EXECUTIVE SUMMARY

AI Is at the Forefront of Reducing Money Laundering

and Combating the Financing of Terrorism
Rapid developments in financial processes
and technologies make it possible to move
money anywhere in the world with speed
and ease. This complex and interwoven flow
of funds brings new urgency to anti-money
laundering (AML) and combating the
financing of terrorism (CFT) programs.
Criminals and terrorists have been
resourceful and persistent with their money
laundering activities − accounting for an
estimated 2% to 5% of global GDP. That’s
equivalent to between $800 billion to
$2 trillion a year, according to the United
Nations Office on Drugs and Crime.
Although most laundered money stems
from drug trafficking and organized crime,
the events of 9/11 put the spotlight on
covert funding for terrorist activities, which
has traditionally been even more difficult
to detect.
Regulatory scrutiny is exposing critical limita-
tions of conventional approaches. Many
AML systems apply a relatively static set
of if/then rules to try to identify potentially
suspicious transactions. Over time, compli-
ance officers and regulators often discover
that these rules are overly broad or don’t
reflect the real money laundering risks.
High-risk entities can escape scrutiny. At the
same time, legitimate accounts and transac-
tions are often flagged for investigation,
which creates unproductive busywork
for compliance staff.
The process is also more time-intensive than
it should be. By some estimates, close to
two-thirds of compliance analysts’ time is
spent on manual data gathering, while only
a third is left for productive investigation.
“The true cost of false positives isn’t just in
the number of hours analysts or investiga-
tors spend to review unproductive work
items,” said David Stewart, Director of the
Security Intelligence Practice for Financial
Services at SAS. “It is also in the drain on
resources that prevents a financial institution
from recognizing complex or more egre-
gious activities that represent greater risk.
“Fortunately, advanced analytics can help.
Artificial intelligence, machine learning and
robotic process automation are already
helping firms overcome the challenges
and make AML programs more efficient
and effective. New legislation, such as the
Fifth EU Anti-Money Laundering Directive
and the AML and CTF Modernization Act
in the US, are intended to modernize
AML regimes.”
The growing scale and
complexities of AML/CFT
efforts will require more
advanced data analysis
and intelligent automation
than traditional systems
can provide.
Evolve beyond rules
As regulators have made clear, traditional
rules of monitoring transactions are not
enough. Why?
• Rules take too narrow a view. What is
perfectly normal behavior for one
entity might be indicative of money
laundering activity for another.
Segmentation of similar entities helps
firms deploy behavioral monitoring,
but often with too few features.
• Rules take a hindsight view. For
example, a rule might state that a
certain transaction frequency, dollar
amount or beneficiary are associated
with legitimate transactions for
an entity, while more nuanced
and emerging interactions may
go unnoticed.
• Rules are unwieldy to maintain. The
moment things change in the world, the
rules need to be modified to reflect new
risk exposures. Manual processes
struggle to keep pace with digital
banking risks.
AI and machine learning (ML) have a big
role in overcoming these limitations.
Advanced analytic
techniques can be used
to identify common and
expected patterns to track
anomalies or false negatives
− potentially suspicious
activities that rules-based
detection engines
might miss.
AI capabilities at the
forefront in AML/CFT
Movies and television often get it wrong.
Say “artificial intelligence” and “robotics,”
and HBO fans may imagine Westworld,
the fictitious theme park hosted by robots
programmed to fulfill guests’ every desire.
The humanlike robots follow a predefined
set of narratives but can deviate from their
scripts based on their interactions with
guests. Unbeknownst to staff, some robots
are learning from their experiences as they
gradually achieve sentience. What could
possibly go wrong?
In the real world, AI is far less dramatic.
AI is more like a smart utility. “It’s simply the
science of training a computer to perform
tasks that are normally handled by a human
being,” said Carl Suplee, Director of Product
Management for Fraud and Financial
Crimes Solutions at SAS. “The second part
to that is training the computer to learn and
build efficiencies to that process, so it will
perform better the next time around, with
less human intervention required.”
In the context of AML/CFT systems,
AI enables an array of efficiency and
accuracy benefits:
• Link analysis (also known as social
network analysis) reveals complex
networks of individuals, entities and
jurisdictions and defines the nature
and strength of possible collusion.
• Graph analytics display networks and
patterns and show how they evolve over
time, enabling you to drill into the details
of each case under investigation.
• Correlation and regression analyses
clarify the extent of dependence among
multiple variables, which helps identify
the attributes most predictive of
criminal activity.
• Cluster analysis uses unsupervised
learning to classify entities into groups
and subgroups that share commonalities
to provide more accuracy in identifying
behavioral anomalies that could indicate
criminal activities.
