Over the past two decades, banking has advanced from traditional paper-based transactions to electronic rule-based systems that now run the online and mobile banking products that customers prefer for speed and convenience. But there’s another side to this coin. The digital services customers enjoy have opened the door for criminals to find increasingly sophisticated ways to commit money laundering, tax evasion, and other financial crimes. As banks grow, add products, and process ever more transactions, the cost of staying a step ahead of financial crimes while adhering to strict industry regulations continues to rise.
Existing methodologies for addressing financial crimes are not sustainable. For example, banks have to report and investigate every instance of suspected money laundering. Yet the technology that banks typically rely on to identify potential money laundering activity generates false positives at a rate of 95 to 98 percent. It takes no time for the cost of looking into all those false positives to add up.
Fortunately, banks have better options on the horizon.
A few days ago, Richard Charlton, Associate General Counsel and Vice President at Federal Reserve Bank of New York, and Rick Shooman, expert in financial crimes and Executive Director at EY, sat down with me for a conversation on innovation and financial crime. Our discussion leveraged decades of personal expertise that we’ve built at the intersection of technology, banking, and fighting financial crimes.
We kicked off by recapping the challenges banks and regulators face when fighting financial crimes before diving deeper into the changing regulatory requirements. Then we moved into a frank discussion regarding how the innovations in AI and machine learning are currently working or not working in the financial ecosystem. There is widespread acceptance that we can apply machine learning in banking, but we are also learning that fighting crime with these innovations isn’t as simple as deploying a single product to fix a single problem. We recognize it can be hard to point to an algorithm and explain to regulators how it has the same or better results as the more common rules-based alerts system in the fight against financial crime.
Discussing the pitfalls of false positives and rules-based alerts led us down the path of banking regulations and the importance of involving field examiners and policy makers early in the digital transformation process. We also reviewed recent developments in the regulatory landscape, in the United States and abroad, including Federal Reserve System Board Governor Lael Brainard’s November 2018 speech on the growing use of AI and machine learning in financial services
From regulatory challenges, we moved on to discuss where digital transformation has already made in-roads. We see huge benefits in terms of processing speed, operational efficiency, and fighting financial crime due to innovations in cloud technology. At Microsoft, we believe that cloud technology offers the most viable way to move forward for the financial industry. Cloud computing currently has unrivaled power to aggregate and process many sources of data at high speeds—an invaluable asset in in the fight against financial crime.
The goal of this conversation, and we hope many more in the future, is to bring together thought leadership from industry experts to help banks large and small understand the potential impact of cloud technology in the fight against financial crime.
For full insights, listen to the webinar recording.