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“Work hard, on few” - Achieving Tactical AML Reporting and the Path to True Discovery

By 2 minute read

It is estimated that money worth between two and five percent of global GDP is laundered every year. That is the equivalent of between $800 billion and $2 trillion worldwide. Of course, due to the secretive nature of money laundering, the true figure could be much higher. Unsurprisingly, as more financial processes have become digitalised, many criminals have adapted accordingly. As a result, anti-money laundering (AML) regulations are continually being updated to counter the evolving threat. At the same time, AML softwares and risk management solutions are providing another weapon in the battle against financial crime.

The current challenge

Compliance officers looking to deter crime must come to terms with two real facts:

1) Their AML transaction monitoring system is only as good as their AML program and controls

2) Some criminal activity will escape review despite their best efforts

White paper: The use of AI in AML Transaction Monitoring

Businesses need to look beyond a reduction of their false positive rate as a measure of productivity. Switching the focus to false discovery rate instead will allow them to truly improve AML discovery.

Today, there are many different digital platforms available to support AML programs. However, challenges remain around false-positive rate obsession and true discovery rate ignorance. Both measurements, which can help businesses determine the accuracy of their AML platforms, can significantly impact how successful companies are at tackling financial crime. Nevertheless, despite their similar-sounding names, they are subtly different.

Put simply, the false positive rate can be found by dividing the number of false positives by the total number of individuals who are not engaged in money laundering (including both false positives and true negatives). The false discovery rate, on the other hand, can be found by dividing the number of false positives by the combined sum of the false positives and true positives; and the same calculation versa for true positives.

How to focus on false discovery within your AML processes?

By reducing the false positive rate, organisations may decrease their compliance workload but will not actually detect any more instances of financial crime. Although the false discovery rate is often neglected by risk analysts, it can provide a clearer picture of the number of individuals that were wrongly identified as possibly engaging in suspicious activity or financial crime.

Martin Woods, Chair of the Global Advisory Board of the Global Compliance Institute, once said “Work hard, on few”. It might seem that a reduction of your false-positive rate demonstrates a net positive for your AML mechanism but in reality, it is only providing AML effectiveness theatre. A reduction of false positives does not infer better criminal activity detection; it only releases additional bandwidth so you can work on more activities that perhaps may be suspicious. Assuming you have integrated an intelligent AML platform that has a verified reduction delivery of false positives, what’s the next step?

Following the true discovery method, the first thing to do is to review any and all Financial Intelligence Unit (FIU) reports and assign them a category. It’s important to define which of your reports fall under the category of “A - required reporting,” “B - continuous reporting,” “C - tactical reporting,” or “D - defensive filing” (according to renowned AML expert Jim Richards). The next step would be to attribute an additional value to them when an FIU or law enforcement (LE) organisation responds to the filed report as a true discovery. Finally, businesses should map the characteristics of the report, working backwards to the initial AML alert before reviewing the case more closely. To really tighten this last step, organisations can create a feedback mechanism between FIU/LE contacts and their case/alert generation allowing them to “work hard, on few”. As a result, their D-category reports is likely to fall to 0.

Lowering the false positive rate of your AML solution may mean less grunt work for compliance teams but it will not necessarily help combat the fight against financial crime. Focusing on ways of increasing your true discovery rate, however, involves the identification of concrete actionable cases, which may bring you out of the world of AML theatre and into the real battlefield to fight financial crime.

Ebook: How to set efficient AML Transaction Monitoring Rules