Japan Banks to Deploy Shared System for AML/CFT Monitoring

The FSA’s Hiroshi Ozaki said the banking sector is planning to deploy a shared transaction monitoring and screening system for AML/CFT across the industry.

Japanese banks are working to implement a new shared platform for AML/CFT monitoring and screening, to address the issue of false positives in the banking industry.

According to Hiroshi Ozaki, director of the AML/CFT Policy Office of Japan’s FSA (Financial Services Agency), the new system has proven to be successful at enhancing the effectiveness and efficiency of AML/CFT monitoring and detection.

Ozaki was delivering the Opening Keynote Speech on Day 2 of Regulation Asia’s Fraud and Financial Crime Asia 2021 Conference. The event continues until Friday (23 July). (Register here)

Japan’s National Risk Assessment has identified organised crime groups (Yakuza, also known as Boryokudan), foreign crime groups, and specialised fraud groups as the highest risk groups in the country, Ozaki said.

However, Japan has made significant progress in these areas in recent years, with the number of individuals designated as Broyokudan decreasing from 78,600 at the end of 2010 to 28,200 at the end of 2020.

With regard to specialised fraud, the number of STRs filed has increased in recent years, the number of arrests for this activity has risen, and the financial damages recorded have steadily fallen.

Despite the progress, the typologies are changing, and bad actors are using new technologies, Ozaki said, adding that a “dynamic process” is needed to combat illicit activities.

He emphasised the key role the banking sector is playing in combatting AML/CFT threats through their transaction monitoring, screening system, and reporting of suspicious or unusual transactions.

However, Ozaki pointed to the increasing costs of investing in and maintaining these systems – and integrating them with legacy systems – as key challenges for banks. Regulators and supervisors have to pay attention to this pain point, he said.

Japanese financial issues are also burdened by high false positive rates in their transaction monitoring systems, ranging from 70-95 percent. To address this, the FSA is advancing efforts to use newer technology for AML/CFT.

In February 2018, the regulator revised its AML/CFT guideline to highlight the ability of new technologies to increase the effectiveness and efficiency of AML/CFT systems.

“New technologies such as AI (artificial intelligence), blockchain, and RPA [robotic process automation] are used in various phases of AML/CFT to improve the effectiveness of controls,” the guidelines say.

The FSA expects financial institutions to examine the benefits of new technologies and proactively explore the possibility of leveraging them in their AML/CFT programmes.

Ozaki also spoke of a POC project the FSA supported last year, funded by Japan’s New Energy and Industrial Technology Development Organization (NEDO).

The project used a shared platform to ingest transaction data from financial institutions, without sharing or pooling the data, and then analysed the data using machine learning and assigned true positive scores to each transaction.

The AI model deployed in the POC was able to learn from each participating institution’s datasets and be tuned to improve accuracy. The project was a success at triaging alerts, reducing false positives and enhancing efficiency in monitoring and screening, Ozaki said.

Based on the results of the POC, the JBA (Japanese Bankers’ Association) is now in the process of working out how to implement the ‘Shared Transaction Monitoring and Screening System’ across the banking industry.

The project was recently featured in a FATF (Financial Action Task Force) report on data pooling and collaborative analytics.

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