In rare victory against financial watchdog, fintech neobank beats Dutch regulator in ‘landmark’ case to use AI to bolster AML program – CFCS

By Brian Monroe
[email protected]
26 October 2022

In what the company calls a “landmark case” and industry watchers call a “David versus Goliath” scenario, a fearsome fintech battled the Netherlands’ top financial regulator about the freedom to use advanced technology to better detect financial crime – and won.

In the case, challenger bank Bunq took the Dutch central bank (DNB) to court earlier this year, pushing the regulator to allow it to “use modern technology in the fight against money laundering”, including artificial intelligence and other potentially transformative technological tactics to uncover illegal financing more efficiently.

DNB had argued that using more advanced data analytics and AI was not a substitute for adequate and accurate AML customer risk assessments at the beginning of a relationship – and that deeper dives should be engaged for historically higher-risk customers and businesses.

In the appeal, the Trade and Industry Appeals Tribunal (CBb) ruled that the central bank had not swayed them with the argument that Bunq’s methods of more strictly engaging AI and more esoteric data analysis on the back end were not in line with the country’s AML legislation. .

The court also rejected DNB’s conclusion that Bunq largely did not capture the necessary information related to compliance obligations related to crime related to business customers.

Court victory opens the door to fresh compliance technology for everyone – fintechs and legacy techs

The fight has counter-crime aftershocks beyond finnicky fintechs.

Bunq argued why such a victory against DNB – which has found its teeth in recent years after embarrassing regional banking scandals, levying hundreds of millions of dollars in fines against financial institutions for AML failures – is historic, for fintechs and brick-and-mortar operations. like.

Essentially: the firm needed the flexibility to ensure it could use the best to fight the worst.

“It is the first time a bank has sued a regulator over such a fundamental issue, as banks prefer to settle disputes with DNB behind closed doors,” said the wily fintech, founded in 2012 and championing sustainability goals. statement this month.

Not being able to test leading technologies to increase performance will be a detriment to any financial institution, the company said.

That would amount to a strategy that is “outdated and ineffective” and would have forced the company’s AML team to rely on “one-sided reporting by account holders — a system that rests entirely on the honesty of fraudsters.”

“We made history today,” said Ali Niknam, founder and CEO of Bunq. “The court has paved the way for progress.”

Bunq even stated that the regulator was working to save face by suddenly embracing advanced algorithms, AI and machine learning in a study published last month.

Positive for regulator, regulated by legal jousting – more willingness to listen, learn, grow

But it was not a flawless victory for the challenger institution.

However, the court found that the regulator was within its power to determine that Bunq had failed in several core AML areas, including weaknesses in determining and documenting how customers earned their money and the source of wealth for higher-risk entities, including politically exposed persons ( PEPs).

DNB was quick to point out that the tribunal found to have proven that Bunq did not comply with various provisions in the AML rules, according to a statement from the supervisory authority.

So it was right to note gaps related to “the duty to investigate the source of a client’s financial resources and the duty to establish the identity of the ultimate beneficial owner, together with non-compliance with the rules governing enhanced client due diligence in the case of politically exposed persons .”

But it also noted that the tribunal ruled that there was “insufficient substantiation for a number of the instances of non-compliance that we had found”.

As a positive for both sides – regulators and financial institutions, DNB stated that in the future it would be more open to discuss and analyze new technologies to better fight financial crime.

“We will consider the ruling and explore its implications for our supervision,” the regulator said.

– We will also include the ruling in our dialogue with the financial sector on risk-based compliance with statutory requirements and the use of technology to combat money laundering.