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How Nasdaq Is Fighting Financial Crime Through Automated Investigations

For the launch of the new Nasdaq Automated Investigator for anti-money laundering, we sat down with Darren Innes, Head of AML Technology @Nasdaq, to discuss how it expands Nasdaq’s efforts in combatting financial crime and promoting market integrity in the capital markets.

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For the launch of the new Nasdaq Automated Investigator for anti-money laundering, we sat down with Darren Innes, Head of AML Technology at Nasdaq, to discuss how it expands Nasdaq’s efforts in combatting financial crime and promoting market integrity in the capital markets and beyond.

You launched a new product in the anti-money laundering (AML) space today. What can you tell us about this new offering?

Yes! We are extremely excited about today’s news, where we have launched the Nasdaq Automated Investigator for AML.

At a high-level, the solution applies an investigative layer to the typical AML process. It automates the review and analysis of alerts generated from the Transaction Monitoring system, providing a decision with a clear rationale, and all evidence supporting the outcome of this analysis. Each case that runs through the solution is either fully- or partially-mitigated. The system reviews 100% of alerts, all of the time. What does this mean? Effectively, the investigation agents use machine-learning techniques powered by a combination of supervised and unsupervised learning and business rules to mimic expert decision-makers. The agents understand complex relationships between entities, the nature and purpose of the transaction occurring, and a number of other factors that help the solution understand if the transaction is normal for the particular entity in question. If the transaction is deemed anomalous, the alert is enriched with the aforementioned details and then prioritized for an analyst to handle, but much more intelligently.

With this approach, banks and financial institutions get proven consistency, productivity and efficiency while gaining the confidence that trustworthy decision-making, comprehensive reporting and regulator friendly audit trails are always a priority. In our engagements thus far, the Automated Investigator has proven to provide between a 40% to a 60% increase in operational efficiencies, allowing analysts to focus their time on prioritizing and escalating the most important alerts where they can add the most value.

Our team produced a short explainer video for the occasion, which I encourage you to watch:

The anti-money laundering solutions ecosystem is new for Nasdaq. Why does Nasdaq want to get into this space?

Money laundering is a 4.4 trillion dollar problem, where only 1.5% of alerts result in Suspicious Activity Reports, and only 1% of criminal funds are seized. As a market practitioner and technology solutions provider, we feel that it is our obligation to bring transparency, efficiency and integrity to the financial ecosystem with a mission to help root out and eradicate illegal money in the financial system. I know that this sounds like a lofty ambition; however, we already have a massive footprint with proven results in fighting financial crime through our trade surveillance and market surveillance offerings. We have 169 banks, broker and buy-side organizations, over 60 exchanges, and regulatory authorities that leverage our technology to detect market manipulation and abuse.

We explored the AML market extensively over the last 12-18 months to identify suitable growth opportunities. It is an area burdened with multi-billion dollar operational expenses and is ripe for technological innovation. By applying (1) our core competence in fighting financial crime through our established RegTech solutions, (2) leveraging the experience of the team we have hired to drive strategy in roadmaps, and (3) powering this all with the neuroscience approach pioneered by our partner, Caspian, to address AML investigation challenges, we believe we can make a huge difference in this space. In fact, we think this is the beginning of a completely new technology category: Automated Investigations Management. We see this eventually moving beyond AML to adjacent compliance siloes.

With regard to the Automated Investigations Management piece, can you explain which gaps you believe that the Automated Investigator offering solves in the current investigations process?

The Automated Investigations Management space is a historically underserviced area of financial crime operations that presents a significant gap in the investigations management process for banks. Many techniques are used to launder money, causing banks to cast a wide net to catch perpetrators. The wide scope of surveillance means AML Transaction Monitoring (AMLTM) systems could potentially trigger as many as 200,000 to 300,000 alerts a month in extreme cases. In response, many banks have tightened the parameters within their AMLTM systems or added additional scoring mechanisms, thereby reducing alerts. However, when banks tune their models too tightly, they run the risk of missing criminal activity and exposing themselves to regulatory sanctions. Even those that have tightened their parameters can experience 20,000 to 25,000 alerts in a month. Without capabilities like ours to intelligently manage through the backlog of alerts, with full audit trail capabilities and explainability behind machine learning models, 99% percent of laundered money could continue to flow through the system for years ahead. 

You mentioned that you see broader applicability for these capabilities. Where will you go next?

We are focused on the retail and commercial banks, but the corporate banks are likely the next natural area for us to address, and as mentioned, we do think there are other areas of the compliance lifecycle with similar needs.

You co-authored a whitepaper with Caspian last quarter that discusses many of the challenges that banks are faced with given COVID. Can you summarize the largest challenges in your mind?

I did! And you can read it here. I can mention a few key challenges that we see banks facing today:

  • Cost of investigations: Substantial alert volumes where 98% of investigations lead to dead ends. To manage volumes of alerts, banks hire an enormous amount of analysts to manage a very manually-intensive investigation process.
  • Consistency of investigations: While large teams often work to rectify the slew of alerts they see every day, there is a shortage of qualified staff. On top of this, there is no consistency in how one analyst investigates – and then documents that investigation – versus another.
  • Regulatory Exposure: Inconsistencies in investigative procedures coupled with inconsistent parameter settings can open banks up to significant regulatory exposure.

Beyond these everyday challenges, we live in a world where criminals are continuously changing their tactics to thwart investigations. This has been exacerbated in the current environment where consumer buying behavior has shifted tremendously – more online purchases, money markets and other investments being converted to cash, large cash purchases (houses, cars, etc.) and more. Lastly, many firms have large populations of analysts in high-COVID areas and are either faced with sending analysts home to avoid the spread or keeping analysts in the office to process alerts and propelling the spread – both of which result in a further backlog of alerts.

In summary, expensive and inconsistent processes lead to inefficiencies, high cost of operations and potentially huge regulatory exposure.

You mentioned earlier that you are working with Caspian to develop the new offering. Can you share the details of your relationship?

We met Caspian through a mutual contact last year. Impressed by the technology and the capabilities that the Automated Investigator unlocks for the industry, we brought Caspian through Nasdaq Ventures and placed a minority investment earlier this year. Through our arrangement, Caspian is our development and engineering partner, helping to drive development efforts against the product roadmap that we have established together, and we will continue to progress further. The Caspian team has developed a truly wonderful offering proven to drastically increase efficiencies. With our scale, distribution and investment, we can bring this offering to many places around the world. Together, we can advance the industry’s approach to financial crime and improve transparency and integrity across global markets.

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