We will look at why detection plays an essential role in countering terrorism financing, and what strategies we can use to detect these financial networks.

Why Detection Matters

Detection of terrorism financing is essential for understanding how terrorist networks operate, who is involved in them, and where their resources are coming from. By being able to identify patterns of transactions that may be linked to terrorist organizations, governments can begin to build up a comprehensive picture of the networks they operate within and disrupt them before they can cause any harm.

This also allows governments to target the sources of terrorist funding more effectively so that they can be stopped before they have an opportunity to reach their intended recipients.

Strategies for Detection

There are several strategies that governments can use when attempting to detect terrorism financing. One such strategy is data mining – analyzing large amounts of data related to financial transactions in order to uncover patterns or trends that could indicate suspicious activity associated with terrorism financing.

Additionally, governments can use predictive analytics – using machine learning algorithms or artificial intelligence (AI) systems –to detect patterns of behavior that could be indicative of terrorist networks trying to conceal their operations through complex financial transactions.                             

Finally, governments can employ cognitive computing technology – utilizing AI-driven programs designed specifically for natural language processing (NLP) – which allow users to search large amounts of text-based data (such as reports or emails) for keywords related to terrorism financing activities.

All three of these strategies provide useful insights into how terrorists finance their operations and provide useful information which law enforcement agencies and intelligence services can use when attempting to disrupt terrorist networks and prevent future attacks.

In summary, detecting terrorism financing is essential for understanding how terrorist groups operate and curbing their activities before they have a chance to cause any harm.

By using data mining, predictive analytics, and cognitive computing technology, governments are better equipped than ever before in detecting these networks quickly and accurately so that appropriate steps may be taken against those involved in such activities. Although terrorism remains a major threat around the world, it is reassuring knowing that there are measures being implemented which help keep us safe from its devastating consequences.

How KYC Works

KYC procedures involve the collection of data related to customers like names, addresses, IDs, contact information, employment details, banking records, transaction histories, etc. This data helps businesses verify the identity of their customers by ensuring that they are who they say they are. The data collected also serves as a means of tracking customer activity over time so that any suspicious behavior can be flagged quickly and addressed appropriately.

Benefits of KYC Procedures

Adopting KYC procedures has numerous benefits for businesses. Not only does it help them strengthen customer relationships by creating greater trust between them and their customers, but it also helps them protect themselves from fraudulent activities such as money laundering or terrorist financing.

Additionally, having strong KYC procedures in place reduces the risk of government fines or sanctions due to non-compliance with anti-money laundering regulations. All of these factors make it clear why having effective KYC procedures is so important for businesses today.

KYC process includes 4 main components:

Identification & Verification Processes

The first component of KYC procedures involves identification and verification processes. These processes involve collecting information about customers such as their name, address, date of birth, and other data points that can be used to verify their identity. This data is then compared against known fraudulent activity or patterns that may indicate suspicious behavior. By verifying customer identities, businesses can help protect themselves from fraudsters and protect customers’ personal information from being misused.

Risk Assessments

The second component of KYC procedures involves risk assessments. Risk assessments evaluate a customer’s risk profile based on factors such as their age, financial history, and past behavior with the company or other similar entities. This helps businesses identify potentially risky customers who may pose a greater threat to their operations or reputation if not handled properly.

By performing this assessment upfront, businesses can take steps to mitigate potential risks before they become more serious problems down the line.

Customer Due Diligence

The third component of KYC procedures is customer due diligence (CDD). CDD involves assessing a customer’s background by examining public records such as credit reports and court filings to determine whether they have a history of criminal activity or other suspicious behavior that could potentially harm the business in some way.

CDD also helps businesses ensure that they are not engaging in any activities that could be considered illegal or unethical by regulatory agencies.

Monitoring & Reporting Requirements

The fourth component of KYC procedures is monitoring and reporting requirements. Businesses must regularly monitor customer accounts for signs of a suspicious activity or fraud attempts, as well as report any suspicious activity to regulators in accordance with applicable laws and regulations.

This helps create greater transparency between businesses and regulators while also helping reduce the potential for criminal activity within a business’s operations.

3 keys to success that can help you speed up your customer onboarding process in the Know Your Customer (KYC) process

1 – Automation

Automation streamlines the onboarding process by eliminating manual tasks, such as data entry and document scanning, which can take a lot of time and effort. Automation also allows you to capture all the necessary information quickly and accurately from customers, so there’s no need for back-and-forth communication or paperwork shuffling. Automation also makes it easier to keep track of customer profiles, so you know exactly who you’re dealing with at all times.

2 – Electronic signatures

Electronic signatures are becoming increasingly popular because they make it easy for customers to sign documents without having to print them off or send them through the mail. This saves time and hassle for both parties involved, as well as simplifies compliance with government regulations. Plus, electronic signatures are legally binding, so there’s no need to worry about any legal issues arising later on down the line.

