• Financial Industry Regulatory Authority (FINRA)
• Financial Crimes Enforcement Network (FinCEN)
• Federal Financial Institutions Examination Council (FFIEC)

Financial Industry Regulatory Authority (FINRA)

FINRA is a private corporation in the United States that acts as a self-regulatory authority. It became the successor of the National Association of Securities Dealers in 2007 shortly after the SEC approved its formation. Since then, FINRA grew to over 3,400 employees working primarily out of Washington, D.C. and New York, NY with 20 other regional offices throughout the United States.

FINRA’s overall responsibilities revolve around regulating member brokerage firms and exchange markets, one part of which is ensuring AML compliance. With these responsibilities, the 3,400 employees oversee approximately 4,250 brokerage firms, 154,000 branch offices, and 625,000 registered representatives. As a part of these responsibilities, FINRA holds periodic regulatory exams for all member firms they oversee. These reviews help FINRA determine where they see room for improvement within these institutions for more streamlined compliance.

Despite being a private corporation, the Securities and Exchange Commission granted FINRA approval to discipline registered representatives and member firms. They also license individuals, admit firms to the industry, and create the rules that govern their behavior. In 2018 alone, FINRA levied approximately $61 million in fines and another $25 million in restitutions. This makes them one of the primary organizations you will have to deal with to achieve AML compliance if you are dealing in securities. They set the rules and regulate them, so be sure to pay attention to everything they do.

Financial Crimes Enforcement Network (FinCEN)

FinCEN was formed in 1990 with the goal of combating domestic and international money laundering, terrorist financing, and other financial crimes. They’re a bureau of the United States Department of Treasury that analyzes information about financial transactions. They are one of 147 Financial Intelligence Units (FIUs) that make up the Egmont Group of Financial Intelligence Units. FinCEN’s director summed up their mission through a statement in 2013 as, “safeguard the financial system from illicit use, combat money laundering and promote national security.” They accomplish this mission through following any financial trails that might lead to a case of money laundering, terrorist financing, or other financial crimes.

One of FinCEN’s primary responsibilities revolve around data collection and data use. They created the FinCEN Query which allows other Financial Intelligence Units to search the mass amounts of data FinCEN collects on all financial transactions. The search engine operates similar to Google making it easy for any of the Financial Intelligence Units to find any information they need. They also create four yearly reports:

• Suspicious Activity Report
• Currency Transaction Report
• The Designation of Exempt Person
• Registered Money Service Business

These reports contain their findings on various threats and indicators facing the United States when it comes to combating money laundering, terrorist finance, and financial crime

Through the use of the extensive data they collect on financial transaction, they conduct investigations into at risk individuals and organizations. This puts anyone not following AML regulations at risk of an expensive investigation that could halt your business entirely. So, to avoid a nasty letter from FinCEN, make sure you follow all financial requirements and regulations to ensure you do not participate in money laundering, terrorist financing, or any other financial crimes.

Federal Financial Institutions Examination Council (FFIEC)

The FFIEC was established in 1979 through the Financial Institutions Regulatory and Interest Rate Control Act of 1978. They are composed of five banking regulators that create uniform guidelines and standards that every financial institution must follow. The five banking regulators that make up the FFIEC include:

• Federal Reserve Board of Governors
• Federal Deposit Insurance Corporation
• National Credit Union Administration
• Office of the Comptroller of the Currency
• Consumer Financial Protection Bureau

In recent times, one of the top priorities of the FFIEC became protecting financial institutions from cyber-attacks. They achieve this through creating guidelines and standards for cyber security that every financial institution must follow. As part of their effort to help financial institutions combat cyber-attacks, they released the Cybersecurity Assessment Tool. Regulators of the FFIEC use the results of this tool as part of their examination into any financial institution.

Another helpful resource the FFIEC released to simplify compliance with the Bank Secrecy Act and Anti-Money Laundering is their BSA/AML info base. Within this infobase you can find guidelines to help you achieve AML compliance, examination manuals, and a range of other resources to help you maintain compliance. Since their overall goal surrounds helping financial institutions combat financial crimes, they aim to teach appropriate standards you should follow to maintain compliance. You can also use this database to see exactly what the FFIEC looks for during compliance examinations of your organization. This helps ensure you pass your examination when that time inevitably comes. You should look to the FFIEC to help you create procedures and maintain compliance with all BSA and AML regulations.

Do You Need Help Achieving and Maintaining AML Compliance?

These organizations are only the tip of the iceberg when it comes to navigating the complexities of AML Compliance. There is the OFAC which regulates all foreign assets, the OCC, FDIC, FRB, CFPB, and then various state level oversight agencies. These organizations play an important role in ensuring you remain compliant with all AML regulations.

If you need help navigating the complexities of AML compliance, contact KYC2020 for a consultation today. They offer software tools to help you manage all aspects of AML compliance and streamline your AML Compliance Program to ensure efficiency. KYC2020 also supports a network of qualified CAMS certified AML Compliance Specialists to help answer any of your questions and guide you through the process of achieving AML compliance. AML compliance does not have to be costly or complicated, so let KYC2020 help you decide your next steps to achieving and maintaining AML compliance in a cost effective and efficient way.

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.