What does new BSA/AML guidance mean for innovation?


New BSA and AML guidance from Congress and federal regulators pushes for innovation.

By Colleen Morrison

When Congress and regulators deliver consistent input on a financial services topic, it sends a clear signal to community banks: Pay attention.

Such is the case with recent activity in Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance. In late November 2018, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing dubbed “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” Just two business days later, a joint agency statement led by the Financial Crimes Enforcement Network (FinCEN) was issued to “encourage banks and credit unions to take innovative approaches to combating money laundering, terrorist financing, and other illicit financial threats.”

Quick stat

$25.3 billion

AML compliance costs U.S. financial firms pay each year

Source: LexisNexis Risk Solutions

This focus on innovation offers a new bent on BSA and AML guidance, and directly references key technologies, including artificial intelligence (AI), as a means of supporting bank efforts to combat financial crimes.

“There’s been a political battle over the fact that the regulatory structure makes it extremely difficult to innovate, streamline and improve the way people respond to their BSA obligations,” explains Karen Garrett, a partner in the banking and technology division of law firm Stinson Leonard Street, LLP. “Regulators wanted to respond.”

And respond they have. In the most recent guidance, regulators lean into a high-tech approach to BSA and AML compliance, referencing AI as a solution for banks in the automation of manual screening processes. AI presents a wealth of potential by enabling machine reading of data to identify suspicious transactions. In particular, AI can help rule out false positives based on account and transaction history.

Top takeaways

This most recent guidance encourages this type of innovation in compliance efforts. Reading between the lines, regulators open a door to new BSA and AML screening technologies in three main messages.

First, they reassure banks that testing new technology will not, in and of itself, lead to additional scrutiny or criticism. The guidance explicitly notes that if a bank is exploring a new technology via a pilot program, that program, even if unsuccessful, will not subject the bank to supervisory reproach. What’s more, if these exploratory efforts identify problem areas in existing BSA and AML programs, they will not necessarily result in supervisory action.

“I think they wanted to get across that they would not be criticizing banks for experimenting with AI or any software,” notes Michelle Bass, regulatory compliance director for financial institutions at CliftonLarsonAllen, LLP. “I took it as a positive note, as a signal that they want banks’ programs to be the best they can be, and they realize AI is a factor in this.”

Yet, alongside this message of innovation comes a point that urges a bit more caution: Pilot programs should serve as an extension of today’s protocol. As financial institutions try on new technologies, they need to keep up with current efforts.

“The second part of the message is, ‘But don’t stop what you’re doing,’” Garrett points out. “They’re saying, yes, innovate alongside what you’re doing today until you know this new process is better or enhances what you’re already doing.”

Finally, there’s a clear signal that regulators will be seeking additional input from the community on BSA and AML innovations. FinCEN announced that it’s launching an initiative to further explore challenges and opportunities in this space, and other agencies will follow suit.

Identifying solutions

As this emphasis on next-generation technologies further complicates compliance, what steps should community banks take to identify the right solutions? For one, they can start with their core providers.

“Most core providers do also provide AML software, so that could be something that the bank could research if they haven’t already,” Bass notes.

ICBA also recently launched its ThinkTECH Network designed to help community banks connect with emerging financial technology companies. This online directory enables community bankers to find relevant fintech companies and solutions through comprehensive company profiles.

And even with expansive digital tools, experts agree that banks should not rule out the value of old-fashioned peer-to-peer networking. “I am a strong believer in attending events and training where the concept of what is current is in the air,” Garrett recommends. “To know what other people in your position have found useful is essential.”

“You can’t keep doing exactly what you did 10 years ago, and 10 years from now, you can’t do exactly what you’re doing today, with or without this guidance.”
—Karen Garrett, Stinson Leonard Street

Whatever the approach to identifying potential BSA and AML innovations, community banks can’t expect to be able to rely solely on their current programs to take them into the future.

“You can’t keep doing exactly what you did 10 years ago, and 10 years from now, you can’t do exactly what you’re doing today, with or without this guidance,” Garrett concludes.

Colleen Morrison is a writer in Virginia.