3 – Verification technology

Identity verification technologies allow businesses to verify a customer’s identity in seconds by using facial recognition or other biometric data such as fingerprints or iris scans. This means that customers don’t have to manually fill out forms or wait for documents to be verified—it’s all done automatically in a matter of seconds! Plus, this technology helps protect businesses from fraudsters by ensuring that only legitimate customers are able to access their services and products.

Conclusion:

In conclusion, understanding how to Know Your Customer (KYC) works is essential for any business owner or financial services professional today. By collecting relevant customer data up front and then monitoring that data over time, businesses can verify identities while keeping track of customer activity in order to prevent fraudulent activities such as money laundering or terrorist financing.

Furthermore, having strong KYC procedures in place ensures compliance with applicable regulations while reducing the risk associated with fines or sanctions due to non-compliance. In short, implementing effective KYC procedures should be a top priority for all organizations involved in finance today!

In an effort to increase loans and deposits and expand their customer base, smaller financial institutions and credit unions have been considering whether or not to work with cannabis-related businesses. It’s a decision that should not be taken lightly. Servicing this customer pool will in some cases greatly increase your institution’s risk profile. It also entails significantly more scrutiny around Anti-Money Laundering/Bank Secrecy Act (AML/BSA) compliance.

Whether or not you decide to bank a cannabis-related entity, before your institution can even open its doors to this emerging market, there are two elements of your AML compliance regime in particular that you need to focus on:

1. A thorough risk assessment
2. A rock-solid onboarding process from start to finish

Much regulatory, legal and reputational damage can be averted right from the beginning when you have access to intelligent data, can automate screening processes, and can combine this with good KYC policies and systems.

A Brief Overview of the Cannabis Business Industry

One of the biggest challenges of cannabis business banking is that the Cannabis industry itself as well as the rules that guide it are incredibly diverse and extensive. For starters, cannabis products actually fall into one of three categories: hemp, Cannabidiol (CBD) oil, and marijuana. Each one of these categories is treated differently from a legal and regulatory standpoint. Complicating matters, there are also differences in the rules and regulations from one state to another.

Here is a brief rundown of each type of Cannabis product, including its current legal and regulatory standing:

Hemp

Hemp is a variety of the Cannabis sativa plant species that is grown specifically for commercial use. Hemp produces a broad range of cannabinoids, including tetrahydrocannabinol (THC), the intoxicating chemical in marijuana. Hemp, however, does not contain enough THC to produce intoxicating effects.

Many countries differentiate hemp from marijuana by the amount of THC produced by the plant. In the US, industrial hemp must not contain more than 0.3% THC.

Hemp has a variety of uses. Hemp fibers can be used to make an assortment of products including paper, clothing, textiles, rope, building materials and compost. Hemp seeds and the oil produced from them, on the other hand, can be consumed as healthy, nutrient-rich, super food.

CBD Oil

CBD oil comes from the flower and leaves of the hemp plant. It is not the same as hemp seed oil, which comes from the seed and contains little to no CBD. Over the past few years, there has been a growing demand for CBD oil as a wellness supplement to such an extent it is a sub-industry all to itself.

Both hemp and products containing CBD oil are treated the same from a legal and regulatory standpoint. CBD is also subject to Food and Drug Administration (FDA) oversight with respect to how products containing CBD can be advertised.

According to the 2018 Farm Bill, growing, processing and selling hemp and hemp derivatives is legal at the federal level, and so is transporting hemp across state lines.

There are, however, many restrictions placed on such activities. For instance, all growers, processors and dealers must be approved, registered and/or licensed by the U.S. Department of Agriculture (USDA). Hemp that is not produced in accordance with the 2018 Farm Bill is designated as illegal marijuana.

For financial institutions in particular, the Financial Crimes Enforcement Network (FinCEN) recently issued their guidance regarding due diligence requirements under the Bank Secrecy Act (BSA) for hemp-related business clients.

Marijuana

Marijuana is the dried leaves and flowering tops of either the cannabis sativa or cannabis indica plant. Since marijuana contains a significant amount of the psychoactive substance THC, it is still considered a Schedule 1 substance under federal law. Many states, however, have legalized the cultivation and selling of medical and/or recreational marijuana.

This odd contradiction between federal and state law has brought about two indirect, yet consequential results:

1. Marijuana is primarily a cash-based industry since most payment networks will not process marijuana-related transactions.
2. Many big marijuana companies rely on the investments of foreign individuals and entities.

Marijuana-related businesses (MRBs) can also be classified into one of two tiers:

1. Tier I MRB- A company that is directly involved in cultivating or dispensing marijuana
2. Tier II MRB- A company that supports Tier I MRBs, such as hydroponic suppliers, packaging suppliers, licensing consultants, or marijuana software providers

Although cannabis business banking may be challenging in the current environment, it represents a potentially lucrative emerging industry for financial institutions. With total sales of cannabis in the states where it is legal expected to reach nearly $30 billion by 2025, a growing number of cannabis-related businesses are seeking access to mainstream financial products.

