UK financial regulator “call for action” on retail banking AML frameworks
The ‘Dear CEO letter’ from the FCA in May 2021 demands actions by retail banks in response to systematic control failings identified in Anti-Money Laundering (AML) frameworks. The FCA asks retail banks to conduct a gap analysis by 17 September 2021 into 5 common weaknesses, including the transaction monitoring process, and take reasonable steps to close any gaps identified.
With respect to transaction monitoring, the FCA states that some firms’ transaction monitoring systems (TMS) are based on arbitrary thresholds, often using ‘off-the-shelf’ calibration provided by the vendor without due consideration of its applicability to the business activities, products, or customers of the firm. Firms have difficulty in demonstrating how the thresholds would relate to the levels of expected activity of specific customers or customer cohorts.
Similarly, we observe such failings across many EU financial crime prevention frameworks, with many calls that we need to update the way we approach financial crime detection and prevention with more foresight (Pol, 2020). It is clear that as we develop economically, so does the nature and level of the crime, with a notable increase in money laundering occurring in much more developed EU states (Achim et al., 2021). Thus, it is imperative that we mobilise an appropriate approach that works together with the technologically advanced landscape that is being created around finance.
Synthetic data generation (SDG) became a mainstream resource for various applications in several industries, including the financial and banking sector. This is mainly due to the need to process and train algorithms for decision-making, requiring access to enormous amounts of data and the importance of maintaining the privacy and security of sensitive information during that process. As such, the role and importance of synthetically generated data (SDG) is increasing. Gartner’s 2021 report has stated that “By 2024, 60% of the data used for the development of AI and analytics solutions will be synthetically generated’’. Further, the UK government is mobilising this approach through initiatives such as the digital sandbox pilot stated in the Kalifa report (2021).
Synthetic data with the power of simulation unlocks the ability to generate data for numerous financial crime scenarios that will enable financial institutions to shift into a much more proactive approach in detecting financial crime. The “Dear CEO letter” from the FCA should be a tipping point in the fight against financial crime that we can’t just ignore. A benchmark is a necessary step to incrementally close this gap and lay the foundation for retail banks to introduce themselves to the new ecosystem dominated by artificial intelligence, and evaluate if they are achieving the correct standards with their technology.
Director at The Dark Money Files Ltd, external financial crime subject matter expert advising EalaX, Caspian and Ripjar on FinCrime Analytics related matters.
Links and references:
Predicts 2021: Data and Analytics Strategies to Govern, Scale and Transform Digital Business (Dec 2020) https://www.gartner.com/doc/3993855
The Kalifa Rerview on UK FinTech (Feb 2021) https://www.gov.uk/government/publications/the-kalifa-review-of-uk-fintech
Achim, M.V., Văidean, V.L., Borlea, S.N., Florescu, D.R., 2021. The Impact of the Development of Society on Economic and Financial Crime. Case Study for European Union Member States. Risks 9, 97. https://doi.org/10.3390/risks9050097
Pol, R.F., 2020. Anti-money laundering: The world’s least effective policy experiment? Together, we can fix it. Policy Des. Pract. 3, 73–94. https://doi.org/10.1080/25741292.2020.1725366