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4 Major Reasons for False Positive Occurrence in Banks

False Positive Occurrence in Banks False Positive Occurrence in Banks

More than any other business, financial institutions need to adopt a risk-based approach in this digital sphere, an era of money transactions. A risk-based approach increases the chance of detecting and reporting suspicious transactions, which helps banks fight against money laundering and other financial crimes.

Financial institutions must comprehensively monitor and screen their clients to avoid inconvenience and compliance actions. Proper screening alerts the compliance team about suspicious transactions in real-time. 

Are all alerts a sign of crime? The answer is no. Due to the error or miscalculation of the measures in the banking sector, they have to check the alerts detected by the monitoring and screening tool as suspicious, even though they seem legitimate. 

According to the Financial Times report, in 2022, more than 8 billion dollars in fines were imposed on the financial banking sector and trading firms for non-compliance or failing to prevent money laundering. One reason for failing to implement a compliance program is the higher rate of false positives within their compliance process.

This blog will cover false positives, reasons for false positive occurrences, the difference between false positives and false negatives, and the way forward for financial institutions. 

Concept of False Positive in AML 

False positives occur when the financial institution’s compliance program flags one or more money transactions as suspicious. Still, the transaction is legitimate when the compliance team thoroughly investigates the flagged data.. False positives cause financial institutions much damage, time wastage, and a lot of resource allotment to manually check each false positive due to the fear of losing the potential client.

The AML system ultimately monitors and screens the customer’s data to identify any potential chances of criminal activities like money laundering and terror financing. However, the complex and strict instructions given to the compliance tool increase the chances of a higher false positive rate. 

False Positive vs False Negative 

Another challenge that financial institutions face is False Negative errors. A false positive flags the legitimate transaction as suspicious. However, a false negative is actually an unusual or suspicious activity that the system was unable to detect for any reason. This could be more damaging for the organizations than the false positive.  

4 Major Causes of false positives in AML transaction monitoring  

Many reasons could cause false positives despite the advanced technology used in the AML compliance program. There is still room for improvement. Let’s understand the most common reasons for false positives while monitoring and screening financial transactions. 

  • Incorrectly defined rules

Among all the reasons contributing to false positives, inaccurate or incorrectly defined rules stand first on the list if we look at the rules often defined by the compliance team as too strict or too weak. Therefore, the company has to face false positives or false negative errors, and both cause companies to pay higher costs for such errors.

  • Incomplete or inaccurate data

Complete and accurate data is essential for reliable, error-free monitoring and screening for financial institutions. However, incomplete data or data arranged incorrectly will likely produce higher false positive results.

  • Lack of contextual analysis

AML Compliance programs detect flagged transactions or consider them legitimate based on context. However, the context can often be judged wrong, as the Monitoring and screening tool can not judge the intention of a client transaction. So, a lack of contextual analysis in the compliance program often generates false positives.

For example, A bank’s anti-money laundering system flagged a significant $50,000 transfer from a foreign country as suspicious because it was much higher than the customer’s usual deposits. The system didn’t consider the context, like the money being a wedding gift from a relative. After the bank’s compliance officer contacted the customer and verified the details, they confirmed the transaction was legitimate and marked it as a false positive. This happened because the system lacked the context of the customer’s situation.

  • System Configuration

Poorly managed or newly integrated monitoring systems could generate more false positives due to configuration errors. For example, setting up your system with very strict and sensitive commands can result in more false positives. However, flexibility in the screening process can also lead to false harmful errors, which are more devastating than false positives.   

Steps to Reduce False Positives in Financial Institutions

Reducing false positive results is suitable for both the customer and the organization. The three easy steps, broken down into bullet points, could achieve this.

  • Adopt a training culture for your compliance team to keep them updated on the latest challenges in compliance programs and their solutions.
  • Cross-training is another way to align your AML false positive compliance program. This method is a great way to let the compliance team know how the higher rate of false positives affects the work schedule of other departments.
  • Integrate with the latest technology being used for AML monitoring and screening, like the one AML Watcher provides. It is advanced, AI and ML integrated, results in zero false positives, and, above all, is lower in price than the other competitors in the market.

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