Moreover, cannabis products derived from Hemp and CBD are both federally legal and considerably less taboo. This means that institutions looking for untapped markets, could get their foot in the door with less risk and uncertainty.

With MRBs, currently 36 states have legalized the distribution of medicinal and/or recreational marijuana. The largest draw for both banks and credit unions in this high-risk market is the vast untapped potential. Like any business, MRBs need access to financial services in order to survive and expand. The MRB industry, however, is expected to reach a staggering $57 billion by 2027, yet a majority of MRBs (70 percent in total) remain unbanked or under-banked.

Understanding Cannabis Business Banking Risk

Whether or not your financial institution chooses to bank hemp, CBD, or MRB customers, your will be making a risk-based business decision. There are three main areas of risk to consider right from the start:

The Risk Posed by the Cannabis Business

As mentioned above, the risks associated with banking hemp companies versus CBD companies versus MRBs all differ tremendously. Not only would you potentially need to stay updated with the current legal and regulatory status of hemp, CBD and marijuana businesses across several different regions, but there are serious know your customer (KYC) risks, too.

The big risk in banking hemp or CBD companies is that either:

• The hemp involved is actually marijuana
• The hemp or CBD company has not followed all legal requirements, such as having the correct licenses and registrations, or it is growing the hemp in a tract of land that has not been approved.

Support services provided by third parties to cannabis businesses, such as hemp testing facilities, may also put financial institutions at risk for money laundering schemes. These types of companies, however, generally do not pose the same amount of risk as direct cannabis businesses, such as farmers, processors, and dealers.

With cash-oriented MRBs, financial institutions face the real risk of legal action for money laundering and aiding and abetting in drug trafficking. But, that’s not all. Some legal MRBs are committing fraud or opening up shell companies just to gain access to the services of a financial institution. For example, an MRB may list itself as a “pharmacy”, “nursery” or “wellness center” in order to get through the onboarding process.

Risk Posed by the Beneficial Owner

Aside from the typical risk associated with politically exposed persons (PEP) or those with a criminal background, one of the biggest risks surrounding the beneficial owners of a cannabis-related business is figuring out who they are in the first place. The challenge is even greater when determining the true beneficial ownership of marijuana companies due to the prevalence of foreign investment and the prolific use of management agreements and shell companies in the industry.

Risk Posed by the Financial Product

The final area of risk to consider is that posed by the desired financial product(s). The risk to offer a deposit account differs greatly from the risk of providing a loan. Once you’ve determined the risk of the cannabis business itself and of the beneficial owner, making this decision depends on your institution’s risk appetite.

Mitigating the High Risk of Cannabis Banking from the Beginning

A great deal of mitigating the risk of cannabis business banking happens at the beginning, before a client has completed the onboarding process. There are two key steps and areas of focus your financial institution should be concerned about:

Conducting a Risk Assessment

After becoming familiar with the relevant laws and regulations across your institution’s entire footprint, you should conduct a cannabis-risk assessment and set your institution’s risk appetite for the industry. The risk assessment process with the aid of AML Compliance tools and consulting will provide an opportunity for your financial institution to see if cannabis business banking products and services truly fall within the scope of its strategy and risk appetite.

A significant part of your institution’s risk management starts with good KYC practices and systems. Thus, the risk assessment process should confirm whether there is adequate infrastructure and support in place in your AML compliance program. For instance, how is your institution scanning watchlist data, which alternative data sources will you be consulting, and how will matches be sorted and verified?

When evaluating any higher risk activities, the legal and regulatory impact should also be considered in terms of both AML/BSA compliance and potential exposure to litigation.

Developing a Thorough Onboarding Process

The Onboarding process starts with the onboarding request, followed by data capture and initial CDD/CIP, and then enhanced due diligence (EDD) for KYC. This is where much of your risk management and AML compliance happens in practice.

After conducting a risk assessment, you then need to set the risk-rating criteria and processes for risk-rating new customers. Here are a few important considerations:

• Use a comprehensive application and onboarding questionnaire to understand the nature of the business and its financial activity and to secure the necessary documentation, such as the business’ registration and license information. Because banking hemp or CBD is different from marijuana businesses, it’s good practice to have different onboarding questionnaires for each of the three types of cannabis products.

• Invest in automated onboarding technology powered by artificial intelligence and machine learning. These technologies can help your institution conduct enhanced due diligence and deep web searches for automating EDD. You’ll have better insight into the background of each business and its beneficial owners. Moreover, automated platforms such as our own DecisionIQ will not only screen for sanctions, PEP, criminal records, negative news media and more, but create an intelligent scoring engine that reduces manual processes and False Positives.

