How to Reduce AML False Positives
Many legal professionals face common challenges when adhering to their AML obligations, and an issue of increasing concer is the potential for false positives - instances where legitimate transactions or information are flagged as suspicious.
False positives can create significant bottlenecks for firms and often divert valuable time and resources from genuine compliance efforts; this not only increases operational costs but also heightens the risk of missing actual threats amidst the noise.
In this article, we will explore the causes of false positives, investigate how they differ from “false negatives”, and outline practical strategies to help you take important steps towards a reduction in false positives.
What Are AML False Positives?
False positives occur when legitimate clients and transactions are incorrectly flagged as suspicious, especially during digital AML or related checks. This triggers the need for further manual reviews and closer scrutiny, where legal professionals aim to determine as to whether the activity is an actual risk or just a false positive.
For example, a false positive may occur when a client just happens to share the same common name (e.g. “John Smith”) with an unrelated person on a sanctions list or a Politically Exposed Person (PEP).
What Causes AML False Positives?
- Generic or common names matching entries on sanctions or PEP lists.
- Using lists with outdated, incomplete, or irrelevant data.
- Human misinterpretation of data when manually reviewing reports.
- Digital screening rules that are either too broad or too sensitive.
- Older legacy systems with limited functionality or inaccurate risk modelling.
What Is the Impact of False Positives?
- Time and resources are wasted investigating legitimate transactions or information, unnecessarily.
- Staff may become overwhelmed by false alerts, diverting attention from genuine risks or fee earning.
- Legitimate clients may face delays or unnecessary scrutiny, damaging relationships.
- Excessive false positives can lead to missed deadlines for reporting or monitoring.
- High volumes of alerts create bottlenecks, slowing down decision-making processes.
- Genuine money laundering risks may be overlooked whilst false positives are handled.
What Is the Difference Between a False Positive and a False Negative?
Although false positives can be disruptive for firms, false negatives can pose an even greater threat. False negatives occur when a genuinely suspicious transaction, situation or individual goes undetected by AML screening and monitoring processes, allowing money laundering to be mistakenly cleared or overlooked as being legitimate. Therefore, whilst false positives create inefficiencies, false negatives can give rise to real threats with potential for significant regulatory, reputational and even criminal consequences for firms and their staff.
False negatives pose more of a “real life” threat than you may think; we know of firms who have experienced this, where (well known) Electronic Identity and Verification (EID/V) systems reported no matches for PEPs, even though there were in fact PEPs involved on the client side. This oversight by the EID/V and other checks, mandated the involvement of the Solicitors Regulation Authority (SRA) for further investigation; a situation that no firm wants to experience!
9 Strategies to Help Reduce AML False Positives
1. Adopt a Risk-Based Approach
Using a risk-based approach reduces the likelihood of missed or incorrect alerts by tailoring your screening process to specific risk levels, improving the efficiency and accuracy of transactions.
2. Implement Dynamic Risk Scoring Systems
Dynamic risk scoring systems continuously evaluate client behaviour and transaction patterns in real time, adjusting risk scores based on new information provided. Unlike traditional static methods, this approach accounts for changing risks and reduces false positives by focusing on statistical anomalies that genuinely require attention. This approach also provides helpful risk data to inform the Firm-Wide Risk Assessment.
3. Improve Client Data Quality
Automated screening systems are only effective when they’re provided with the right information, otherwise, misinformed conclusions may be drawn. By improving data quality, such as verifying names and addresses, your firm can reduce screening inaccuracies. Regular data audits can help to ensure that records are both up-to-date and reliable for use.
4. Refine Detection Rules and Alert Thresholds
Generic detection rules and overly broad alert thresholds can often lead to excessive false positives, but by refining these to align with your firm’s specific risk profile and controls, unnecessary alerts can be kept to a minimum. However, you should ensure that these thresholds are regularly reviewed and updated so that they remain relevant to current regulations.
5. Use (and Review) Advanced Technology
Digital processes, such as electronic Know Your Customer (eKYC) systems, use tools like biometrics, AI, and machine learning to validate identities and identify suspicious behaviour. However, these should be annually reviewed to ensure that they serve their purpose in alignment with the unique risk profile of your firm, as outlined by the Legal Sector Affinity Group (LSAG).
6. Don’t Solely Rely on Technology
Although technology can be very useful for your firm, it is important to recognise that it is merely a tool that is only part of your checking and monitoring processes, and not to heavily rely on it for all parts of your screening processes. The application of “old-fashioned” common sense and inquisitiveness is an important part of Customer Due Diligence (CDD), helping you work towards reducing false positives (and false negatives, too).
7. Maintain Effective Staff Training
Your staff are your first line of defence in an AML landscape that is shifting all of the time. To be alert for signs of concern when monitoring transactions and clients, staff need thorough, regular training and supervision. The cocktail of risks, controls, regulations and systems are evolving so quickly that knowledge can become out-of-date in only months. The days of once-per-year-only training are a thing of the past and AML Officers and managers must constantly monitor training needs to meet this challenge.
8. Ensure the Topic Is Part of Routine Reporting by the MLRO
Making false positives a regular topic in the routine reporting from the Money Laundering Reporting Officer (MLRO) to senior management ensures that the issue receives appropriate attention.. By keeping senior staff informed about the frequency, causes, and impact of false positives, your firm can make informed decisions to allocate resources to manage the situation.
9. Ensure Robust Ongoing Monitoring
AML systems and processes must be regularly reviewed and improved to keep pace with changing risks, controls, systems and regulations. These include regular performance reviews, for both staff and systems, as well as close inspection of frequently published guidance from the SRA and the Law Society.
How Can PDA Legal Help?
We can help your firm improve its AML compliance approach by providing expert, bespoke guidance on how to refine your monitoring processes, through our AML consulting, independent AML audit and AML training services. Our expert team will work closely with you to develop tailored strategies, effective risk-based systems, and more to help you keep false positives to a minimum.
To get started simply contact our team today to book a FREE, no obligation consultation with our Operations Director, Neil Partridge.