• Neural networks and predictive analytics
tools analyze vast and varied data sets to
find hidden patterns and trends and
model expected behavior to more accu-
rately spot false positives.
• Natural language processing (NLP)
scans, extracts and classifies content
from text and image sources to bring
unstructured data into the detection
process and streamline report
generation.
• Robotic process automation (RPA)
automates routine tasks, such as
retrieving information to enrich alerts,
reconciling data across systems and
responding to common requests.
Different types of machine learning
The right ML approach for detection depends on the input
you have for training the model and what you hope to achieve:
• With supervised learning, the model is presented
with sample inputs and their associated outputs.
The goal is to devise a general rule that maps those
inputs to outputs. For example, what attributes were
associated with cases that turned into suspicious activity
reports (SARs)? What findings were associated with false
positives or false negatives? The model learns how
to better predict the outcome when it is applied to
new data.
• With unsupervised learning, the learning algorithm isn’t
given any labels (dependent variables, in statistics terms).
The algorithm determines patterns in the data. Because
you don’t know what data represents suspicious
activities, you want the model to create a function that
describes the structure of the data, flags anomalies
and then applies this knowledge to new data.
“These applications of AI and RPA to AML A closer look at ML
will enhance efficiency by automating
A subset of AI, ML adapts to changing
manual processes and improve effective-
events, behaviors and realities. The system
ness by generating superior insights and
automatically creates analytical models that
intelligent visualization,” said Arin Ray,
adapt to what they find in the data. Over
a Senior Analyst at the financial services
time, the model learns how to deliver
research and consulting firm Celent. “Banks
better results − a level of accuracy that would
have started dipping their toes into the
be difficult to achieve with
pool of AI through pilots and proof of
conventional methods.
concepts, and there is growing interest
for wider adoption.”
 Instead of simply reacting to past informa-
tion, ML delivers a forward-looking
advantage. You can distill previously
unknown or unavailable data elements
for AML/CFT models. The more training a
model gets with feedback data, the smarter
it becomes and the less tuning it requires.
Not ready to give up your trusted rules?
Adopting ML doesn’t mean you have to
abandon established ways of working. The
right route for AML/CFT modeling might
be a hybrid of rules and predictive models.
“As AML professionals, we’ve grown up for
20 years working with rules,” said Eric Hale,
Vice President of Analytical Solutions for
Zencos, a consulting firm that delivers the
SAS® Financial Crimes Suite to midmarket
financial institutions. “When you have a
business group that’s used to seeing rules-
based alerts and has grown comfortable
with those rules, it’s really hard to rip them
straight away from those rules and go right
to a machine learning, score-based
approach. But you can combine machine
learning to provide risk scores and build
business rules on top of that to create a
robust investigation package on an entity.
That’s really a great vision and will help the
normal regimes transition into this world
of AI.”
What AI and ML do for
AML and CFT programs
“Many programs are finding that all of a
sudden the CFO is saying, 'Why is AML
costing me so much money?’” said Hale
of Zencos. “And you start thinking about the
true cost of your AML program – the manual
The concepts of ML have
been around for decades.
What’s new is that it can
now be applied to huge
quantities of data right
now, at a realistic cost.
workloads, the time spent hunting and gath-
ering data, chasing false positives and the
tedium of filling out reports. At that point you
should start thinking about what AI
can do for you.”
Below are a few examples of what SAS has
been working on with financial institutions.
AI and ML for process automation
As risk and compliance pressures mount,
it’s not feasible to add more people to
the problem. Instead, we must find ways
to streamline the work. ML is a natural fit for
automating repetitive processes because
manual processes raise the cost of compli-
ance to unacceptable levels.
With AI and ML, you can automatically:
Enrich alerts and boost SAR conversion
rates. Auto-referral or hibernation functions
tap into a broad range of relevant informa-
tion to either expedite or hold off on
escalating an alert for review.
Collect data for investigations. ML can guide
systems to automatically search and retrieve
data, run database queries or get informa-
tion from third-party data providers without
human intervention.
Reduce the complexity of generating
business rules. ML examines masses of
data to help establish rules and keep
them current, usually in the form of an
easy-to-understand decision tree.
Generate notes and narratives. With
accuracy rates of 80% to 85%, NLP can
be a tremendous help in auto-generating
content for alerts, SARs and CTRs.
Create a virtual digital assistant to stream-
line processes. AI bots can determine
how you usually navigate a system and
help predict and offer next steps for
your workflow.
Recognize and scan document types.
In a recent pilot with a tier one bank,
SAS scanned about 9,000 SWIFT network
messages in less than a second per
message and found that 2.5% of them
called for some type of further action.