• Developing an onboarding process that reflects your risk appetite should always be considered a work in progress that you periodically return to and adjust where needed. This reevaluation process will also help your institution conduct its ongoing monitoring for suspicious activity.

In short, banking cannabis-related companies raises the level of risk for any financial institution. But your institution can mitigate the high risk in cannabis business banking by getting your onboarding process, systems and procedures in line with your risk appetite and financial goals.

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As credit unions continue to grapple with a growing mountain of costly and complex financial regulations as well as an evolving digital ecosystem, they have been ramping up their investment in regulatory technology (RegTech) solutions.

Determining which AML compliance solutions make the most sense for a specific credit union, however, can be a challenge. Over the next four years, the global RegTech industry is expected to reach $16 billion. While there are many established players already in the market, this growth is in large part driven by a rising wave of new RegTech innovators. These companies are harnessing advanced technologies to address a wide range of issues in addition to AML compliance, such as data and network security, user experience, the increasing demand for faster digital transactions, affordability and ease of integration.

RegTech has become mission critical among credit unions seeking support in their AML/CFT compliance efforts. Earlier in this series, we examined the ways in which modern Credit Unions need to rethink their approach to AML/CFT compliance as well as the unique challenges they will face in the process. The distinct path awaiting Credit Unions towards an accurate, cost-effective, and nimble AML compliance regime requires that they look beyond many of the established vendors.

Credit unions do not operate in the same way as banks do. They have their own unique structure, mission, and set of needs. RegTech platforms that prioritize affordability, accuracy, customization, support, and ease of use are better suited to these financial institutions.

Heading into the future, partnerships with RegTech vendors can help to make credit unions more adaptable and competitive in a changing financial services landscape. Many small and mid-sized credit unions today face two options: either adapt to changes in regulation, technology, and financial market trends or be absorbed by a bigger financial institution. Though the Covid-19 pandemic initially slowed down M&A activity among credit unions, all signs indicate that M&As will increase in 2021.

Having smart, customized AML compliance solutions in place is a necessary growth strategy for today’s credit unions. In fact, it could end up being one of the most significant factors in the fundamental viability of the credit union model going forward.

In this final article of our series on AML compliance among credit unions, we will look at three core RegTech solutions that are putting these financial institutions back on the financial services playing field.

3 Smart AML Compliance Solutions for Today’s Credit Unions

A solid AML/CFT credit union compliance program will depend on some combination of three core services:

Moving from Big Data to Smart Data

AML compliance begins with screening clients as part of customer due diligence (CDD). A good sanction, PEP, and adverse media screening program begins with great watchlist data.

Most AML compliance data vendors build and promote BIG DATA. However, when it comes to a given database, bigger isn’t necessarily better. The problem with big data is that it is often full of junk and bloated with duplicates. This unnecessary, incomplete, or unwanted information creates added work for AML compliance staff who must manually reconcile and clear the excessive false positives. Financial institutions typically end up over-engineering their screening systems to deal with junk data to strike a balance between an “acceptable” number of false positives with their efforts to avoid missing true positives.

The beginning of modern KYC and sanctions screenings still starts with sanctions lists, but now extends to other watchlist data, including PEP (politically exposed persons), RCA (relatives and close associates of politicians), HIO, Regulatory Authority, Negative News, and more. These lists are constantly evolving, while sanctions are becoming more complex and the number of regulatory bodies are growing. For credit unions working with limited resources, this big and constantly changing data pool must be augmented and transformed by SMART data systems prior to consumption for screening. SMART DATA leads to INTELLIGENT SCREENING. Solving the data problem is the most effective way to enhance a credit union’s AML compliance program.

For this reason, KYC2020 developed VisionIQ, the most comprehensive, advanced, and affordable watchlist database on the market with access to over 1000 watchlists and over 10,000 automatically updated news sources from more than 200 countries. The VisionIQ data advantage is not just that the data is comprehensive so that a credit union never misses a relevant true positive, but that we spend a great deal of time to make it SMART so that our clients are not dealing with endless false positives.

For a credit union to be served the right data to suit their risk profile, VisionIQ is powered by advanced technologies, such as artificial intelligence (AI) and natural language processing (NLP).

Data is structured and organized to make it easy to selectively group watchlists for different risk profiles and screening criteria. Data is de-duplicated and cross-linked across watchlists to better resolve the data into personas. Data, especially PEP and RCA data, is further augmented by name and entity recognition in relevant adverse media. Personas are also tagged with aliases, common name variants and misspellings to reduce fuzzy search errors and false positives. Plus, we have added machine learning (ML) to the mix which makes the data, and by extension the AI-based compliance system smarter over time.

Best of all, we have priced VisionIQ with smaller financial institutions in mind. Data does not have to be so expensive, and credit unions do not have to compromise quality for good data.

