New Technologies and AML Compliance

Decisions, decisions, decisions; it seems everything in life is full of pros and cons, advantages and disadvantages, requiring careful analysis to determine the best way forward. That’s the situation many financial institutions (FIs) and other organizations currently find themselves in when considering various Anti-Money Laundering (AML) compliance technologies.

To help provide clarity, the Financial Conduct Authority in the UK (FCA) published a report New Technologies and Anti-Money Laundering Compliance. On behalf of the FCA, the report was completed by PA Consulting Group and surveyed 40 tech providers and regulated firms. The research offers insight about various emerging AML technologies, implementation by regulated firms, and the role of the FCA.

With so many options for technologies, processes and companies, a clear and well-defined segmentation helps deliver a holistic overview. Interestingly, the report split the industry quite similar to how we segmented the RegTech industry:

• Customer onboarding and maintenance
• Client screening
• Transaction monitoring and filtering
• Reporting and management information

In our RegTech Supply Chain series, we introduced five categories — separating out a segment for detection tools.

As for technologies, the report considers industry utilities, biometrics/video KYC, data analytics, machine learning, Natural Language Processing (NLP) and blockchain/distributed ledger technology. Each of these technologies has significant potential in AML compliance applications.

Regulatory Friction

However, success in implementing technology does not depend solely on having good tech, especially in compliance. If the rules and regulations don’t adjust to take advantage of the possibilities, compliance has little choice but to wait for the regulators to catch up. While survey respondents were generally positive about the FCA’s approach to innovation, by its nature the FCA has to err on the side of caution and be very thorough, specific and accurate. Tech can charge ahead, but regulators have to think of all the possible scenarios, vet the technology, and ensure that new rules keep a level-playing field.

It’s not as though regulators are a homogeneous, single-minded entity. In fact, they have different departments with different outlooks and interpretations. Respondents felt there was a disconnect between the FCA’s policy and the people actually working with the regulated firms (the AML enforcement teams).

Furthermore, regulators, in many cases, aren’t even one bureaucracy. In the UK, there’s also the Treasury and the National Crime Agency NCA, which have their own thoughts about AML technologies. For any technology to truly take hold, it would have to appeal to all the demands of different agencies, departments and teams.

Take one example, the concept of a KYC Registry, an industry utility to share Know Your Customer (KYC) data. While there’s a huge potential for cost savings, it would require widespread data sharing between institutions. Who’s responsible for the data storage, privacy, and liability? What guarantees are in place to ensure that the data is accurate? These criteria, and others, would need detailed regulations before any risk-averse institution would even consider implementation.

Operational Resistance

Besides regulators, another impediment to adoption are operational challenges. There’s the need to have the necessary talent to investigate, gauge and implement solutions, and there’s the upfront cost, both in time and money. There are concerns about data privacy and data quality; who are these guys and can they be trusted with our valuable customer information?

Questions about trust are at the core of the issue of implementing AML compliance technology. In many cases, the processes, technology and suppliers are all new, and the appetite for change in established FIs is low. After all, they’ve built their businesses on safely handling money, so change runs counter to the corporate ethos.

While these general concerns cut across the industry, each different technology, segment, process, or player has different criteria to consider. Making an informed decision requires arduous research for specific needs, uncovering the right tools and technologies available, and consideration for select solutions and how their vendors can deliver. Unfortunately, one size does not fit all.

AML Compliance Success

One technology spotlighted in the report was Electronic Identification Verification (eIDV). Report writers Richard Grint, Chris O’Driscoll and Scott Paton (all from PA Consulting) stated eIDV is “widely considered by respondents as one of the most mature and instantly useful elements of technology in AML… Many respondents felt that this was an area where a change in operational performance could be easily achieved by the adoption of new technologies.”

Success in this area points to how to make other decisions regarding AML solutions:

• Look for proven technologies; just having potential is not enough (we’re looking at you, Blockchain).
• What is the utility? What pain-point does the solution solve and how quickly will it bring results?
• How easy is it? While compliance technology does involve complex ideas and technology, good solutions are adaptable and can integrate quickly into existing workflows. Having to fundamentally change processes is prone to resistance from staff, customers and regulators.

Technologies that add to, or improve existing processes are gaining the most traction. Two other technologies that the respondents consider highly promising are machine-learning and Natural Language Processing (NLP). Machine-learning can “dramatically enhance the performance of existing analytics or decision-based solutions” and NLP can “enable both a reduction in false positives and better prevention of both fraud and money laundering/terrorist financing.”

With any change, there are obstacles to overcome. AML compliance technology is gaining traction and the benefits are too powerful to ignore. The report says it best, “it is clear that new and emerging technologies have genuine potential to have a transformative impact on AML compliance, both in helping to prevent money laundering and in reducing the cost of compliance.”

Originally published at www.trulioo.com on October 11, 2017.