Can Banks Reduce False Positives in AML?

Can Banks Reduce False Positives in AML?

Anti-money laundering (AML) measures are essential for banks to combat financial crimes. However, these procedures can unintentionally affect legitimate customers, causing frustration and inconvenience. By improving data usage, optimizing detection models, and enhancing customer communication, banks can mitigate this issue and provide a better experience for their clients.

In late 2023, media reports highlighted a troubling trend: financial institutions were increasingly closing customer accounts without warning, leaving individuals confused, angry, and without recourse other than airing grievances to reporters or on social media. The fine print in account agreements allows banks to close accounts for any reason, but this is little consolation to customers suddenly cut off from their funds.

The Root of the Problem

Banks must comply with laws designed to prevent money laundering, terrorism financing, and other illegal activities. While these efforts are crucial, they sometimes mistakenly target innocent customers. What can banks do to reduce these false positives and improve the situation?

Understanding Red Flags

A customer's transactions can trigger a red flag from three primary sources:

 1.Government Mandates: When the federal government orders a bank to close an account, there’s no recourse, according to Aaron Ansari, a principal consultant at Side Channel.

 2.Internal Controls: Banks create transaction monitoring systems to alert on unusual activities. These systems work best when they have ample data on customer behavior. However, many banks, lacking the computational resources to analyze individual transactions, use peer group comparisons, which can be imprecise.

 3.Third-Party Systems: Some banks opt for third-party AML software integrated into their overall operating systems for cost-efficiency. These systems often use artificial intelligence (AI) to identify suspicious activities but provide little transparency on why an alert was generated, which can be problematic.

 Addressing the Issue of False Positives

Here are several strategies banks can implement to reduce false positives:

1.Incorporate Diverse Data Sources

Larger banks should consider building their own detection systems to incorporate multiple data sources. Marcia Tal, CEO of Tal Solutions, suggests using a variety of behavioral data to create more accurate risk assessments. Banks can analyze transaction patterns, account behaviors, and customer interactions to develop a comprehensive understanding of customer activity.

2.Validate and Tune Models Regularly

Regularly reviewing and tuning detection models is crucial. Banks should check their systems periodically to ensure they effectively balance the need to detect suspicious activities with minimizing false positives. This process, also known as model validation, should happen at least annually, according to Jaco Sadie, a senior managing director at FTI Consulting.

3.Enhance Human Oversight

Training staff to investigate flagged accounts can reduce unnecessary account closures. Employees should be encouraged to seek additional information when they encounter unusual activities. A strong relationship between investigators and client service teams can facilitate this process, making it easier to clarify the reasons behind atypical transactions.

4.Improve Customer Communication

Effective communication with customers is vital. Banks should establish clear channels, such as dedicated email addresses or phone numbers, for customers to contact if their account is flagged. Educating customer service teams about the AML process ensures they can provide accurate information to affected customers.

5.Focus on Quick Resolution

If an account is closed due to AML concerns, banks should work to release funds as quickly as possible, ideally within 90 to 180 days, as suggested by Nicholas Gilmour, co-author of "The War on Dirty Money". This helps customers meet their financial obligations without undue stress.

6.A Commitment to Improvement

Banks must strive to improve their AML processes continuously. "We need conviction that we can and want to improve on the outcome," Tal says. "As sophisticated as we are, we can always get better."

By adopting these strategies, banks can reduce false positives in their AML systems, ensuring they fulfill their regulatory responsibilities while maintaining customer trust and satisfaction. 

‍