Smart Sanction Screening Solutions

Sanction screening is an integral part of KYC and AML/CFT compliance. Sanction screening systems are designed to protect financial institutions from high-risk customers and help to ensure the integrity of the financial services sector. But it does not stop with just sanction screening. Today, financial institutions must screen for PEP, criminal, and even negative news.

Aside from the risk of regulatory fines, credit unions must think about their reputation. Nothing will ruin a credit union’s reputation faster than being tied to a rogue member or an employee who has generated negative publicity. Where a financial crime was committed, the financial institution’s ties may be made public, creating a reputational crisis. The credit union may be deemed guilty by association, with members questioning the integrity of the credit union itself even if it has done nothing wrong.

For example, corruption among public employees, such as politicians, government officials and their associates is on the rise. As part of their customer due diligence obligations, banks and financial institutions must establish and report whether their clients are Politically Exposed Persons (PEP) and at risk of being involved in financial crimes, like money laundering, or are associated with a predicate offense as reported in the news.

A great KYC sanction screening solution for CDD begins with an exhaustive watchlists and negative news database. However, even the best compilation of data and news sources is useless without an intelligent search and scoring engine that works to minimize False Positives, while helping to ensure that True Positives are discovered.

KYC2020 SmartScan is the best in class sanction, PEP and negative news screening and scoring service that integrates automation, AI and NLP for big and small credit unions alike with flexible price plans to suite any budget.

SmartScan gives credit unions the smarts and sophistication of an enterprise sanction screening solution while avoiding all the cost and complexity. It is available as SaaS solution or OnPrem deployment. Plus, we have developed an extensive API Library for easy integration with in-house systems and workflows.

From Screening to Decisioning

Despite all the advances in technology, sanction screening still requires a significant amount of manual intervention that can dramatically slow down and disrupt the customer verification and on-boarding processes. There are generally four main hurdles to overcome:

1. False Positives. The best systems still yield 5-7% false positives that must be cleared manually by a compliance officer.
2. Record keeping. Compliance best practices require the storing and organizing of auditable documentation for minimum of 5 years. The administrative effort and resources needed to fulfill this requirement are high, costly, and can lead to expensive inaccuracies.
3. Long On-boarding Times. Sanction screening plagued by over-engineered systems, depends even more on manual interventions that are not only slower, but prone to mistakes and discrepancies. This results in a slow customer verification and on-boarding process.
4. Ongoing Monitoring. Constantly changing data means regular and recurring screening of customers. Depending on your risk-based approach, this could mean quarterly, weekly, or even daily screening. A poor screening system invariably leads to an inaccurate and ineffective batch monitoring program.

Traditional sanction screening solutions are designed to filter a set of watchlists. The search results are then manually exported for review. To stay relevant and competitive, credit unions must move from screening tools built around integrated manual workflows to stand-alone decisioning systems that automatically clear false positives to yield actionable screening decisions. All this in near real-time, with a human readable and audit friendly decision proof-of-work file, and without requiring manual effort.

Manual-centric AML compliance systems are by nature reactive. When processes are dependent on manually clearing a mountain of false positives and routinely tie up a large amount of resources, credit union leaders can feel like they are never in control.

On the other hand, a smart, automated sanction screening decisioning system can render 95% of all verification decisions automatically within a 60-second response time and a low decision error rate. For records that require manual screening, they can be sent within minutes to compliance officers, who should have all the info they need to take immediate action.

With DecisionIQ, we put credit union AML compliance teams back in the driver’s seat. We take a risk-based approach coupled with the best watchlist data and latest technologies in search, scoring, AI, NLP, and decision systems. Automated clearing dramatically speeds up on-boarding while reducing wasteful manual work. Each decision is accompanied by a rational proof-of-work file that is securely stored. All case management and AML officer reviews can be done electronically, and best of all, our highly intelligent monitoring system actively tracks watchlist data changes, automatically re-scans impacted customer records, and only send an alert when appropriate. This means no more manual redundant reprocessing of customer batch files in the name of ongoing monitoring!

No Need to Go it Alone

Credit unions do not have to figure out the best AML compliance system on their own, nor should they resort to requiring staff to multi-task between their regular roles and AML/CFT compliance efforts. Our qualified CAMS and VSkills certified specialists have experience working with credit unions and can help with a range of compliance needs, from revamping an AML system or tailoring our products to fit established workflows.

In Closing…

Smart data and automated decisioning promise to be a fundamental part of AML compliance among all financial institutions in the future. Credit unions, however, require smart AML compliance solutions that suit their unique structure, workflow, transactional needs and budget. Such systems are more than just a way for credit unions to stay AML compliant. They are necessary growth strategy that can keep them competitive in the years ahead.

Want to learn more about how KYC2020 solutions can help your financial institution? Contact us here or send us an email at sales@kyc2020.com.

KYC2020 is also not alone in the world of RegTech innovation. To find out more about other 2021 innovators, check out the RegTech100 list.