AI and ML for more rapid and
accurate detection
ML is powerful for creating profiles of
entities and their peer groups, which can be
used to better understand the risk of new
entities that match those profiles. Here’s
what’s possible today:
Detect atypical events in real time. New
entities and relationships arise and change
all the time. ML can adaptively evaluate a
profile, a time series or an entire history
of these entities and their relationships.
Detect more AML and CFT activity.
Advanced matching algorithms, complex
rule-based scenarios, and conditional and
auto-adjustable thresholds improve detec-
tion quality and model output.
Improve results by adding insights from
text analytics. In building detection models,
text can be very useful to disambiguate
certain attributes that numerical data might
not. Even small amounts of text can be a rich
data source.
Use unsupervised learning to find out what
you don’t know. An unsupervised learning
model can analyze data and find things you
might not hypothesize or hidden risks you
hadn’t thought to look for.
With advances in predictive analytics and
ML, AML and CFT systems can learn, adapt
and uncover emerging transaction patterns
and players – all the better to capture the
most accurate and nuanced view of entity-
level and overall risk.

Granular segmentation
and advanced algorithms
generate better-quality
alerts that can be scored
and prioritized according
to risk using intelligent
automation.
10 keys to success
with AI and ML
Take a hard look at legacy systems
“When I’m working with clients that don’t
already have a mature AML monitoring
regime in place, they typically have a
vendor’s model deployed,” said Hale. “In
essence, they have outsourced their AML
risk through this vendor. They’re trusting the
vendor to have the right models in place to
have the right risks covered. And as they’re
growing or getting feedback from regula-
tors and internal model management,
they’re finding they need something
more robust and enterprise-worthy.”
Recalibrate your segmentation
strategy
Get more rigorous than simply dividing
personal and commercial clients. “That’s
a start, but once you’ve done that basic
classification, you want to get more granular
to reflect your business model,” said Hale.
“You could do it using a basic approach,
for instance, taking standard deviations and
bucketing organizations into small, medium
and large based on their total transactions.
Or creating segments by product or
transaction type.
Don’t chase what may turn
“But we find it’s really useful to use a out to be false positives.
k-means clustering algorithm to understand
Low-risk alerts can be put
how dimensions interact and how they natu-
rally cluster entities into different groups. in hibernation mode while
Once we have accomplished that, then we the system gathers more
can truly narrow our scenarios and look very
information related to the
closely at risks specific to those clusters.”
case and triggers an alert
Don’t treat it as a when additional relevant
set-it-and-forget-it thing information is found.
The risk environment is a shifting sea.
Criminal strategies change over time. The
bad guys modify their methods to continue
to slip in undetected. So AML and CFT
Intelligently triage alerts
is not about buying something, putting it in
place and moving on to business as usual. Not every alert needs human review at the
time of alert generation. It should be about
It needs to be constantly updated and
focusing on what’s important. “Alert hiberna-
nurtured. AI can handle much of that.
tion is a mechanism to be able to delay
review of an alert until that entity’s risk has
“This calls for continuous learning and
risen to a level that it should be presented
making sure that as something new
to an investigator,” said Hale. “The opposite
happens, it is taken into these new equa-
of that is auto-escalation, where the entity’s
tions,” said Suplee. “For instance, if you’ve
risk is high enough that we may skip right
identified some new risk or built some new
through the investigation process and very
monitoring capability into your program, it
close to the SAR process. Both mechanisms
may have impacts in other areas you didn’t
fit into an artificial intelligence technique
realize. It may even affect investigators’ prior-
we call automated alert triage, which
ities and workflow. AI can help you automati-
cally deal with these new risks coming uses various forms of supervised
machine learning.”
through the system.”
Harness the value
of unstructured data
“People get so focused
If you’re making decisions on only on the
on false positives that
structured data fields in your systems, then
you’re making decisions with less than 20% they don’t realize the
of the available data. To reach the needed false negatives they’re
level of accuracy, it’s critical to bring in
missing by not having
unstructured data − text, audio and images.
The analysis benefits from rich new data good customer
sources such as previous SARs, text segmentation analytics.
comments in customer service records
That’s what allows you
and recordings of phone calls.
to model down to those
smaller segments to
really filter out the good
cases found there.”
Eric Hale, Vice President of
Analytical Solutions, Zencos
ML can analyze
historical outcomes
and automatically
adjust thresholds to
reduce false positives.
Lessons learned
should be frequently
fed back to the system
for continuous
improvement.
“With AI, we definitely see
alert-to-SAR and case-to-
SAR ratios improve, with
a clear reduction in false
positives. In many cases,
you may actually be
reviewing more alerts,
but you’re looking at the
right activity that really
poses the risk to your
institution, and you’re
finding the things that
add the most value.”
