Why Do AML False Positives Occur So Often?
What could be more challenging for the financial institutions and particularly the compliance team to cater to that challenge? ItsIt’sout AML’s false positive rates in le monitoring and detecting suspicious transactions. This often happens to a higher rate of daily transactions in the banking channels, strand ict AML regulations incorporated in the compliance efforts.
The reasons for the strict implementation of AML rules are many like the Ukraine-Russian, US-China trade tension, and increasing rates of money laundering and financial crimes.
The report from FATF states that nearly 2 trillion dollars are laundered every day. Seeing this huge amount of time, the financial institutions have to implement strict AML regulations to avoid being exploited for money laundering activities.
Why Do False Positives Occur So Often?
False positives are a major threat to financial institutions because they cause the potential clients to go unnoticed by the real threats and money laundering transactions. But the real question is here why these false positives occur so often in financial institutions. Today we will try to explore the different reasons why use a higher rate of false positives
- Strict and Complicated Rules-Based Systems
Conventional AML systems that use the old technology will automatically flag every transaction that fulfills the defined rules for suspiciousness. And it is not obvious that every time the relrelevantansaction will be a suspicious one. Let’s understand it with an example.
Transactions that are made over a certain dollar amount may be flagged automatically by the rigid system without identifying the risk associated with it.
This happened because such sort of AML systems are capable of differentiating between illegal and illegal transactions. And loopholes in the AML compliance system create more false positive alerts.
- 2. Inaccurate or Incomplete Data
The failure and success of any AML system heavily rely on the accuracy of data collected by the compliance team. Because it stores customer information, history of the transactions relations with other people, current risk status, and other factors. Imagine you own a system that contains inaccurate and outdated data, the system will more consistently flag then the legitimate transaction as the legal due to uncertainty in the database.
Systems that rely on limited or narrow data points can fail to distinguish nuanced differences between typical and suspicious behavior.
- 3. Lack of technologically advanced AML Screening Algorithms
So, what’s the point of integrating an ML compliance program within the organization? Obviously to first save the organization from being abused by lauunderers and second mitigate the money laundering and other financial crimes.
To secure the organization, many organizations often implement the conventional and strict AML system that flags even slight deviations from typical behavior, which could be reduced by the advanced screening solution because advanced typically works the customer behavior, analyzes the transaction history, and generates alerts on real-time threats of money laundering.
- 4. Complexities in Customer Behavior
Is it easy to keep up with the modern financial behavior of hundreds of customers? It is quite difficult because they often use multiple currencies for transactions in different industries, do across-bordering, and use multiple bank accounts and transactions within the country under the threshold. So, in such scenarios, the AML system can get confused and often flag the legitimate behavior as suspicious.
Therefore, In high-volume financial environments, AML systems can become overwhelmed with the number of transactions they need to screen. And in return flag the real transaction as illegal.
- 5. OveOver-regulations Compliance Pressure
The pressure of complying with the latest and updated AML regulation remains always there for entailing institutions, and failing to can cause firms to pay mil millions of dollars, loss of potential clients, and reputational damage as well.
To avoid facing such circumstances, they implement the overly cautious approach to AML screening to avoid any of the above regulations.
As a result, the system flags the below threshold transactions and reports them as unsuspicious.
As org Organizations to comply with follow the AML regulations that require institutions to monitor and report a wide range of suspicious activities, some of which may be ambiguous.
Threats posed by the Higher rate of AML false positive
- The higher rate of false positives can lead to inefficiency in business operations
- AML false positive needs institutions to spend a lot of resources and time to differentiate between legal and illegal activities
- false positive rates increase the chances of overlooking the real threats and can cause failure to report the suspicious transaction
What’s the Solution
AML Systems with accurate, updated, and efficient databases, incorporated with advanced monitoring and screening solutions can comprehensively reduce the AML false positive rates. Financial institutions need to incorporate the AML system that not only follows strict regulations but also analyzes customer behavior, and customer transaction history and generates results on real real-life scenarios.
