Due to AML (Anti-Money Laundering) regulations, many industries are required to monitor their users. Although necessary, this process isn’t always the easiest or most straightforward. There are a few problems that will always be prevalent, and one of them is the false negative and false positive rates. Although there is no way to eliminate them completely, a high false positive rate can cause quite a few problems for KYC, KYB and AML transaction monitoring systems. However, the right AML compliance tools can help your company reduce them to an acceptable number.
What are AML False Positives and Negatives?
The idea of false positives and negatives is quite simple. It describes results that are wrongfully flagged as positive or negative. A simple example would include financial institutions flagging a person as a sanctioned entity and denying them access to the service when they are not sanctioned. Although simple on the surface, avoiding false positives and negatives requires a complicated and extensive check process. Just in the US, there are over 40 thousand people named John Smith. If one of them ends up sanctioned, this could cause issues for all 40 thousand potential customers.
This is not to say that false positives or negatives are hard to investigate. All it requires is another check to solve the mystery. However, this means that the KYC or KYB processes must slow down, compliance teams have extra, unnecessary tasks, and the user needs to wait longer to get through. As we know, 40% of users abandon onboarding processes that last longer than 10 minutes. That is why investing in an effective AML compliance program is so important for financial institutions and other industries. As reducing false negatives and false positives also means keeping more customers.
What do AML False Positives and Negatives Entail?
Although simple on the surface, false positives and negatives in identity verification have several drawbacks that make them a big problem in anti-money laundering compliance:
- Loss of business. First of all, false positives that indicate a legitimate customer is a fraudster can deter the customer from using the service. Additionally, as our report has shown, 40% of customers abandon onboarding processes that last more than 10 minutes. With the additional checks that false positives require, the process may take even longer.
- Additional costs and waste of resources. The additional checks required for false positives and false negatives will take up more time. In the time it takes to confirm the legitimacy of the false positive, the KYC agent could have onboarded several other customers.
- Letting through legitimate criminals. In this article, we’re talking about best-case scenarios. Where a false negative is noticed and dealt with in time. However, that’s not always the case. Without a system to differentiate between legal and illegal transactions, names with the same spelling or low-risk and high-risk customers, a false negative could easily slip through your compliance agents. This could lead to sanctioned entities gaining access to your business and ruining your reputation.
What Causes False Positive and Negative Results?
- Lack of resources. Sometimes there’s just not enough time to double-check all false negative or false positive alerts. Overwhelmed employees can easily let things slip through simply because they do not have the time or the energy.
- Human error. When dealing with human-oriented KYC and KYB, human error is inevitable. Your employees will make mistakes from time to time, and those mistakes will cost you.
- Outdated systems. Working with outdated software or using manual processes poses a few issues that raise false positive rates. First, it’s easy for documents to get misplaced, which makes the checking process much slower. Second, it’s harder to adapt to any AML compliance changes, and these happen quite frequently.
- Data overload. Overwhelmed compliance teams are the easiest way to let false positives and negatives slip through.
How can Ondato Help Reduce False Positives and Negatives?
AI-based Process
The great thing about AI is that it doesn’t get tired, doesn’t get overwhelmed, and it will not succumb to the same problems that humans do. As a high false positive rate is often the result of an ineffective process, AI has become essential to AML compliance. Luckily, with Ondato’s software, you can easily test, change and deploy the AML rules needed for your customers. This ensures both a lower false positive rate and a process that can easily adapt to your needs as well as the ever-changing regulations of anti-money laundering compliance. This way, your AML compliance program is always up to date with the latest methods, both from your competitors and scammers that aim to trick you.
Well Organized Data
Manual processes take much longer than automated ones. A big part of that is due to how easy it is to misplace physical documents. With Ondato OS, you can rest assured that all of your data is in the same place. This allows for easy updating, a quick way to change the risk level of a customer and an efficient way to double-check any positive or negative results to ensure they are not false. This is the best way to make each distinct piece of the enormous stream of data you’ve gathered for analysis easily reachable for compliance teams.
Risk-based Approach
Ondato OS offers a risk-based approach. It’s the one way to stay at the top of your game with fraudsters. This approach includes creating risk profiles for entities to be monitored and implementing rules and policies appropriately. By developing a risk profile, you can decrease the amount of data that is relevant for your customer review process while also reducing the number of false positive AML alerts without increasing the likelihood of false negatives.
Last Thoughts
At the end of the day, false positives and negatives are just another challenge in the ever-changing world of AML compliance. To address them in a timely manner, all your business needs to do is invest in a reliable AML compliance program like Ondato OS.
