Jul 31, 2020

RegTech: what keeps money launderers up at night?

Regtech
AI
Silent Eight
Legal
John O’Neill, Silent Eight
4 min
Legal document
If you’re laundering money or financing terrorism, what keeps you up at night...

If you’re laundering money or financing terrorism, what keeps you up at night?

Beyond the day-to-day intrigues of a life of crime, you have a money trail to worry about. Sure, you fear the sophisticated law enforcement and intelligence agencies with the power to track you, shut you down, and put you behind bars. But what about the thousands of watchful eyes observing your money as it flows through banks, casinos, real estate and other covert financial conduits? 

Some of those eyes belong to trained bank employees -- BSA and AML analysts, Financial Crimes Investigators, Compliance Officers, and many others -- tasked with enforcing regulations meant to prevent exactly what you’re doing. Still, those individuals only investigate cases that have been discovered, so you and your fellow criminals rely on the surveillance that’s meant to find you to be unsophisticated, burdensome, and technologically behind.

Prosecution for financial crime can come at you from a number of directions. It’s certainly true that many important cases are developed from whistleblowers and informants, undercover operations, and referrals from other domestic and foreign law enforcement agencies. 

But far and away the most fruitful investigative sources are the banks and other businesses that have a detailed view of financial transactions, and which submit Suspicious Activity Reports (SARs) and other forms to report potential financial crime. Financial investigations begin with these reports and end with convictions and the shutting down of networks.

Law enforcement, intelligence agencies and others rely on reporting entities to conduct effective surveillance for financial crime and produce high-quality reports. Criminals and terrorists rely on them to fail.

‘Surveillance’ sounds easy, doesn’t it? Cops on CSI and Boesh do it all the time. It seems almost exciting. Banks see all the transactions, so creating and maintaining a system to flag suspicious activity should be pretty straightforward. 

But, of course, it isn’t. The problem isn’t simply sharpening your methods until they find every illicit activity hiding among those transactions you thought were harmless (in AML parlance, a ‘false negative’), but the much bigger problem of handling the mountain of alerts generated when you turn a hyper-sensitive process like that loose on the millions of transactions a bank typically handles each month (the ‘false positives.’) Every one of the false positive alerts has to be painstakingly investigated and cleared -- and the more thorough and exacting your AML process is, the more of them you generate.

And, on top of the normal caseload, consider how the current global pandemic has created an even bigger backlog for banks -- both with stimulus payment programs that generate alerts and by disrupting the normal operations banks use to deal with them.

You can see how artificial intelligence (AI) and other forms of technology are fast becoming very compelling. Properly used, AI applies advanced logic on a consistent basis to spot hidden transactions and reduce false positives – more wheat, less chaff. 

Just as importantly, an AI learns on the job and learns quickly. As analysts review the output from the AI, and either validate or reject it, that feedback becomes critical inputs in the AI model -- part of its continuing education, as it were -- and it rapidly adjusts its triggers and thresholds accordingly. 

In doing so, AI integrates the best of both worlds, marrying technology’s ability to deploy complex logic across large sets of data rapidly and effectively, with human judgment and the ability to make decisions in situations lacking full clarity.

This doesn’t just improve the alert-generation stage, but also the investigative process. SARs are the primary means of passing information to law enforcement, and the quality of that reporting is critical. AI allows the analyst to bring multiple sources of data to bear -- on the client, the counterparty, and the account’s transaction history -- so that the decision to file a SAR is fully supported by the evidence, not just a single red flag. 

It also dramatically reduces the time taken to produce the SAR, and ensures that the report is more detailed and thorough, giving the investigator a better head-start on the investigation.

AI is more than just a pathway for financial institutions to become more efficient, manage risk better, and make better use of resources. By enhancing the quality and frequency of reporting to national Financial Intelligence Units and law enforcement, it is a critical element in the global effort to combat terrorism financing, money laundering, and the underlying crimes they fund. 

And it guarantees nothing but sleepless nights for criminals trying to exploit the financial system.

This article was contributed by John O'Neill, Silent Eight

John O'Neill has worked in the tech industry, specifically AI and machine learning, for over 25 years and holds a PhD in Chemical Engineering.

Share article

May 28, 2021

FCA bans ‘price walking’ for insurers from Jan 2022

FCA
pricewalking
insurers
Insurtech
3 min
The City regulator has said insurers must not raise prices at renewal and penalise loyal customers

Insurers will no longer be allowed to raise premiums upon annual customer renewals following a new ruling by the Financial Conduct Authority (FCA)

The new move, which comes into effect in January 2022, will directly affect people renewing their home or motor insurance because they will pay no more for their premiums than a new customer. 

The FCA said the change will save loyal customers an estimated £4.2bn over a 10-year-period. However, it also admitted the move could mean cheaper deals for new customers can no longer be sustainable for insurers attempting to attract business. 

Price walking practices ended

According to reports, the FCA has been working on changing the rules on ‘price walking’ as it is termed, because customers are charged more their annual premiums, even though their level of risk remains the same. The system has resulted in complaints from consumer groups that loyal customers pay more unnecessarily.

Speaking about the regulatory change, Sheldon Mills, from the FCA told the BBC

"These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider, but won't be charged more at renewal just for being an existing customer."

Victory for the customer

Consumer groups have hailed the change as a victory for customers who have ended up paying higher premiums unnecessarily, but admitted it presented huge implications for insurers in the short term.

Consumer Intelligence CEO, Ian Hughes said, “These changes represent a tsunami for both insurers and their customers, but we should be in no doubt that the fault line that sits underneath this is fair value, mentioned 153 times in the final statement. GIPP changes will feel like just a ripple for those who don’t offer fair value to customers."

He continued, “This is going to be a bumpy ride for insurance brands and consumers alike in the short term. Today, the FCA has revealed that cash and cash-equivalent incentives, other than toys and carbon off setting, cannot be used to entice new customers without being offered to renewing customers. This means the savviest consumers who shop around each year will see prices rise and discounts and offers disappear.

“However, there is an opportunity for the industry to take advantage of all this change that is coming and do something that will be good for brands, good for the industry and good for consumers."

Consumer Intelligence PR and communications manager, Catherine Carey agreed, and described the victory as “a shot in the arm for innovation.”

Carey said the move “presses a giant reset button on the relationship between price and value, it will change the relationship between brands and consumers.”

She explained, “We expect to see insurers changing their models and new firms entering the market for the first time as loss-making year one pricing phases out. If you look at these new rules, and specifically the introduction of fair value, it’s the most exciting time for the development of the general insurance market for decades.”

Hughes also warned against insurers resisting the regulatory change, “Those that don’t take advantage of the opportunity are going to find it really tough.”

He added, “The tipping point we find ourselves at today is a critical point in the journey of this industry and there is an opportunity to be positive.”

 

Share article