Security & Fraud

FinCEN Files Show Banks’ Use Of AI And Machine Learning Effective In KYC/AML

Financial Crimes Enforcement Network

Gross negligence – or evidence of a battle waged by banks that requires new, high-tech weaponry?

To that end, and as reported by BuzzFeed, documents submitted by banks to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) show that several of the largest global banks moved money on behalf of scores of individuals and enterprises involved in criminal financial activity.

The documents, officially known as suspicious activity reports (SARs for short) show that the banks had filed more than 2,000 reports across the past 17 years. And as reported by the International Consortium of Investigative Journalists (ICIJ), which was working in tandem with BuzzFeed and 108 media partners across nearly 90 countries, the suspicious activity totaled more than $2 trillion in transactions as measured between 1999 and 2017.

As reported by CNBC, that cumulative tally represents only a fraction of the SARs filed through the years (the consortium estimates that the transactions reported this week represent 20 basis points of all SARs logged in those years).

The consortium reports that suspicious activity reports were filed by a few large banks: In terms of a report “tally,” Deutsche Bank filed 982, Bank of New York Mellon had 325, Standard Chartered Bank filed 232 and J.P.Morgan Chase had 107. In terms of dollar amounts, Deutsche led the pack at $1.3 trillion in suspicious transactions; J.P.Morgan followed with $514 million and Standard Chartered logged $166 million.

The headlines blare a chorus: Banks are not doing their jobs.

As BuzzFeed reported, “laws that were meant to stop financial crime have instead allowed it to flourish. So long as a bank files a notice that it may be facilitating criminal activity, it all but immunizes itself and its executives from criminal prosecution. The suspicious activity alert effectively gives them a free pass to keep moving the money and collecting the fees.”

Drill down a bit, and as noted by PYMNTS, the efforts to track and catch the bad guys is akin to playing a game of whack-a-mole.

As Standard Chartered noted to BuzzFeed in the wake of the FinCEN files report: "In 2019 we monitored more than 1.2 billion transactions for potential suspicious activity and screened more than 157 million transactions for compliance with applicable sanctions requirements. The reality of the global financial system is that there will always be attempts to launder money and evade sanctions; the responsibility of banks is to build effective screening and monitoring systems, and we work closely with regulators and law enforcement to bring perpetrators to justice.”

Banks, it should be noted, have paid hefty fines for past violations and for issues tied to controls and reporting. In one example, reported on Monday (Sept. 21), Commerzbank recounted in a statement that the transactions detailed in the FinCEN files are “based entirely on reports made by Commerzbank to the responsible authorities, mainly in the period 2010 to 2016,” and that the bank had reached a settlement in 2015 to pay regulators about $1.5 billion in fines.

And in PYMNTS’ own coverage, the twin external forces of regulatory scrutiny and market pressures are pushing FIs to retool and strengthen their anti-money laundering (AML) efforts. Much of those revamped efforts come, perhaps not surprisingly, through advanced technologies.

By way of example: ICIJ’s analysis, according to its site, found that in half of the reports, banks didn’t have information about many of the entities that were tied to the transactions.

“In 160 reports, banks sought more information about corporate vehicles, only to be met with no response,” reported the ICIJ.

To get at least some sense of how banks and other financial services companies are seeking to better wage the war against fraud, Synchrony Financial Executive Vice President and Chief Customer Engagement Officer Michael Bopp told PYMNTS that “if we have a better understanding of how our customers use our cards for their everyday needs, the new [info] can direct our AML strategies and activities accordingly. It's the combination of these technologies that becomes powerful."

In a nod to those technologies, the increasing pivot toward online transactions and cross-border commerce mandates that, as Philipp Pointner, chief product officer at Jumio, told PYMNTS, “it’s important to leverage biometric-based technology to really prove your customer is who they say they are. Taking a single selfie just isn’t enough to ensure your customer’s identity. It leaves banks and financial institutions vulnerable to spoofing attacks, as a fraudster can easily find a picture of someone else online and pass that off as genuine. But using solutions that employ biometrics, and specifically, 3D face maps and certified liveness detection, ensures the [people] behind a transaction [are] who they say they are.”

And in one recent edition of PYMNTS’ KYC/AML Tracker details, the rise of open banking is likely to spur a “fast track” for new AML efforts, including multifactor authentication (MFA) and strong customer authentication (SCA) processes. The greenfield opportunity is there, as detailed in an interview between Karen Webster and Amyn Dhala, vice president of global product management and AI Express for Mastercard.

Joint PYMNTS/Brighterion research found that 63.6 percent of FIs believe AI is an effective tool for stopping fraud before it happens. But AI is still relatively rare in the banking world: Only 5.5 percent of banks in our survey fight fraudsters with “genuine” AI systems – most are reliant on automation and machine learning (ML) technologies, a number that grew to 10 percent by the spring.

Dhala told Webster that when it comes to leveraging AI in the fight against transaction fraud, FIs “don't know exactly where they should be starting from.”

Separately, last month, five federal regulatory agencies – including the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Financial Crimes Enforcement Network (FinCEN), the National Credit Union Administration (NCUA) and the Office of the Comptroller of the Currency (OCC) – issued a joint statement designed to address questions tied to customer due diligence, particularly for those who might be viewed as “politically exposed persons” (PEPs).

The agencies urged that “banks must adopt appropriate risk-based procedures for conducting CDD that, among other things, enable banks to: (1) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (2) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information,” according to a joint statement.

The agencies offered a bit more transparency in identifying politically exposed persons to aid in AML efforts. Risk factors include monitoring the volume/nature of the transactions and government responsibilities.

FinCEN also said it is looking for public comment on at least some changes to reporting and monitoring transactions – which may in turn change requirements for the FIs themselves. The battle against illicit finance and fund flows will be never-ending, with one constant: FIs adding new, tech-driven arrows to its quiver to fight the threat.

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