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FATF: NEW TECHNOLOGY OPPORTUNITIES FOR EFFICIENT AML/CFT

Nowadays technology and finance go together hand in hand. An increasing number of banks, money service businesses, and FinTechs are adopting new technology to combat money laundering and terror financing. Standard-setting bodies in the financial crime prevention industry, such as the FATF, and regulators are increasingly supporting innovation.


This year (2021), the Financial Action Task Force (FATF) published a report on the Opportunities and Challenges of New Technologies for AML/CFT. This report raises awareness of progress in innovation and digital solutions which the financial institutions are using or planning to use. It will also help compliance professionals compare what actually works, what the benefits are, and where were the pitfalls experienced by peers. FATF’s project includes review and analysis of regulatory technology (RegTech) and supervisory technology (SupTech) which have the potential to improve the effectiveness of FATF Standards.


Interestingly enough, one of the main deterrents of AML/CFT measures implementations is the lack of understanding of threats and risks. Additionally, when the decision-making processes are governed by a defensive “tick-the-box” approach, heavily relying on human input also creates problems and challenges. Last but not least, some risk assessment tools still reside in Excel spreadsheets or other static platforms, and this is simply not reflecting the dynamic environment of financial compliance and limits accurate data analysis and risk identification.

This article focuses on the opportunities which new technologies create, and in the next post, we will summarize all the challenges.


Three main themes emerge from the paper when it speaks about new technologies adoption in AML/CFT:

1. Financial institutions are expected to responsibly and proportionally use new technologies

2. Take on an adequate risk-based approach

3. Follow a problem-solving approach – not creating additional burdens and undesirable consequences to the process.

Here are the advantages of using innovative technology according to the responses which were analyzed by FATF:

· “Better identification, understanding, and management of ML/TF risks;

· The ability to process and analyze larger sets of data in a quicker, speedier, and more accurate manner;

· More efficient onboarding practices (digital);

· Achieve greater audibility, accountability, and overall good governance;

· Reduce costs and maximize human resources to more complex areas of AML/CFT;

· Improve the quality of suspicious activity report submissions.” (FATF, 2021)


According to the respondents of FATF’s questionnaire, the technologies with the potential of achieving AML/CFT effectiveness are AI, including machine learning and natural language processing tools, Application Programming Interfaces (APIs), and CDD tools.

In the following paragraphs, we are reviewing the benefits which these new technologies may bring according to the report findings.


Reducing False Positives and Data Quality Improvements


AI and machine learning provide financial institutions with the opportunity to reduce the manual effort in monitoring, lower the number of false positives, and help more efficiently manage risk. Additionally, machine learning is good for detecting anomalies and outliers, and improve data quality. For example, to focus on certain patterns of activity which require enhanced due diligence, AI can be employed to perform alert scoring.


A branch of AI that can help with reducing false positives and improving greatly data quality is the so-called Natural Language Processing (NLP). Through NLP computers are able to understand and interpret human language. Some of its applications may include: “connecting search engine results with PEP lists, identifying fraud attempts, monitoring sanctions lists” (FATF, 2021). NLP and fuzzy logic matching tools can help in the overcoming of language differences, cross-reference data with adverse media information, and check simultaneously multiple databases.


Many financial institutions operate on many different legacy systems and the different components of the AML/CFT compliance programs are not well connected within these systems. A technology that can help to address this is the Application Programming Interfaces (APIs). It can, for example, make connections between customer identification software with monitoring tools, or risk and threats identification tools with customer risk profiles in order to generate alerts or alter risk classifications as relevant.


Transaction and customer behavior monitoring


AI is also enhancing transaction monitoring by carrying faster and more accurate reviews (in cases when the machine is set up adequately and well trained). However, it is worth noting that FATF says AI should not be viewed as a replacement of the existing systems and employees, but rather a complement to them.


An example for better business relationships monitoring is the so-called “unsupervised machine learning algorithms”. This type of machine learning can group customers based on their behavior. Based on that, regulated institutions can then create better controls allowing for tailored monitoring with a more adequate risk-based approach.


Customer Due Diligence (CDD) and Client Satisfaction


The greatest improvement potential through new technologies is in the customer due diligence. This may be due to the number of issues that exist with this process. FATF report states the following with regard to issues with CDD:

“According to the private sector parties surveyed, CDD measures and monitoring make for an extremely burdensome process whilst still generating high levels of uncertainty in data quality, difficulties in updating and matching information as required. CDD procedures are also among the main sources of dissatisfaction for customers. The process of collecting and verifying information is often difficult and strenuous, filled with endless requests for documents and additional in-person periodic evidence submissions. In addition, experts mention the risk analysis generated by CDD is too rule-based rather than behavioral or contextual leading to the financial exclusion of unprivileged individuals or groups, who struggle to comply with the requirements.” (FATF, 2021, p. 27)


FATF’s report mentions digital ID[1]as one of the solutions addressing these problems. Thanks to digital ID solutions customers have more access to financial services securely using mobile devices and phones. The need for remote onboarding and services has particularly increased during the COVID-19 pandemic. Digital ID allows financial institutions to strengthen their consumer knowledge and at the same time provide quicker payments and services. For instance, onboarding tools that consider client traits analysis (such as geolocation, credit checks, anti-fraud software, and others) lead to more accurately know your customer knowledge and a better understanding of the business relationship (FATF, 2021).

On other hand, AI can be used for remote onboarding and authentication. This would include biometrics, machine learning, and liveness detection techniques that can perform anti-spoofing checks, fake image detection, and human face attributes analysis (FATF, 2021).


Another interesting new development in CDD is the distributed ledger technology (DLT). There are existing systems using DLT which maintain digital identities and enables partner entities to use and exchange CDD details (image below).

Through DLT institutions can better manage CDD requirements contributing to user concerns regarding this process, greater cost-effectiveness, and a more accurate and quality-based data pool. Another interesting example is China - according to FATF’s report, financial institutions use DLT is being used by financial institutions to share watch lists or red flags on the basis of the scope of confidentiality permitted by this system.


Source: FATF, 2021, Opportunities And Challenges Of New Technologies For AML/CFT, page 27



To conclude this overview, new technology certainly provides a number of opportunities for regulated entities to enhance their AML/CFT processes. It is very important before making the decision on what kind of solutions would be best, to truly identify where the key problems are. FATF and regulators embrace the technology progress as they see and showcase the benefits. For the institutions afraid to innovate, the respondents in the FATF analysis declare that among the favorable outcomes are better governance, speed, and flexibility. Also, as mentioned before, some of the solutions would bring cost-effectiveness and customer satisfaction.

Follow the blog for part 2 of the summary of challenges for the implementation of new technology. If you would like to hear some of the expert guests on Compliance Time talking about risk-based approach and risk management, listen to episode 16 AML & Cryptocurrency Trends in Europe and episode 20 Understanding Financial Regulations.


Sources:

FATF (2021), Opportunities and Challenges of New Technologies for AML/CFT, FATF, Paris, France, https://www.fatf-gafi.org/publications/ fatfrecommendations/documents/opportunities-challenges-new-technologies-aml-cft.html

[1] For more details of Digital ID technologies and systems, see FATF’s Guidance on Digital Identity (2020): https://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-on-Digital-Identity.pdf

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