Automation in financial crime compliance

Every year, financial services providers spend more than $110 billion in the fight against money laundering. The struggle against criminals is accurate, and regulators and governments have enlisted the help of service providers in fighting back. Financial services companies keep records of their clients’ identities, transactions, and other vital details. They are also privy to information that governments may not be, such as where money is going, how much, and why. This has resulted in governments creating strict rules and processes that all entities processing money (virtual or fiat) must adhere to. Sticking to these rules is known as compliance.

It’s believed that 90% of laundered funds are never recovered and that AML activities only recover 0.1%.

While compliance can be challenging to businesses, due to its ever-evolving nature, it is a necessity. Failure to be compliant can land operators in hot water, including fines, revocation of licenses, and even prison. Not to mention devastatingly bad PR. But one of the main challenges is that the vast majority of alerts end up being false alarms while real threats and illicit activities slip through the net.

Thankfully, as ever, technology has stepped in to fill the gap. Some technological solutions exist, but many of them are outdated or need significant improvements. Here are some of the technologies that can help.

Machine learning

Machine learning is a distinct form of artificial intelligence that helps software improve its performance and capabilities. It does this through the quantification of masses of data which allows the software to adapt without having to be programmed to do so.

Specially created machine learning algorithms can be given data on financial crime and money laundering from past incidents. Once the algorithm is exposed to enough different events, it builds a model of what financial crimes can look like. This model is based on certain factors and repeated patterns that are displayed in other crimes. By feeding the algorithm more new data, it can use what it’s learned to identify new instances of financial crime. The beauty of this technology is it can process information in a few seconds and process new data just as fast. This means it offers real-time solutions to fast-paced businesses and sectors.

The key is to keep feeding the algorithm with information on confirmed crimes to update its information constantly. This will allow it to respond to new and evolving threats, efficiently.

Big data

As of 2020, there were 59 zettabytes of data in the world. This is equivalent to 59 trillion megabytes and is expected to increase to a staggering 175 trillion megabytes by the end of 2025. To comb through even a fraction of this data would be impossible for a human being or a regular computer. Enter big data.

Big data refers to automated and computerized ways to assess, evaluate, analyze, and process extremely large data sets. Usually, these data sets are too big for a human or regular processor to deal with. Instead, specific software is needed to process it and turn it into understandable chunks.

The use of big data in compliance makes analysis and prediction much easier for operators. It can not only weed out the criminal activity when it’s happened, but it can even predict it before it takes place. The data provided by big data applications can look at KYC information, transactions records, regulatory information and provide actionable insights. This increases compliance and provides operators with a higher level of awareness regarding their business and customers.

Artificial intelligence

Artificial intelligence (AI) has a wide range of applications in the compliance world. It has the power to significantly improve the efficiency of investigations and audits while reducing costs and the incidence of false alerts.

This technology can be integrated throughout the entire customer relationship cycle. At the onboarding stage, it can be used to collect information and paperwork. This can include passports, utility bills, and other data used to open accounts. It can also ask questions regarding the origin of revenue, how many transactions are expected, and even the purpose of transactions.

Accounts can be secured with AI, requiring facial recognition or other forms of biometrics before actions are executed. Once the account is open, AI can perform regular checks, including updating information and gathering new documents. It also can carry out specific tasks automatically if a translation or account is flagged.

AI chatbots can also serve as a point of contact for customers, regulators and internal staff who want to retrieve information or records.

As AI continues to advance, its possible applications in compliance and the fight against money laundering will likely increase. This will also make it more accessible and affordable.

Smart contracts

Over the last five to ten years, blockchain has become a part of many of our lives. The technology that once served only to underpin bitcoin has gone on to find its way into almost every industry. One of the sectors that have been fast to adopt blockchain is the financial services sector. The fact blockchain is immutable, tamper-proof, and decentralized makes it the perfect solution for many pain points in the sector.

But how can it help with compliance? Smart contracts are automated, self-executing contracts that operate on the blockchain. A series of events is pre-programmed into the contract, and each step of the process can only proceed when the previous one is completed. It can be programmed to include multiple parties, and information such as documents and signatures can be timestamped and stored securely.

In compliance, smart contracts can be used at the onboarding stage, but they can also be used to register alerts. All internal and external parties can be notified, and the following up of identified issues can be assured. Furthermore, as smart contracts cannot be tampered with or deleted, this resolves the issue of corruption within organizations. If an alert is generated automatically by AI or machine learning, there will be a permanent paper trail, meaning it must be acted on.

The last word

There are many ways that automation can improve your compliance capabilities. But central to them all, is the need to have a good corporate service provider. They will be able to advise you on what obligations you have, and any changes. A corporate service provider will also be able to offer you audits, assistance in creating policies and processes, and advising you on how to improve your level of compliance. Look for one that is knowledgeable in your niche and jurisdiction and that is transparent and responsive to your needs.