When I began my career, back in the late 90s, I was hyper-focused on rule-based technology and methodology. Rules represented our best chance at using automation to monitor transactions and prevent money laundering and other financial crimes. Two decades have passed, and it’s easy to see how wrong I was. At its very best, a rules-based approach finds one instance of financial crime for every 99 instances that it stops. A measly 1% of true positives, while 99% of its alerts are false positives that keep analysts busy but do little to thwart money laundering. In place of rules, we are starting to appreciate the value that artificial intelligence (AI) brings in transaction monitoring. From my front-row seat, I’ve enjoyed the role I’ve played in the rapidly evolving fight against financial crimes. I’d like to take a fresh look at transaction monitoring, and the way it has changed over the last half-decade. Understanding Transaction Monitoring Every time money moves from one account to another, we have a transaction. Monitoring those transactions means looking at where the money came from, and where it’s going. When you think about me sending you $100, the monitoring is pretty simple, but when you start to think about it at scale, with millions of transactions moving across different banks, borders, and currencies, it starts to get complicated. Hidden among legitimate transactions are illicit transactions, where criminals move money that have been involved in drug dealing, illegal arms sales, and human trafficking. Regulators demand that banks monitor these transactions to prevent money laundering. That monitoring is important; banks who fail to do so are at risk of millions of dollars in penalties. To make matters more complicated, monitoring goes beyond the current transaction. It requires a knowledge of historical transactions as well and reviewing a customer’s activity and information to get a full picture of the money trail. The Complexity of Cross Border Transactions At the heart of a bank’s responsibility is preventing financial transactions from passing through a bank in an international transfer. Money launderers love moving money across borders. For one, it enables them to pay suppliers, but it also allows them to clean money so that it can be used for other purposes. Despite it being 2021, or perhaps because of it, sending money from one country to another isn’t easy. If you wanted to send money from New York to California, the two banks most likely have a relationship, and the money can easily pass from one bank to the next. However, if you wanted to send money from New York to Johannesburg, South Africa, your money is in for quite a ride. To protect themselves from falling afoul of regulators, over the last few years banks have de-risked themselves and limited their relationships with foreign banks. The New York bank uses a series of correspondent banks to send the money from the United States to South Africa. The money might go to London first. From there, it may travel to Germany,

With over 4000 leaked SARS that were involved with 2000 banks, turns out most of the SARs were related to cross border activity, a well-known “blind spot” in the banking world.  Over the past several years, large schemes revealed the financial systems failure- with billions of dollars remaining undetected and unreported.  The list of SARs also revealed the inadequacy of the system, banks and FIUs to fulfill their obligation of identifying, reporting, and making effective use of the SARs, which is standard procedure. If most activities remain undetected, and the ones detected and reported did not lead to an expected outcome, what is the purpose of this mechanism? Who will be held responsible to prevent financial crimes?  Key questions are usually re-surfaced when large schemes are published:  Most of these schemes go un-detected and unidentified while banks continue to cater to these customers. All regulators and large banking organizations such as the Wolfsburg group and the European Banking Federation call for the use of effective controls, EU commission response to the recent large schemes was a call for significant changes in the enforcement of AML.  On September 16th FINCEN published a call for comments covering the new guidelines for effectiveness.  All stake holders acknowledge the fact that the current methods proved unreliable and that the industry should shift from a rule-based approach to risk based. The FinCEN leak justified this decision.  How is it that throughout the AML value chain, this requirement was not mentioned?   What is the meaning of effectiveness? The guidelines for regular standards are vague and can be interpreted in various ways. The EBF document calls for urgent change and covers the following aspects:  Redundant costly rule-based solutions “Tick-the-box” approach  Irrelevant controls  “De-risking” challenge “Risk-based approach” Public-private partnership Implementing new technologies Effectiveness focuses on results. The new published guidance by FinCEN is steering us in the right direction, although it attempts to combine old terms and methodologies that have failed in the past. A familiar bell rings, as Albert Einstein once said: “you can’t keep doing the same thing and expect different results” this is the definition for “Insanity”  Banks- regulators sync Interesting points of view regarding SARs can be learned by a report published by the Swiss regulator, with statistics around the quality of SARs reported. This dramatic increase in number of SARs and consistent decrease in quality shows the negative impact of the relationship between regulatory expectations and the financial industry, only a few understand what works and what will be considered “compliant.”  Haven for criminals and terrorists The lack of ability to decide what to do and to bravely implement effective measures left a barrier for bad actors that has “more holes than bricks”, laundering money and moving illicit funds between jurisdictions is overall fairly easy. Winning the war against the “dark side” Finding lists of SARs that are over 4 years old is practically a wakeup call, reminding us to be one step ahead of criminals and to stop suspicious activity in both

Global economy is facing real challenges with cross border payments, Financial Institutions lost trust in their counter-parties and their AML controls, De-risking and slow business are no longer needed-with ThetaRay financial institutions can gain trust back and support growth with confidence.

