Do Government and AML Officers See “Innovation” Differently?

This article is authored by THE DATA INITIATIVE AB Member David Caruso.

“Innovation” is one of those words we hear all the time. We feel like it’s important and exciting and, apparently, it is also coming to Anti-Money Laundering compliance. Even the government wants us to innovate.

In December, US regulatory agencies published a Joint Statement encouraging financial institutions to commence AML innovation.  The Joint Statement prods the private sector to harness modern technology in order, “to augment risk identification, transaction monitoring, and suspicious activity reporting.”

It is quite a change to see regulators nudging industry to try new things. Why? What benefit does AML innovation provide the government?

Why Innovation Happens

Innovation sprouts when we ask questions like; “Why do we do this?” “Why do we do it this way?” “Is there a better way to do this?” If we want innovation, we must change our status quo.

When pushing the AML industry to innovate, what is it the government wants to change?

Government Innovation vs. AML Compliance Innovation

When reading the Joint Statement, it feels like the regulators see AML “innovation” as the way to uncover more suspicious activity. That makes sense. It is easy to imagine that when government officials think about their role, they would ask, “How can we get more AML data so we can identify more crime, investigate better cases, and get more convictions?”

But, when AML officers and bank management think about innovation, are they asking these same questions? No.

AML professionals and bank executives continuously ask, “How can we get rid of false positives? How can we cut down inefficient work? How can we reduce costs while maintaining compliance?”

Of course, AML professionals also share the same goal as government – reducing financial crime and its terrible impact on people. But, the weakness of existing approaches leaves us buried in false positives and burdened by manual processes. Fixing these problems is the priority of AML officers. This means industry wants less of something (false positives) while the government wants more of something else (SARs). It appears “innovation” has a different meaning to different people.

This as a problem for AML professionals. The government expects AML innovation to yield more SARs and better information. How will regulators and law enforcement respond when institutions unveil new innovative software that reduces false positives and speeds up work, yet doesn’t increase suspicious activity detection?

Innovation Is Uncomfortable

Contrasting views about the purpose of AML innovation will cause uncomfortable tension between the government and industry.

Financial institutions want to reduce workloads and eliminate processes. This will raise concern among regulators, law enforcement and policymakers, who will question how we fight financial crime with less effort and fewer people.

Existing AML systems identify very little money laundering. Presumably, at some point, better software will enable more suspicious activity detection while also reducing false positives, achieving the objectives of both the government and industry.

However, to get to better systems that better detect suspicious activity, the industry first needs systems that clear out false positives and reduce manual work. It is unimaginable that financial institutions would see something as “innovative” that met the government’s interest (more SARs), but that didn’t first end the misery of false positives.

The regulator’s Joint Statement is welcome. Seeing the government promote new approaches to AML compliance will hopefully create an environment where better ideas and software applications will thrive.

We should keep in mind though that while both the government and private sector share the goal of reducing financial crime, the ways to achieve a shared goal are often different.  Having this understanding at the outset may help reduce friction that comes with change and help accelerate much needed AML innovation.

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