Using AI with open eyes: Why financial services organisations must proceed prudently

By Phil Cotter, CEO, SmartSearch

Financial services organisations face a constant challenge to keep up with an ever-evolving regulatory landscape. With an increasing number of high value services and transactions being delivered via digital channels, businesses must balance finding fraudulent activity from increasingly sophisticated criminals with providing the seamless experience and high-quality service expected by their customers.

The rise of AI presents a new challenge, as bad actors leverage the technology as an attack vector and almost half of global citizens are concerned that AI will be used to violate their privacy. However, AI platforms do also have capabilities that can be used by organisations to help them identify and fight financial crime.

It is understandable why regulated businesses wish to explore the possibilities of AI, however, the government and regulators must take the time they need to get legislation right. Until then, regulated companies should proceed with caution when implementing AI into their business processes.

A constant stream of regulation

March saw the UK Economic Crime and Corporate Transparency Act come into force and an open consultation on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations (MLRs). These are just the latest in a constant stream of changing rules and regulations that financial services organisations must abide by.

Phil Cotter

While businesses may welcome more action to fight financial crime and improved clarity on the scope of the MLRs, keeping up with ever-evolving regulation is a pressing challenge.

The enticing business benefits of AI

Regulation is not the only thing that is constantly changing – financial services organisations are also fighting against increasingly sophisticated would-be fraudsters.

It is enticing to turn to AI platforms for help, as they can analyse historic data and recognise complex patterns that indicate suspicious activities that may have been missed; streamline and automate tasks; and recognise risk. However, AI legislation remains in its infancy, with the world’s first AI law approved by the European Union as recently as March 2024. There are still more questions than answers on critical issues of data ownership and intellectual property.

Approach AI with open eyes!

Prioritising data security and complying with privacy regulation is of paramount importance for regulated businesses when considering the potential efficiencies AI can deliver.

Businesses managing sensitive data should approach AI adoption cautiously while we are still learning more about it. This is especially important given that only one in ten workers have key AI skills, with just 14% skilled in areas like encryption and cybersecurity. Appropriate skills are essential to ensure AI is implemented into business operations safely and compliantly.

Organisations that use AI in the future will need to be able to explain to regulators how the AI works, satisfy them that it does not breach data privacy and other relevant regulations, and prove that they have robust procedures in place for managing AI data models.

Tried and tested technology

Whilst organisations continue to explore AI adoption, the good news is that there are other tried-and-tested technologies out there – such as integrated platforms – that enable financial services organisations to identify potentially high-risk customers and detect suspicious activity, fulfilling their Anti-Money Laundering, Customer Due Diligence, and Know Your Customer compliance obligations.

Manual processes are no longer sufficient for organisations to verify individuals and businesses, as they are time-consuming and open to human error, increasing the risk of convincing fakes slipping through the net. Electronic verification offers a more robust system to identify potentially fraudulent ID documents and incidences where a fraudster is trying to steal a legitimate identity. ID documents can be cross-referenced with information from global data sources, enabling financial services organisations to assess the risk of doing business with an individual or entity, whilst also providing a more seamless customer experience.

Technology evolution not revolution

AML, KYC and KYB technology can be a vital tool in enabling financial services organisations to conduct all necessary checks in accordance with relevant regulations and protect themselves and their customers from financial crime. Tried-and-tested solutions in this space that continually innovate are invaluable to enable businesses to adopt a more proactive approach to detecting illegal financial activity.

Over time, the evolution of AI and its accompanying regulation will further enhance the tools available to regulated businesses to fight financial crime, improve the customer experience and assist them in meeting their regulatory obligations. Evolution not revolution, however, should be the approach taken to ensure data, customers and businesses remain protected.


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