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Anti-money laundering (AML) compliance has always been a significant burden to credit unions. But as the new year gets underway, fulfilling the regulatory requirements against financial crime may be all the more daunting.

Over the past few years, consumers and a growing range of business clients have been seeking faster banking, more convenient access to their accounts and quicker funding decisions. But credit unions have been stuck treading water in the rising wave of new and existing financial regulations, while risks of default, fraud and other types of cybercrime continue to mount.

Historically, AML compliance and regulation did not apply to credit unions in the same way it has to larger banks and traditional financial institutions. However, as digital commerce goes mainstream among credit unions and they open the door to under-served, yet higher-risk businesses, recent changes to BSA/AML compliance have been shifting this dynamic.

Understanding the Challenges in Credit Union AML Compliance

In the first article of this series, we looked at the four critical pillars of AML/CFT compliance among credit unions. In this second article, we’ll now examine the five biggest obstacles that are standing in the way of an accurate and effective compliance program.

Balancing Accuracy and Speed

Regulatory authorities have been charging hefty fines to financial institutions that fail to meet all the compliance requirements of AML, KYC, and BSA. In fact in 2020 alone, financial institutions across the world have been penalized with a staggering $10.4 billion in fines and penalties.

The continual screening, monitoring, recording and reporting requirements is a resource-intensive business process for even the biggest financial institutions. Big banks, however, can afford to throw people and money at the process, and they can more easily absorb the financial “hiccups” along the way.

With smaller financial institutions there is a struggle to balance accuracy and speed while fulfilling ALM/CFT compliance regulations. Many credit unions still employ legacy systems that rely on a significant amount of manual activity and action.

Not only are these systems expensive to run, maintain and upgrade, but they are incredibly inefficient, too. The reliance on manual, repetitive procedures increases the chance of mistakes and omissions, and onerous reporting and auditing requirements frequently tie up employee time and attention. Moreover, senior leaders continue to invest significant time and money into cybersecurity and compliance rather than strategic initiatives and goals.

Making Informed, Smart Data-Driven Decisions

This leads us to a rather strange paradox: Many financial institutions already understand that in order to comply with anti-money laundering, fraud and data security regulations, they need the assistance of automated software. A number of credit unions have already done the research and plugged the best tools into their system. But instead of improving performance, their compliance efforts are impeded.

There are two main reasons for such an outcome. The first issue involves the synergy between automation, AI, and machine learning on one side with human decision-making, input and due diligence on the other side. Relying too heavily on manual operations opens the door to inefficiencies and inaccuracies. But, an over-reliance on the results of AML detection and risk assessment solutions, can lead to a disproportionate amount of false positives and negatives– the effects of which can be catastrophic for both the credit union and its members.

The second issue can be traced back to bad data. Global watchlist data, especially PEP, RCA, HIO, is unstructured, impractical and “ugly.” Though it’s a real challenge to aggregate and standardize, it is mis-information to think that it’s a “big data” problem. The race to bigger databases leads to lack of quality in the data itself. Credit unions would be wise to start with quality data such as VisionIQ Global Watchlist Database where the data philosophy is compliant, comprehensive, and smart versus big, getting bigger, and becoming dirtier.

For these reasons, it’s not uncommon for an AML system to generate a high proportion of false positives. We’re talking about 80 to 90 percent of alerts. If a credit union blindly acts on a suspicious activity alert and files a SAR on a client, yet the client’s transaction activity was actually legitimate, it can lead the financial institution down a rather destructive path.

The member client will now become subject to frequent review. Each review will scrutinize the customer’s financial activity. If the suspected suspicious activity happens again, the credit union could decide to close all associated accounts. Multiple SARs could also attract the interest of law enforcement and eventually lead to an investigation. An initial query by internal AML investigators can easily de-risk a client who is making legitimate transactions and save a tremendous amount of time, money and headache.

On the other hand, if credit unions are not diligent enough in monitoring transactional activity and paying attention to other red flags, they become complicit with the illegal activities of the clients in their watch. Many compliance and risk assessment monitoring systems are equipped to mitigate risk on behalf of the financial institution. Credit union leaders would do well to keep in mind that although these solutions are getting better with time, the techniques and strategies criminals are using to cover up fraudulent behavior are, too.

Working with MSBs and “High-Risk” Entities

With increasing regulatory scrutiny on large financial institutions, many high-risk clients, such as money services businesses (MSBs) and marijuana-related companies, are turning to credit unions for their banking needs.

Some of these high-risk organizations may indeed be involved in money laundering and other financial crimes. Small institutions are preferred targets for such operations since they tend to have less regulatory oversight and compliance processes in place.

