Anti-money laundering refers to a set of laws, regulations and procedures aimed at preventing criminals from disguising illegally obtained funds as legitimate income. For community banks, AML compliance is not just a legal obligation but a crucial aspect of maintaining trust and integrity within the communities they serve. The ramifications of non-compliance can be severe, including hefty fines, reputational damage, and even the revocation of banking licenses.
Recently, several banks have faced consent orders and enforcement actions due to shortcomings in their AML practices and violations of key regulations like the Bank Secrecy Act.
Community banks are subject to stringent AML regulations enforced by various agencies to ensure they implement comprehensive measures to detect and prevent money laundering and related financial crimes. Key regulatory requirements surround customer due diligence; suspicious activity reporting; currency transaction reporting; ongoing monitoring; AML training; and OFAC compliance and sanctions screening.
Why now?
In an era where financial transactions are increasingly digital and global, the importance of robust AML and financial crimes measures has never been more critical. Community banks, often seen as the backbone of local economies, are particularly vulnerable to financial crimes.
From my perspective, there are two key factors at play here:
- The recent surge in consent orders clearly indicates that current AML and transaction monitoring tools are either inadequate or not being effectively utilized.
- As previously noted, the pace of digitization in financial services continues to accelerate. With the continued proliferation of digital onboarding and real-time payments, the need for improved monitoring tools is more important than ever.
What’s the role of technology in all of this?
Technology in AML work significantly amplifies the roles traditionally filled by human experts. Historically, AML professionals have relied on manual processes, intuition and experience to identify suspicious activities. However, the sheer volume and complexity of modern financial transactions make it increasingly challenging for humans alone to keep pace. Here, technology steps in, automating tasks that would otherwise be considered mundane and rote, such as monitoring transactions, flagging unusual behavior, and cross-referencing customer information against watchlists. This automation not only frees up human experts to focus on more strategic and complex analysis but also enhances accuracy by reducing the risk of human error.
Incumbents in the AML space
Traditional players like Actimize, Verafin, LexisNexis, and SAS have long dominated the AML space for community banks. These incumbents have established themselves through robust, well-tested systems that provide extensive coverage and reliability. However, they often fall short when it comes to serving community banks. Common issues include:
- Complexity and cost: Solutions are often too complex and costly for smaller institutions to implement effectively. Community banks may lack the resources and expertise needed to manage these sophisticated systems.
- Scalability issues: Many traditional systems are rigidly designed, making them less efficient and more cumbersome for community banks with lower transaction volumes.
- Lack of customization: Incumbents typically offer one-size-fits-all solutions that may not address the specific needs of community banks. Customization options are often limited and costly.
- Slow adaptation to new threats: Large, established systems can be slower to adapt to emerging threats and incorporate the latest technologies, leaving community banks at a disadvantage.
The new gold standard
After speaking with a number of bankers on the topic of AML, it seems like the next Gold Standard AML/financial crimes solutions in banking will incorporate four key components that will set them apart:
- Centralized information across functions
Today’s compliance solutions for banks are point solutions that cover a specific subsegment of the broader compliance workflow — KYC/KYB, onboarding, transaction monitoring, sanctions screening, etc.
A consolidated, commanded center that centralizes information across these disparate systems will provide a more holistic view of transactions and customer activities. For instance, ongoing transaction monitoring tools, which are crucial for detecting suspicious activity, will benefit immensely from incorporating behavioral analysis captured during the KYC (know your customer) and onboarding phases. Today, these systems often operate in silos with limited API connectivity, but future advancements will enable a seamless flow of information, allowing for more nuanced and accurate monitoring.
Moreover, the integration of AML systems with marketing tools offers another powerful opportunity. Imagine an AML system that dynamically reacts to activity bands set by marketing. If a marketing campaign is dormant and suddenly there is an unusual spike in transactions, the AML system could trigger an alert, recognizing the anomaly as a potential red flag. This level of interconnectedness between AML and other systems will not only improve the detection of illicit activities but also optimize the overall efficiency and responsiveness of the bank’s operations. In this new era, AML tools will evolve from isolated compliance mechanisms to integrated components of a bank’s broader ecosystem, setting a new benchmark for safeguarding financial integrity.
- Automation of rote tasks
Generative AI presents a remarkable opportunity to further augment human work within the realm of AML. By leveraging AI’s capabilities to analyze large datasets, generate predictive models, and even create dynamic scenarios, banks can empower their compliance teams with tools that go beyond simple automation.
Generative AI can assist in crafting detailed reports, simulating potential money laundering schemes, and offering insights that might elude even the most seasoned professionals. Moreover, it can help train and upskill employees by providing real-time feedback and generating complex case studies for practice. This not only increases the efficiency and effectiveness of AML operations but also ensures that human expertise is supported and enhanced by cutting-edge technology, making the fight against financial crime more robust and adaptive.
- Advanced predictive analytics
Advanced technology, particularly in the realm of predictive analytics, holds the potential to revolutionize AML by enabling banks to thwart bad actors before they even have the opportunity to engage in illicit activities. By analyzing patterns and trends across vast datasets, predictive analytics can identify early indicators of suspicious behavior that might precede money laundering attempts.
This proactive approach shifts the focus from merely reacting to potential threats to preventing them altogether. For example, by predicting when and where money laundering activities are likely to occur based on historical data and behavioral cues, financial institutions can allocate resources more effectively and intervene before these activities can fully materialize.
This capability not only enhances the security and integrity of the financial system but also positions banks as proactive defenders in the fight against financial crime, staying one step ahead of those seeking to exploit the system.
- Negligible switching costs
Beyond offering a superior product, it is crucial for AML solutions to easily integrate within a bank’s existing tech stack to minimize the cost of switching and reduce potential disruptions.
Financial institutions already operate with a complex array of technologies, and the introduction of new systems often brings with it challenges related to compatibility, training, and data migration. A solution that seamlessly integrates with a bank’s current infrastructure not only accelerates adoption but also ensures that the transition is smooth and cost-effective.
By reducing the barriers to implementation, the company can position its product as an attractive option that adds value without the associated friction or expense often seen with major system overhauls. This ease of integration is particularly vital in a highly regulated environment like banking, where compliance requirements are stringent, and any downtime can have significant consequences. Thus, ensuring that the solution can be implemented with minimal disruption is as important as the features it offers.
There are also a number of new, innovative entrants offering modern AML solutions entering the space, including:
- Footprint
- Oscilar
- Fincom
- Refine Intelligence
- Sumsub
- HawkAI
- Alloy
- Castellum AI
- Sardine
- RiskScout
- ComplyAdvantage
Conclusion
As financial crimes become increasingly sophisticated, community banks must stay ahead of the curve with effective AML strategies. While traditional incumbents like Actimize, SAS, LexisNexis, and Verafin have laid the groundwork, the new generation of fintech innovators is providing the tools and technologies necessary for community banks to thrive in the fight against money laundering. By leveraging these advanced, tailored solutions, community banks can ensure compliance, protect their reputation, and continue to serve their communities with confidence.
Community banks play a vital role in the financial ecosystem, and with the right AML strategies, they can fortify their defenses against financial crime and continue to support the economic health of their communities. As they navigate the complexities of AML compliance, the partnership between traditional and innovative AML providers will be crucial in building a resilient and secure financial future.
Jake Fuchs works on the BankVentures investment team, based out of New York City. Fuchs helped launch Primetime Partners, a $50 million venture fund that invests in products, services, and experiences that cater to the older adult demographic. (ranging from fintech to proptech to digital health).
