Applying AI to the war on financial crime

Applying AI to the war on financial crime

© Erik Carter

Clouds are gathering over swathes of fintech companies, as declining economic growth, rising interest rates and the cost of living crisis strain their business models, forcing job cuts and valuation-crushing funding rounds.

ComplyAdvantage founder Charlie Delingpole knows his company is not immune to these forces, as fintechs are among the biggest buyers of his financial crime prevention products. In fact, some clients, including crypto lender Celsius Network, have already gone bankrupt.

But the company – which uses natural language processing and artificial intelligence (AI) to perform compliance checks on transactions – is proving more resilient than most as Russia-linked sanctions and a global crackdown of financial crime are supporting healthy demand.

“We’re the last thing they turn off before their server,” says Delingpole, a former JPMorgan Chase technology banker, of continued demand for his firm’s services from financial groups even when times are tight. .

Delingpole, who rose from chief executive to executive chairman in October, founded ComplyAdvantage eight years ago. At the time, the demand for compliance checks was already increasing in the aftermath of the 2008 financial crisis, with financial institutions being hit with heavy fines for errors and misconduct.

The Kremlin Square seen through a metal barrier lattice

Sanctions on Moscow and the falling ruble have increased the risk of financial crime for wealthy Russians © Valery Bocman/Getty Images/iStockphoto

Delingpole believed financial services companies and the third-party data providers they relied on, such as LexisNexis and World-Check, were missing a lap in the race to keep up with ever-changing rules and more aggressive regulators.

“They employed thousands of researchers to manually compile the information,” he says. “What we’ve done is use machine learning to bring together thousands of data sources and then merge them together.”

ComplyAdvantage automates the scanning of hundreds of thousands of documents to establish links between people, companies and illicit activities. “We don’t fly to Saudi Arabia to check the company registry,” Delingpole explains. “We only do very high volume AI type work.”

ComplyAdvantage’s growth to become a $50 million revenue company with 500 employees and a list of over 1,000 customers has been fueled by several international trends.

Global fines for anti-money laundering violations have risen sharply, having quintupled to $2.2 billion between 2019 and 2020 – an escalation that has put financial services companies around the world in a state of distress. alert for future non-conformities.

The war on terrorism and drug cartels has sparked a broader crackdown on money laundering around the world, led by institutions such as the Intergovernmental Financial Action Task Force and Moneyval, the anti-money laundering body money from the Council of Europe.

More recently, Western sanctions imposed on Russia following its invasion of Ukraine have pushed regulatory compliance to the top of business concerns, given the scale of restrictions imposed by the United States, UK, EU and others.

“You can divide companies into two groups: companies that grow cyclically in correlation with gross domestic product; and companies that are growing secularly, where there’s an underlying driver – ComplyAdvantage falls into the second category,” says Jan Hammer, partner at Index Ventures, which owns a 15% stake in ComplyAdvantage after leading its $30 million Series B financing. round in 2018.

“We consider the trail ahead of us to be completely inexhaustible,” Hammer says, pointing to the rise in digital fraud as another reason banks and financial services firms want to step up their fight against crime.

Everyone involved agrees that technology has a vital role to play in keeping malicious actors away from financial institutions and trading or payment systems. “The technology is useful for identifying complex money laundering patterns, for mining large datasets for terrorist financing activities, and it is irreplaceable for criminal cases involving cryptocurrencies,” says Igor Nebyvaev, Executive Secretary of Moneyval.

However, none of this means the financial industry should turn to ComplyAdvantage for technology. Financial institutions can and do build their own solutions, especially large corporations, which spend billions a year on technology. Additionally, competitors in the AI ​​and machine learning space may emerge.

A group of officers holding a meeting

Institutions such as the Financial Action Task Force on Money Laundering are cracking down on money laundering © Andrey Rudakov/Bloomberg

But Hammer insists that ComplyAdvantage will corner the market because its technology is more advanced than anything available, or likely to hit the market in the near future. “The key is to make the connection . . . know who the entities are connected to,” he says of ComplyAdvantage’s approach to verifying transactions. “It’s really very complex mathematically . . .[and]then layering the technology around those datasets, it takes years.

Marcus Swanepoel, co-founder and managing director of cryptocurrency platform Luno, said his company initially attempted to create its own compliance verification system. Then he tried working with traditional vendors, who rely more on manual processes. He ultimately settled on ComplyAdvantage because “it gives more accurate results and minimizes false positives, giving our team more time to focus on customers who are at real risk.”

Swanepoel says ComplyAdvantage is also easier to use than other services Luno has tried and innovates faster. “They collaborate with us on product development, which is especially important in a new industry like crypto,” he says. “Our teams and developers and theirs are together on Slack channels, where we can talk in real time about existing and future implementations and a product roadmap.”

When Delingpole is asked about ComplyAdvantage’s development milestones, he talks more about the technology that has been developed over the past 12 months than world events, such as the imposition of Russian sanctions.

a woman walks past an illuminated billboard showing currency exchange rates

An example is a new product using AI to target “hidden risks” in transactions. The tool, which is being tested by 50 clients, allows companies to detect “risks that are not obvious”, such as money muling, where a single group may be behind many seemingly unrelated accounts operating financial institutions.

So far, the scope of this new tool is limited to Politically Exposed Persons (PEPs), corporations, sanctioned individuals and adverse media appointees, but Delingpole says it may ultimately be much broader. “The really exciting work we’ve done is on the underlying graph of every person and business,” he says. In his view, ComplyAdvantage’s technology can ultimately be scaled to profile connections between everyone on the planet, businesses and other databases.

ComplyAdvantage also sells its white-label tools to other more specialized companies, such as Thirdfort, which performs identity and “source of funds” checks for lawyers and real estate agents. “When they do sanctions checks or PEP checks, they ping our API [portal]“, explains Delingpole. These white label partners generate approximately one-third of ComplyAdvantage’s revenue.

“There are so many different vectors of money laundering and so many different types of risk in business that it makes sense for a business to be a critical source of data,” he says, suggesting that controls could be applied in all kinds of sales transactions. , from real estate to private jets, paintings and high-end cars.

Olly Thornton-Berry, co-founder and managing director of Thirdfort, says the market for selling anti-money laundering services to legal and real estate professionals is growing rapidly. This, he notes, “is in line with the growing risk of fraud, increased regulation and adoption of technology. These trends show no signs of slowing down.

However, the road ahead for ComplyAdvantage is not smooth. “The critical risk is execution risk, the risk that we won’t be able to deliver the product we’ve articulated to the market and to investors,” Delingpole says.

Growth could also be dampened by a decline in the number of fintech start-ups, with the economic downturn affecting funding and failures of existing fintechs. ComplyAdvantage’s customer base is currently geared towards small and medium-sized businesses.

Another risk is that ComplyAdvantage may not be able to become big enough and well-known enough to penetrate the biggest financial institutions. “The real barrier to entry is brand,” says Delingpole, explaining why ComplyAdvantage struggles to attract the biggest financial services companies. He says his team would also need to build something that was “several times better than their [the clients’] current offer” and demonstrate that it could be resilient on a large scale.

That’s a big ask, given the multi-billion tech budgets that Wall Street’s biggest firms have at their disposal. Still, Delingpole is quietly confident. “The adverse information system we have today is already far superior to the systems adopted by most major financial institutions,” he says.

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