Across the globe, the C-suite of financial institution fear the unknown. In fact, most of us fear the unknown but FI executives can get into serious regulatory, legal, financial and reputational hot water – especially with unknown unknowns. What do I mean by that? In simplest terms, an unknown unknown is an unspecified threat that is also undiscovered. Some of the largest fines imposed on financial institutions over the last two decades were because of unknown unknowns – the financial institution knowing neither that an event had occurred nor what it was until it was too late. Some of the largest criminal “wins” to date were unspecified schemes where the bad actor had a dwell time of years. In fact, many times, an unknown unknown event is only discovered because a conspirator confesses or gives up his cronies. To bring this home, imagine playing craps in a casino. You’re so confident that you will win that you’re gambling with your life savings. You’ve studied the rules, practiced the math, and feel invincible as the dice hit the table. The problem is, when we see risk we often expect a degree of fairness; this rarely happens however, and when it does, it’s purely by chance. Today’s financial institutions are sitting at the craps table and hoping the dice roll in their favor. They are in an unremitting war, battling criminal syndicates, rogue states, and individual bad actors that get more sophisticated by the day. FI executives are apt to lose with each throw of the dice as the rules are in flux and the wager yet to be placed. In other words, the legacy rules-based technology that they’ve been using to prevent and identify threats is ineffective against such cunning foes. What is the answer? Enter artificial intuition or what we call IntuitiveAI. IntuitiveAI, which takes a new and more effective mathematical approach to identify and prevent financial crime, mimics the powerful and effective way humans make decisions; and it is helping financial institutions stay one step ahead of the criminals. Returning to our casino analogy – IntuitiveAI helps executives completely side-step the shifting rules to all but win the game before it is played. Artificial intuition or IntuitiveAI is a powerful weapon to add to any financial firm’s crime prevention program. To learn more about ThetaRay’s unknown unknown detection capabilities contact us [+1(646) 757-4956].

I think you all know that correspondent banks are required to meet specific regulatory obligations while maintaining their correspondent relationships, as well as meet general compliance obligations to report suspicious activity, prevent money laundering, and comply with economic sanctions. A mouthful but true, nonetheless. Although the Legacy AML and traditional AI systems, in place at banks monitor customer activity, this approach is not effective for monitoring flow of funds that aren’t related to the bank’s own customers. Moreover, these systems are based on rules that incorporate preset scenarios with conditions and thresholds looking for patterns that are known. We do it differently. Our IntuitiveAI for correspondent banking analyzes SWIFT messages without setting any predefined condition or threshold. Historical data is used to learn what is “normal” in terms of transactions and data flow and then detect anomalous activity with respect to that normal. This approach enables complex patterns of behavior to be caught which otherwise would have been missed by legacy or traditional AI systems. At the core of the solution is the data scientist It’s up to them to set the analysis strategy. The strategy includes selecting the relevant data sources and calculation of “features” — the key parameters and ways of deriving information specifically relevant for correspondent banking. ThetaRay’s IntuitiveAI algorithm then analyzes these features altogether to define what’s normal and what’s abnormal activity, without setting any predefined patterns or thresholds. The key data sources utilized are the SWIFT messages (MT103, 202, 202C), KYC information, Country Risk and bank risk information. These data sources are extracted over a historical period of a few years and are then utilized to calculate an entity called the “Full Path.” The Full Path covers the end-to-end payment flow and banks participating in the payment. Once the Full Path is derived from the SWIFT messages, several features are calculated. The features designed are related to volume and value changes in the Full Path activity over time, various combinations of risk indicators of the sources and destinations of funds, banks involved and the structure and location of the bank codes in the path. Stay with me now. An example of such a feature is the total amount of SWIFT 103 messages that have been sent over a Full Path during a specific time period and with a specific currency. We then take that total amount and compare it to similar time frames in the past in a form of a statistical calculation. Then, this calculation is factored with another calculation which indicates how significant this total amount is compared to other similar paths during the same time period. These two calculations are then combined into a single feature value. Several of these smart features are calculated and then injected altogether into the algorithms. Still here? Once features are created, an analysis is conducted and fine-tuned. Results worthy of further investigation are turned over to analysts to then take that investigation forward. On top of all this we have to ensure that we do what

My banker told me that, in theory, managing his relationship with regulators and respondent banks is straightforward. Then he paused and said, “Actually, about as straightforward as explaining quantum physics to a five-year old.” And he’s right. Both understanding quantum physics and correspondent banking relationship obligations are tough. Quantum Physics makes sense of the smallest things in nature – how the billions of sub-atomic particles work together. Correspondent banks need to make sense of even the smallest transactions in a financial network and work together with their respondent banks to reduce financial crime risks. Quantum physics tries to prove there is ‘weirdness’ at the subatomic level which indicates the existence of multiple universes. Correspondent banks have to prove they are complying with both multiple universes of regulations, as well as its own risk management obligations. In Quantum physics reality is complex, not fixed and shifting. For Correspondent banks the reality is that maintaining an effective anti-financial crime (AFC) program entails complexity and commitment to address shifting financial crime vectors and proactive engagement along the entire correspondent banking network. Dealing with the above challenges requires significant effort, both for AFC experts and rocket scientists (but that’s a longer discussion). Correspondent banks need relationships with respondent banks that make their lives easier not more difficult – they don’t create additional enforcement risks and they minimize compliance burdens. Getting comfortable with a respondent bank’s AFC program means having as complete an understanding of their AFC program as you do your own. You have to do the hard work. • Assess the risk of the respondent bank’s business and operating strategy • Develop a governance structure providing for appropriate escalation as necessary • Escalation paths need to be staffed by experienced, well-trained and engaged professionals • Develop a compliance culture • Ensure regular, thorough, and independent reviews and internal audits of the AFC program Both rocket science and AFC are critical to the world. Rocket scientists drive innovations which lay the groundwork for our future. AFC experts secure the world so we can take advantage of that future. And if you do want to explain quantum physics to a five-year old, try quantum physics for kids.