Meeting anti-money laundering (AML) compliance standards is a challenging operation for many organizations. With rules and regulations constantly changing and adapting, it is important for financial institutions and compliance professionals to understand ways to reduce AML false positives in compliance to ensure that effort and funds are directed to an efficient and effective compliance program.
In this article, we will take a look at the time-saving opportunities and effectiveness of advanced analytics, artificial intelligence (AI) and rules-based analytic programs.
The Inherent Difficulty in Reducing AML False Positive Rates
Compliance reporting standards and regulations are currently set in a way that will always result in false positives to some degree. There are certain requirements, such as suspicious activity reports (SARs) or currency transaction reports (CTRs), that mandate reports be filed when certain thresholds are reached, such as cash transactions exceeding $10,000. In these instances, alerts are not subjective or open to interpretation, and therefore there are no ways to reduce the amount of CTRs you must file, even if they do not result in action taken by law enforcement.
Other areas of AML compliance, however, such as transaction monitoring, if optimized with efficient rules and AI capabilities, can enable higher operational efficiency and effectiveness of your compliance program, leading to better conversion rates for reporting.
The Right Tools Can Reduce Your False Positive Rate
As with most things, the key to being more efficient, and reducing false positives, lies in perfecting the basics. Advancements in machine learning and AI are exciting prospects for compliance professionals, however, these tools still need improvement, and unfortunately are useless if they are not implemented on top of an effective rules-based program.
Depending on the industry your institution operates in, various AML compliance standards, as mentioned above, are not driven by behavior, and would therefore not necessarily benefit from AI.
Identifying when a SAR must be filed or whether a client is a sanctioned individual, for example, requires effective rules-based alerts. The priority in reducing false positives in some areas of AML compliance therefore lies in implementing a rules-based system with clearly defined and structured data and rules, along with current sanctions lists.
In areas where client behavior and employee interpretation are not factors, implementation of AI may lead to AI bias, potentially resulting in incorrect filtering of pertinent alerts. For certain areas of AML compliance such as sanctions screening, the real danger is not missing out on reducing false positives, but rather implementing a program that results in false negatives, leaving your organization susceptible to fines and penalties from regulatory institutions.
Running a rules-based AML program over time will allow you to analyze whether certain rules are needed. This can provide you with the data to customize your rules-based approach, removing unnecessary rules, to reduce the amount of false positives in your AML compliance program.
For other areas such as fraud detection and prevention, and certain areas of transaction monitoring, a combination of rules-based analytics with AI and advanced analytics may reduce false positives in AML compliance to a scale that saves your organization time and money.
The key here is to determine the potential benefits and ROI of implementing additional tools, such as AI. The real factor in deciding whether AI will add cost-saving benefits lies in an analysis of the scale of your operations and its compliance program.
Large corporations will most likely benefit from further technical tools due to sheer the number of transactions and clients they deal with on a daily basis. A rules-based approach will yield simply too many alerts and may require artificial intelligence to sift through large amounts of alerts generated through a rules-based program.
Are AI and Other Advanced Analytics Tools Worth It?
To determine whether advanced analytics and AI will reduce compliance efforts and costs for your organization, it is first imperative to calculate your rate of false positives in your current rules-based AML compliance program.
In some cases tweaking certain rules and removing others will allow you to reduce false positives without the need for additional tools or investment.
What Should Your False Positive Rate Be?
An ideal false positive rate will be dependent on the industry you operate in. It is estimated that most compliance programs have a 95-98% false positive rate. Having a robust rules-based system and AI capabilities could help to reduce this number. Even reductions of 5% could lead to a significant reduction in cost for organizations.
The Cost of AI
Most organizations will find that the current costs of implementing additional AI tools will in fact not provide higher savings than the initial costs of AI. For organizations in smaller and middle markets, the key is to establish an effective rules-based program, in addition to a cost-effective AI program, that meets compliance standards. Rather than spending funds to acquire costly advanced analytics and AI tools, focus on ensuring your current rules-based program is operating effectively with relevant rules.
As your organization grows, and clients and transactions increase, having already established an effective, customized, rules-based analytics program will provide you with the foundation to implement additional tools, such as AI, where needed.
To learn more about rules-based and advanced analytics, view our in-depth look at the differences between these two compliance analytics.
Using Alessa for Improved Compliance Efficiency
At Alessa, we provide an all-in-one compliance tool software to help you meet compliance standards. Our AML compliance software includes real-time screening and monitoring of transactions, sanctions screening capabilities, fraud detection and prevention and more.
Our features, specifically our real-time transaction monitoring and screening and automated regulatory reporting, allow for improvements in efficiency for compliance teams and the reduction of false positives.
Real-Time Transaction Monitoring and Screening
We mentioned above the importance of ensuring that your transaction monitoring system runs rules that are specific to your business. A second component to save your compliance team time and money is to ensure you are monitoring and screening transactions in real time. Allow your team to be proactive, rather than having to sift through old alerts that can accumulate over time.
Alessa’s real-time screening and monitoring will also allow you to more accurately fine-tune your rules with the real-time data you receive. With Alessa, our users have experienced:
- 60% improvement in efficiency – leading to lower administrative costs
- 70% reduction in alerts
- 80% increase in alert accuracy
Automated Regulatory Reporting
Another great way to increase efficiency is to automate your compliance team’s reporting duties. Automating away time-consuming aspects of reporting such as creation, validation and e-filing allows your team to spend time in areas that require human decision-making and fine-tuning. On average implementation of our compliance software has allowed organizations to gain:
- 60% reduction in estimated time investigating suspicious transactions
This reduction of time and resources is accomplished by eliminating tedious manual data retrieval for standard requests and improving compliance teams’ workflows.
Our rules-based analytics system allows for customization to ensure real-time monitoring of rules that matter to your specific industry and size. Paired with AI-driven sanctions screening capabilities, Alessa provides the foundational tools and data for compliance that grows as you do. Once installed, we update our software to account for changes in regulations and sanctions list so you don’t have to focus on minute changes made by compliance regulatory bodies.
Contact us today, or get a free demo below to learn more about how our software solutions can help reduce AML false positives in your compliance program, allowing you to meet your compliance needs while cutting costs.