Statistical Gymnastics

I should’ve labeled this Dirty Money Weekly-ish. Life and work happens. This week I wanted to tackle the change in the model risk management guidance from the big bank agencies. This was a breath of fresh air, but also the parallel thought was – “it never really applied anyways”. (“it” being the old capital risk model guidance that some ill-informed consultants and examiners misapplied to the AML model from transaction monitoring to risk assessments)

Many years ago, I was on a panel with the great Peter D. Wild FCA, CAMS Audit. I had issues then (and now) with the 1996 and 1999 Basel Committee published guidance that was used to inform the OCC 2000-16 and 2011-12a Risk Model Publications. NONE of these were helpful or useful. And to be honest, what came out of this stretching of non-AML risk model guidance are YEARS of statistical gymnastics. Resulting in FIs paying for expensive “validations” that were basically ATL and BTL (above/below the line) hoop jumping. Nothing about establishing the threat landscape outside of the transaction monitoring system. Nothing about how effective the monitoring system is as it relates to the identified threats. Fourteen years ago, the approach we took to validations differed greatly from everyone else. We lost out on business but that is ok. Some FIs wanted statistical nonsense. We make it clear – statistical hoop jumping does NOTHING for the AML function. As your FI looks at the new removal of this nebulous and ill-anchored model validation requirement, do not forget – that the principles of a well-performed validation should always be part of your AML program. (if you are a NY regulated FI, you must follow their validation requirements)

Your FI does not need an outside firm to do it (unless again – NY must be independent). Your FI can follow the simple principles of establishing a threat landscape and testing your own monitoring program. Effectiveness indicators can go a long way in guiding your FI down this path. Think like a criminal, poke holes in your monitoring system, and find gaps that are most likely there. This is where nimble AML monitoring systems will be vital. While the validation requirement is no longer there, the underlying principal that guides everything that we do still remains – to find suspicious activity and report it to our law enforcement partners in an effective manner.

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