Carl Suplee, Director of Product
Management for Fraud and
FinancialCrimes Solutions, SAS
“We’ve seen this type of automated triage
increase SAR conversion rates 30% to 50%,”
said Suplee.
Continually challenge the state
of the art
Models must be tuned and tested as things
change. Maybe the original model worked
well for a while, but now it has become less
effective. Or there have been changes in
the customer base you don’t know about.
Maybe feedback from investigators shows
that some scenarios need to be fine-tuned.
“So, I have this model. Great. It’s in place,
it’s performing. It’s helping me focus on
quality investigations,” said Hale. “But what
am I doing to validate and challenge it, to
ensure that it is still the best model that fits
my business process? Am I looking at
different techniques? Am I tuning the
existing model? And then finally, am I
documenting all of this?”
Through multiple iterations using different
ML techniques, you test and determine
the best-performing model (known as
the champion), which may unseat the
existing model.
Feed results back into the system
for continuous improvement
Was a particular rule or risk factor helpful
in the decision to either investigate or not
investigate? Did the SAR end up being
based on the system-identified trigger, or
was it something else discovered during
the investigation – something the moni-
toring program missed? What attributes
were associated with false positives and
false negatives? What new intelligence
items should get more or less attention?
“Learning from resolved case decisions
is crucial to harnessing AI to continuously
improve onboarding, detection and investi-
gations,” said Ray of Celent. “Combining the
human experience of investigators with AI
allows the system to make recommenda-
tions or improvements to production
processes, enhances overall efficiency
and effectiveness of AML programs,
contains costs and ensures superior
compliance with regulations.”
Put the governance in place
When delegating many operational
processes to the machines, you must
monitor how the machines are
making decisions.
“Machine learning? Firms can do that
today,” said Suplee. “But it’s also applying
all the rigor that goes around it, making sure
you have controls in place. That’s the part
that I often see missing in the industry. For
this kind of a program to work, you have
to have good controls on the back end,
making sure that you’re testing and
validating the process.”
AI techniques need to be
evaluated, monitored and
governed with appropriate
oversight and controls
in place.
Be prepared to demonstrate
the controls
“You need to be able to show regulators,
examiners and your internal audit teams
evidence of how you arrived at a decision
and that controls are in place to ensure that
decision is a good one,” said Suplee. “You
have to demonstrate that you’re following
a standard model validation process and
documenting model testing and changes
along the entire life cycle of the model.
You have to be able to show how a result
was arrived at, and be able to replicate it.
“These aren’t new concepts, but they take “I don’t necessarily see AI replacing transaction
on new emphasis given the relative lack of monitoring systems, but rather as a supplement,
transparency in autonomous, self-learning
approaches.”
being integrated to work together in an AML/CFT
program. The best result for the institution is in
Don’t let AI feel intimidating bringing those two processes and capabilities
“AI is nothing to be scared about,” said together.”
Suplee. “It’s technology you should be
embracing. Your organization might already Carl Suplee, Director of Product Management,
be using it in some other capacity. And you Fraud and Financial Crimes Solutions, SAS
can leverage it throughout the entire life
cycle of your monitoring program, all the
way from the data to the process to the back
end and then back around. There are a lot of
places where AI can come into play. It isn’t
about replacing human beings. It’s about
replicating some of those manual processes
for more efficiency and consistency and
delivering the insights that make your work “False positives are demonstrably costly.
more productive.” However, false negatives – where AML
systems fail to spot actual suspicious
Closing thoughts
cases – may carry higher risk and be hard
Leading-edge analytics and hybrid
modeling techniques detect AML and to quantify. As criminals become smarter,
CFT threats faster and more accurately. the ability to quickly identify new and
Embedded ML enhances every step of the
previously unknown patterns will be para-
process – continuously fine-tuning detection
algorithms, streamlining and automating mount in AML. Advanced analytics such
investigative processes, and boosting as AI, ML and RPA offer opportunities for
overall performance while reducing cost.
real improvements and efficiency gains in
By applying advanced analytics and AML operations.”
powerful machine learning on a unified
Arin Ray, Senior Analyst, Celent
platform, your organization can uncover
more financial offenses, reduce false posi-
tives and run more efficient investigations.

“Firms are really starting to evaluate

machine learning and AI for their AML/CFT
programs,” said Suplee. “It’s a great opportu-
nity to really rethink the way they do some
of their monitoring. But it’s not necessarily
about looking to rip and replace everything
they’ve done. They’ve gained a lot of histor-
ical knowledge over the years, and they
need to keep that, but now it’s time to figure
out how to bring technology to bear to
make it better than it is today.”

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