Consider, for example, a large MSB. A money services client can generate significant transaction volumes that could overwhelm a small credit union. Yet to ensure compliance with the KYC and BSA regulations, a credit union must continue to assess the risks posed by this client, closely monitor activity, report any unusual behavior, and implement a range of added controls to manage any exposure to risk. This includes continuously monitoring media for relevant negative news on their customers and members.

Such AML compliance measures may often be at odds with providing a good customer experience to high-risk credit union members, but are necessary. Fast, sophisticated, affordable, and low-friction regulation technology solutions can be a boon to help balance both goals. For example, as it relates to negative news screening, our Adverse Media Check ®, relies on AI, Machine Learning, and Natural Language Processing to continuously monitor thousands of relevant global news sources to create a persona database of individuals, companies, and politically exposed persons (PEPs) for relevant negative news. But we don’t stop there, the results are then fed into a AI-based decisioning system to clear false positives and identify risk. More about this and other market solutions in our final article in this series.

Mitigating Data Security Threats

As incidents of cyberattacks continue to evolve and grow, small and mid-sized credit unions face a greater threat in a sense than the largest enterprises due to their tighter budgets and access to fewer resources. Compromised customer data typically leads to fraud, stolen identities, and more. Solving for AML compliance should not be at a cost of compromising customer data.

Only sustainable data security best practices will help credit unions stay BSA/AML compliant while keeping their data and networks safe. Specifically, credit unions must now have controls in place to protect the security and confidentiality of member records, respond to and report security breaches in a timely manner, and maintain vital data helpful in identifying the source of cyber criminal behavior.

Maintaining a Positive Customer Experience

Customer expectations for fast, seamless banking create two competing priorities for financial institutions: staying AML compliant and keeping customers happy. Slow on-boarding, false positives, and cyberattacks will certainly compromise that experience.

Credit unions are known for their customer service towards members and it is a big reason why clients would choose to bank there. According to a recent PwC report, speed, convenience, helpful employees and friendly service is important for more than 70% of banking consumers, and positive customer experiences influence 75% of customer decisions in banking. Satisfied credit union members are loyal customers who will increase the scope of their relationship and recommend their credit union to others.

In short, AML/CFT compliance has always been a complicated, resource-intensive process for credit unions, and all signs indicate that it will only get more challenging in the years ahead. But, credit unions don’t have to go through this process alone. A number of regulation technology innovators can help credit unions stay compliant, even with evolving threats, while maintaining the level of quality service they are known for. At KYC2020, we have a history of working within the credit union space. We understand the unique challenges credit unions face on a daily basis and offer local solutions.

In the last article of our AML for credit unions series, we’ll examine some of the many solutions that are giving credit unions the technological edge they need to both stay compliant and expand their operations.

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For more than 30 years, the Financial Action Task Force (FATF) has been the global standard by which many countries have wholeheartedly adopted the measure to combat Money Laundering and Terrorist Financing(ML/TF). Since the FATF first started in the late 1980’s, many countries have come a long way in adopting FATF regulations and limiting the spread of ML/TF. While the primary G37 members have strict adherences and enforcement to the FATF 40 “Recommendations”, other members follow the guidelines with more leniency. When FATF was first founded,  there were only 7 pages of the 40 “Recommendations”. A mere 7 pages!  On the other hand, there are now a staggering 127 pages printed In the recently published June 2019 version of the “Recommendations”. Let that sink in.

Similarly, the original version only mentioned “policies” once, while in the latest version these policies are mentioned 30 times. This means that new “policies” were added almost 10 times per decade, resulting in about 42 new pages per decade.  This progression is not lost on most Compliance Officers, nor is it unexpected whenever regulations come into play.  So, when one may I ask, “Why is an AML Policy so important?” The answer to the question comes down to, its required by law!

Seriously though, WHY! Apart from the legal aspect there are many more important reasons why AML policy is becoming so crucial.  To be able to combat ML/TF risk, one needs to understand the risk which can come from all types of criminal individuals and organizations.  From the lone wolf to the entrepreneurial criminal enterprises, criminals launder trillions of dollars in drugs, human trafficking, bribery and the like according to a UN study in 2011. The FATF states “The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.”

For some companies it can be complicated to build and maintain an AML Policy. AML regulations are constantly being updated as seen by the FATF example over a 30+ year period. In addition, some of these businesses operate in more than one jurisdiction, and often there is more than one regulator. If you think you have what it takes to build your own AML Policy, take our CAMLO quiz and see if you have what it takes.

If not, our team at KYC2020 has set out to create a tool to help with the development and support of an AML policy.  It was built with templating in mind to have a base to start with and then customize for each entities specific lines of business.  The first version was focused on FINRA regulated entities in the US.  Now we have two more in production for Money Service Businesses (MSB) and Dealers in Virtual Currencies (DIVC) in Canada and the US. The AML Policy template mechanism is structured to allow for flexible sections and content to be tailored to the specific activities of the Regulated Entities (REs).

