US Regulators Urge Tech Innovation To Combat Financial Crime

Regulators Urge Tech Use Against Financial Crime

Several regulatory agencies issued a joint statement Monday (Dec. 3) that urged banks to study and implement “where appropriate” methods that would bring innovate approaches to anti-money laundering efforts and Bank Secrecy Act compliance.

The agencies tied to the joint release include the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network, the National Credit Union Administration and the Office of the Comptroller of the Currency.

The agencies, in tandem with the Financial Crimes Enforcement Network (FinCEN), said they “recognize that private sector innovation” that builds on existing tools or embraces new technologies can help banks identify and report money laundering, terrorist financing and other illicit activities.

In reference to technologies, “some banks are becoming increasingly sophisticated in their approaches to identifying suspicious activity, commensurate with their risk profiles – for example, by building or enhancing innovative internal financial intelligence units devoted to identifying complex and strategic illicit finance.” Digital efforts have spanned artificial intelligence and tech-driven identity systems that can and have boosted transaction monitoring systems.

According to the statement, the agencies said they would consider bank pilot programs.

“While the agencies may provide feedback, pilot programs in and of themselves should not subject banks to supervisory criticism, even if the pilot programs ultimately prove unsuccessful,” said the statement. “Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.”

By way of illustration, when banks test or implement artificial intelligence-based transaction monitoring systems and identify suspicious activity that would not otherwise have been identified under existing processes, the agencies, they said, will not automatically assume that the banks’ existing processes are deficient.

In terms of future efforts, FinCEN said it is launching an innovation initiative to foster a better understanding of BSA/AML-related innovation in the financial services sector. As part of this initiative, FinCEN will engage in outreach efforts that include “dedicated times for financial institutions, technology providers and other firms involved in financial services innovations to discuss the implications of their products and services, and their future applications or next steps.” Each of the aforementioned agencies has established, or will establish, projects or offices that will work to support the implementation of responsible innovation and new technology in the financial system.

As for those banks that opt out of these efforts, the agencies said jointly, they “will not penalize or criticize banks” that do not pursue such innovation but demonstrate continued compliance.

Senate Hearing on AML

Late last week, the Senate Banking Committee held a hearing on updating the Bank Secrecy Act’s anti-money laundering requirements.

At that hearing, as reported by Credit Union Times, smaller financial institutions, including credit unions, said the laws should take into account regulatory burdens and emerging technology.

The recommendations came from a number of trade groups, said the publication.

“Credit unions take BSA/AML compliance seriously and dedicate significant resources to it,” CUNA President/CEO Jim Nussle wrote in a letter to the congressional committee. “However, when credit unions are spending their limited resources disproportionately on compliance, this means they are spending fewer resources on innovating and providing safe and affordable products and services.”

Nussle said that Congress should look to minimize duplication of information and increase the threshold of currency transaction reporting, among other recommendations.

In a separate missive to the committee, Brad Thaler, who serves as vice president of legislative affairs at the National Association of Federal Credit Unions, wrote that the federal agency known as the National Credit Union Administration should “support flexibility in carrying out this important function to ensure that necessary and vital reporting continues and credit union staff may be protected from civil liability.”

Per the hearing, Republican Mike Crapo of Idaho, who chairs the committee, stated that “while not yet settled on any one particular reform or fix, members of the committee are united on the idea that there is room for change in a decades-old system that will yield a modernized BSA anti-money laundering regime that works for law enforcement, financial institutions, their regulators and the man on the street, who is the ultimate beneficiary of a strong U.S. financial system.”

As noted by Credit Union Times, there was some discussion over how relaxed rules should be for smaller financial institutions.  Said Ohio Democrat Sherrod Brown, such relaxing of rules could be harmful.

“Money launderers are looking for the weakest link, whether it is HSBC or BB&T or Lone Star National Bank, and will migrate to smaller banks as necessary to hide their crimes,” Brown said, as quoted by the site. “Community and regional banks play a crucial role alongside our biggest banks in monitoring transactions across the country.”

In other testimony, Kenneth Blanco, director of FinCEN, stated that the rules in place are indeed working, and that any changes must be carefully considered when it comes to battling financial corruption.

“While we are eager to improve and reform the BSA framework, we believe it is important to ensure that any change is supported by such an assessment and a clearer understanding of how to measure the effectiveness of BSA data,” he said, as quoted by Credit Union Times.