the quality of transactional data used in the learning process is good, and it is important to use datasets that offer a variety of patterns, to improve the quality of the learning.

These algorithms will have to be put through rigorous testing to determine the ‘dependability factor’ before they can be used to replace human operators. Until this happens, these algorithms can be used to assist human operators in pre-classifying potentially suspect transactions into low, medium and high risk categories, helping improve the efficiency of human operators.

The impact of artificial intelligence

When such technologies are employed at scale, they can offer enormous benefits. Firstly, they improve the overall quality of transaction monitoring and compliance, as they can read and make sense of large quantities of structured and unstructured data, and conduct real-time analysis of transactions to classify potentially suspicious ones and grade them as low, medium and high risk categories. This enables prioritised processing by human operators.

One of the biggest challenges in a manual intensive process is the human-fatigue factor, and the possibility of some transactions slipping through the net due to this. Technologies such as AI and ML solutions do not have the fatigue factor, and have a much higher threshold at significantly larger transaction volumes. They can also learn to spot newer patterns of potentially suspicious transactions through continuous learning, both supervised and unsupervised.

Ultimately, the major impact on banks will be to reduce the overall number of people deployed in AML and KYC operations in banks – this not only saves costs, but enables banks to redeploy those staff into more creative, problem-solving roles. With customers wanting more instant, seamless experiences than ever before, banks should be using their best staff to find new ways to innovate and meet customer demand – not to carry out manual processing tasks that machines can do faster and better.

A combination of AI and machine learning can enable financial institutions to reduce their exposure to the risk of penalties and fines from national and international regulators. The time is now ripe for financial institutions to take note and incorporate these advanced technologies – they have incalculable potential to transform the sector and enhance customer experience.


Quote of the Day

“This last is important. Even in corporate environments, it is very difficult to remove an underling for incompetence if that underling has seniority and a long history of good performance reviews. As in government bureaucracies, the easiest way to deal with such people is often to “kick them upstairs”: promote them to a higher post, where they become somebody else’s problem.”

David Graeber, Bullshit Jobs: A Theory
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