Once a template is chosen, the RE works through the various sections answering the questions related to the particular component of a standard AML Policy, while customizing the components and sections specifically related to their business.  Once done, the RE can request to have a certified CAMS (or equivalent) person review it and provide additional feedback or suggestions on updates and changes.

When the RE is satisfied with the results, the AML Policy can be frozen, and version control kicks in.

As with FATF and their 40+ recommendations, it is the same idea with the RE’s AML Policy.  It will be a living breathing document that expands and changes over time.   The constant transformation of the document is a good thing, it demonstrates that the REs AML regime is maturing over time to deal with new risk, regulations, and changes to the business to fight ML/TF.

Want to find out more about our AML Policy tool?  Click here and sign up for this and all the other offerings at KYC2020.

Use Cases Included:

• CIBC presenting a use case for AI/ML for streaming the onboarding process to near 89% that of human capabilities.
• KYC2020 use case on how using its DecisionIQ reduced the overall burden of reviewing false positives from 8 hours down to 30 minutes.
• AML professionals reported that AI/ML from AML had many applications in non-compliance functions including training, marketing, sales, and improved customer service.
• That all solutions are not a 100% replacement of human functions, rather, and an enhancement to extend beyond human insights.

There seemed to be a consensus among attendees that adaption of AI/ML tools will continue to move slowly. When asked about some of their reasons they said:

• A limited understanding of AI/ML application in the context of AML compliance programs.
• The idea that AI/ML is a “black-box” that isn’t easy to understand for executives, regulators, and compliance officers.
• The scrutiny of AML compliance programs by regulators to be able to demonstrate an understanding of what the AI/ML is doing to come up with the results.
• The actual cost savings and/or efficiency benefits brought on by using AI/ML.

To the last point, a recent report by PwC indicates that “While many favour the use of technology in combating fraud and/or economic crime, 37% of respondents believes that it produces too many alerts or false positives. This can lead to customer friction – a growing challenge for organizations as they seek to strike the right balance.” This balance is the key to delivering on the promise that AI and ML will reduce alerts and false positives.

Surmounting the False Positive Problem

While designing DesicionIQ, KYC2020 encountered similar challenges. We needed to determine what constituted the “right balance.” That meant we had to cast a wide net while KYC searching to insure we caught the maximum amount of hits. We needed to create AI/ML models that emulated the process a person would go through to clear the false positives. The difference being on a significantly larger scale than a human would be capable of reviewing. And in a matter of seconds.

But making a screening decision isn’t the only thing that matters here. Our CAMS(tm) certified AML specialists made sure that our system’s decision process are easily auditable in the same way you’d audit a human’s. To accomplish that, DecisionIQ provides all of its decision processes in a clear, readable “Proof of Work (POW)” format. The files are securely stored and easily accessible by compliance staff, auditors, or anyone else.

A Penny Poorer, a Pound Richer

Next-generation solutions that use AI/ML systems deliver overall cost savings and a more effective compliance regime. It can be challenging to convince management that that the initial investment is worth the spend. Yet, that thinking creates situations where a company is a penny richer and a pound poorer in the end. Advances in AI/ML will allow compliance professionals to make greater strides and reduce overall spending for management teams.

Over the years, we have seen the regulatory landscape of list screening expand from the usual sanctions lists to:

• Foreign (Politically Exposed Persons)
• Domestic PEPs
• Heads of International Organizations (HIOs)
• Relatives & Close Associates (RCAs)
• most recently adverse media

These lists and sources will only continue to expand. Consider the recent inclusion of digital currencies, such as Bitcoin or Ethereum into address into the OFAC as a searchable field. Pretty soon we will see other G38 members of the FATF do the same. There is no doubt this trend will continue to be a focal point for regulators to ensure regulated entities include more and more sources.

Regulators continue to push forward to the notion that more tools are needed to tackle these issues. A recent joint publication from the Fed Reserve, FDIC, FinCEN and the National Credit Union Association states that the joint agencies are committed to supporting “innovative efforts in combating money laundering, terrorist financing and other illicit financial activity.” This is a strong statement encouraging all those governed by the BSA that the use of AI and ML learning is an acceptable approach to “enhancing the effectiveness and efficiencies” of the financial sector the point where Fincen is willing to consider “exceptive relief under 31 CFR 1010.970 to facilitate the testing and potential use of new technologies and other innovations”.

Here in Canada, the Financial Stability Board (FSB) has also recognized in a 2017 report that AI and ML is playing a critical role in driving “to increase productivity and simultaneously reduce costs and risks, while complying with regulations”.

The Take Away

AI and ML capabilities have been steadily increasing over the last few years and to ignore them much longer would be at an organizations peril. It will not only affect its bottom line, but will most likely cost more due to the shear amount of data, alerts, and false positives that are increasing every day. It’s time to take a leap forward in AML compliance and start investigating the use of AI and ML to drive efficiencies and meaningful results.