Fintech companies have developed innovative AI based solutions that can help banks improve their BSA/AML compliance measures, but banks are hesitating to experiment with the new solutions. Banks are hesitant because the banking industry is strictly regulated, and they do not want to commit to a technology that may not be compliant with future regulatory updates.

 BSA AML Technology

The federal regulatory agencies have realized that this has become a roadblock for innovation in the industry and have tried to assuage the concerns of the banking industry with an encouraging joint statement. The statement has been jointly issued by the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network (FinCEN), the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the National Credit Union. The statement can be read on the FinCEN website here.

Why the statement was needed

This is a welcome statement because it clears up a lot of confusion. Compliance management is a major cost in the banking industry and BSA/AML compliance technology required banks to invest in new technology. The industry did not want to invest in a technology that would not be compliant. The statement reads:

The Agencies will not penalize or criticize banks that maintain effective BSA/AML compliance programs commensurate with their risk profiles but choose not to pursue innovative approaches. While banks are expected to maintain effective BSA/AML compliance programs, the Agencies will not advocate a particular method or technology for banks to comply with BSA/AML requirements.

This statement clarified that the regulatory bodies will be concerned with the results of the technology used for BSA/AML compliance, and not with the technology itself. This gives banks room to innovate without worrying about compliance, as any solution that accomplishes the goals of BSA regulations will be considered compliant, regardless of what technology is being used in the solution.

Encouraging innovation by providing protections for innovations

The joint statement delves into the practical problems faced by banks when it comes to BSA compliance. Banks were concerned about launching pilot programs to test new BSA/AML technology because every pilot program has a chance of failure. The statement reads:

Pilot programs undertaken by banks, in conjunction with existing BSA/AML processes, are an important means of testing and validating the effectiveness of innovative approaches. While the Agencies may provide feedback, pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful.

The federal regulators have now clearly stated that the agencies will only be providing feedback for these experiments and will not penalize banks with failed pilot programs. This creates a safer environment for experimentation in BSA/AML compliance.

Dealing with the Catch 22 of BSA/AML Compliance

One thing which is clear from this joint statement is that the regulatory bodies have a great understanding of the hurdles faced by the banking industry when it comes to compliance technology, particularly the catch 22 of BSA/AML innovation. Banks were concerned that if they tested a new BSA/AML technology which was better at catching BSA/AML violations than their existing compliance processes and framework, they would be admitting that their current framework was deficient. The more successful a pilot program is, the more flaws in the current infrastructure it will reveal. The statement reads:

Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program. For example, when banks test or implement artificial intelligence-based transaction monitoring systems and identify suspicious activity that would not otherwise have been identified under existing processes, the Agencies will not automatically assume that the banks’ existing processes are deficient. In these instances, the Agencies will assess the adequacy of banks’ existing suspicious activity monitoring processes independent of the results of the pilot program. Further, the implementation of innovative approaches in banks’ BSA/AML compliance programs will not result in additional regulatory expectations.

The joint statement clearly states that the assessment of the bank’s current processes will be done independently of the results of the pilot program.

What the joint statement means for the banking industry

This joint statement released through FinCEN is fantastic for the banking industry. It provides protection to BSA/AML innovation by explicitly stating that pilot programs will be subject only to feedback and not criticism. It also provides clarification on restrictions regarding the technologies banks can use by stating that the technology itself will not specified, only the results required of the technology. This means that banks can freely choose between the BSA/AML solutions provided by multiple Fintech companies without worrying about the solution they choose being legislated away.

About the Company

360factors, Inc. (Austin, TX) helps companies improve business performance by reducing risk and ensuring compliance. Predict360, its flagship software product, vertically integrates regulations and requirements, policies and procedures management, risks and controls, audit management and inspections, and on-line training and qualifications, in a single cloud-based platform based on artificial intelligence.

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