Business
common Factors of False Positive
What Are the Causes of False Positives in Financial Institutions and the Way Forward?
The purpose behind introducing the anti-money laundering rules and regulations was to encounter criminal activities in the business process, particularly in financial institutions. However, despite these regulations, the surprising and alarming aspect about red flags is that these alerts in financial institutions are 95% false positives.
When we look at the strictness imposed by the regulatory compliance bodies to comply with AML compliance programs for financial institutions, we get the answer as to why the compliance team in every financial institution always remains in search of reliable and accurate AML compliance solutions. The reason is apparent: they want to identify the risk and threat the suspicious transaction can pose to their organization and other criminal activities like money laundering and terror financing.
So, this blog will cover understanding false positives, factors contributing to the higher rate, and the consequences financial institutions face due to false positives.
Understanding the False Positive with Real-world Example
When an AML monitoring system detects innocent transactions as illegal, the detection is well-known as a false positive. Let’s understand with an example:
Suppose a customer makes a large deposit of $9,900 while the reporting threshold is $10,000. The AML finance system bank might flag this transaction as suspicious because it is close to the $10,000 reporting threshold, even though the customer is simply depositing savings from selling a car. This is a false positive because no illegal activity is involved.
Such red flags waste time and resources because financial institutions have to investigate every false positive manually to ensure that the transaction isn’t intended for money laundering.
Factors contributing to the higher false positive rate
- Rigid Rules-Based System
One of the primary reasons behind flagging legitimate transactions by financial institutions is the implementation of static and predefined rules. Due to such strict instructions to the compliance tool, businesses often have to face a higher rate of false positives. Another reason is the difficulty in adapting these systems.
- Data Quality Issue
The quality of the data collected from different sources for accurate compliance programs needs to be completed, have zero errors, and be aligned. It’s easy to understand that the higher the rate of data errors, the higher the chances of false positives. Some companies provide consultation on collecting the data correctly to reduce the possibility of false positives and negatives.
- High Volume and Complexity of Transactions
Financial institutions handle millions of transactions daily, and manual monitoring of such a high volume of transactions is not possible. The higher volume of transactions also increases the likelihood of false positives. On the other hand, the complexity of these transactions makes it even more complicated to distinguish between legitimate and suspicious activities.
- Lack of Advance Technology
Although AI has revolutionized every industry globally, financial institutions are reluctant to apply it in their compliance programs. The reliance on traditional and less sophisticated AML finance trade compliance systems causes institutions to face a high level of false positive
A consequence of high false favorable rates in financial institutions
- Cost of Manual Review: High false favorable rates create more trouble for the institutions because they have to check every suspicious detected transaction annually, which causes costs in the form of time and resources because every detection also causes costs in the AML process.
- Operational inefficiency: Financial institutions have to deal with many other business operations, and if they spend most of their time investigating false positive results, and that too manually, it will definitely negatively impact the business operations. This will not only increase the workload on the staff members but also decrease their productivity.
- Regulatory Risk: Despite your Compliance tools detecting the AML false positive, but still while investigating the false positive, if you miss or delay the genuine suspicious activities due to the overwhelming volume of false positives, your business may have to face a penalty or regulatory fine.
- Customer Experience: A higher false positive rate also hurts customer satisfaction because there are chances that the potential customer may face a delay in his transaction, an account freeze, or any other legal security. This will definitely lead to a potential customer’s loss.
Repeatedly flagged transactions, while they are not, also damage the business’s reputation. Customers can create the perception that the organization is not worth doing business with, and you can lose your trust and credibility.
Where do we go from here?
Financial institutions need to integrate their compliance program with the advanced AML software solution. AML Watcher compliance tool for financial institutions ensures you get zero false positive outcomes. You also don’t need to follow the rigid and old way of a predefined set of rules for the detection of suspicious activities, AML watcher software solutions provide you the option of making custom rules based on your business requirements and needs.