By Jessica Tirado
Artificial intelligence (AI) isn’t just for big banks anymore. One compelling use case for community financial institutions: reducing the cost, effort, and headache of AML compliance.
An AI-powered AML solution can automatically review millions of transactions overnight, surface unusual activity, and even draft a suspicious activity report (SAR) while your analysts sleep. However, greater speed and scale come with a tradeoff: as system complexity increases, transparency can decrease.
To manage that risk, AI-powered AML systems still need human oversight. Some aspects of your program should never be entrusted to AI.
What Kind of AI Supports AML?
Although generative AI has dominated headlines over the past couple of years, AI is more than just chatbots. In AML compliance, key AI technologies include:
- Machine Learning (ML): Learns and adapts from transaction history to detect anomalies and adjust risk scores.
- Natural Language Processing (NLP): Extracts data from unstructured analyst notes or reports.
- Graph Analysis: Maps relationships among accounts, people, devices, and transactions to spot hidden connections.
Opportunities for AI in AML
When these techniques are paired with quality data and strong governance, community banks can see powerful benefits:
- False positive reduction: The system learns normal patterns and suppresses benign alerts, so analysts spend more time on genuine risks.
- Faster investigations: The system auto-collects KYC data, negative news, and transaction history, so SARs are completed and filed faster.
- Pattern recognition: The system spots indirect or layered transactions that rules miss, increasing the detection of complex laundering typologies.
- Continual learning: The model evolves alongside criminals’ tactics. Compliance keeps pace without constantly rewriting rules.
Risks and Downsides of AI
Opacity
Rules-based systems are easy to explain: “If X, then Y.” AI models rely on thousands of parameters, making it hard to trace decisions. Without strong explainability tools, this can become a governance risk. Hybrid models, which include AI layered on rules, help balance scalability with transparency.
Bias and Blind Spots
AI reflects the biases in its training data:
- Under-represented groups may be missed or unfairly targeted.
- Media sources or sanctions lists can encode geopolitical bias.
- Analyst behavior, like clearing alerts faster for familiar customer types, can reinforce skewed patterns.
These issues are harder to spot in opaque models, making governance reviews essential.
Missed Red Flags
AI models only know what they’ve seen before. Emerging typologies like crypto off-ramps can evade detection. Human oversight is essential for recognizing novelty and interpreting real-world context.
Amplified Errors
Faulty inputs or logic scale quickly in AI systems. A single mis-weighted variable could freeze hundreds of accounts or overlook major fraud before anyone notices.
Regulatory Responsibility
The OCC and FinCEN have made it clear: you own your AI’s outcomes. Institutions must validate, document, and explain model behavior. “The algorithm did it” won’t satisfy an examiner.
AML Tasks to Keep in Human Hands
Automation is a force multiplier for your compliance team, not a replacement plan. These critical functions should remain human-led:
1. Setting Risk Appetite
Only the board and senior leadership can define acceptable levels of residual AML risk. AI can enforce thresholds, but deciding what those thresholds should be belongs in boardroom minutes, not model settings.
2. Designing Customer Risk Scores
AI can crunch data but can’t make value judgments. For example, should cash volume or political exposure carry more weight? That’s a question of ethics, strategy, and regulatory expectations.
3. Clearing Alerts
Models can cluster alerts or assign “likely benign” scores, but a human must make the final call. Auto-closing alerts removes your ability to defend decisions in hindsight.
4. Finalizing SARs
AI can draft SARs by linking accounts and summarizing activity. But only a trained analyst can verify accuracy, add context, and craft a clear, defensible narrative.
5. Model Governance and Tuning
Vendors may build the models, but you’re on the hook. That means validating data inputs, sanity-checking the math, and signing off on all changes.
6. High-Impact Customer Actions
Freezing accounts or filing 314(b) requests affects real lives. AI can recommend—but humans must confirm and justify each step.
7. Explaining to Regulators and the Board
No algorithm can sit across from an examiner and defend itself. Your team must translate model logic into plain English, from feature weights to tuning rationales.
Best Practices for Community FIs
To use AI safely and effectively in AML, community institutions should:
- Use Explainable Models: Choose vendors that provide reason codes or variable weights so analysts can explain every decision.
- Customize for Your Risk Profile: Tune models to reflect your institution’s size, market, and product mix.
- Keep Humans in the Loop: Let AI prioritize alerts, but reserve final decisions for trained analysts.
- Validate Regularly: Conduct independent validation pre-launch, test after any material change, and audit frequently.
- Invest in Analyst Training: Run workshops on model interpretation and encourage staff to challenge or override model outputs when their gut says, “Dig deeper.”
Bringing It All Together
AI is fast becoming a standard part of AML programs, even for smaller institutions. When deployed thoughtfully, it can cut through noise, surface risk patterns, and save staff hours of clerical work. But it must remain a co-pilot, not the one flying the plane.
Community banks that strike the right balance will:
- Adopt explainable, customizable hybrid systems.
- Embed human review at all high-risk decision points.
- Validate and document continuously.
- Cultivate staff who understand both compliance and AI.
Follow these steps, and you can get the best of both worlds: the speed of automation and the assurance of human oversight.
About the Author
As the Product Manager for CSI’s AML Solution, Jessica Tirado has deep roots in BSA/AMl with years of hands-on experience in banking compliance and financial crime prevention, bridging the gap between compliance needs and technological innovation.