Friday, April 6, 2018

Artificial Intelligence For Compliance

Some years ago I was peddling a personal investment for Merrill brokers with billion dollar books-o-business, back when a billion was real money. This led to a couple scenes that I think of from time to time.
After doing the paperwork with one of these retail titans I asked if I should send a copy to his compliance officer. He got a sincerely confused look on his face and said: "I own compliance."

Since then it has been a dream to capitalize on various prime broker functions. Here's one example:
Artificial Intelligence in Risk Management: Looking for Risk in All the Wrong Places
Opportunity is where you find it, turn your risk manager into a profit center....
And while the following link doesn't address the dream directly, I'm sure there's an edge in here in other ways.
From Nanalyze:

Digital Reasoning – AI That Understands You
Compliance is another one of those bureaucratic departments like Human Resources or Legal that largely serve as a bit of CYA so the company directors can sleep well at night. In departments like compliance, any notion of efficiency or effectiveness is thrown out the window in favor of rules-based procedures that make absolutely no sense when applied to the real world. If an employee takes $1,000 and buys some shares that are on a “restricted list”, then the end result is several days’ worth of back-and-forth with HR, involvement of a few highly-paid MDs, and a “written warning”. Never mind it’s a $1,000 stock investment and completely irrelevant to the firm’s fiduciary obligations to their shareholders.

This bureaucratic mire of time-wasting that was once called compliance will soon be relegated to an entity with the half-a-brain it takes to recognize a real compliance problem – as opposed to some poorly paid company grunt trying desperately to pick the next Microsoft so he can escape hell. That’s where companies like Digital Reasoning come into play.

Founded in 2000, Tennessee startup Digital Reasoning has now taken in $104 million in funding from some big name financial firms like Goldman Sachs, Barclays, BNP Paribas, NASDAQ, and Credit Suisse. We first came across Digital Reasoning in our article on Artificial Intelligence (AI) as a Service and “Core AI” in which we noted that their technology, Synthesys, is exceptionally good at understanding what people are actually saying when they use analogies. It’s like when you come across some really good coke and email your boys on the sales team to let them know there is “snow on the ground”. If you say that and it happens to be the middle of July, Synthesys would easily be able to understand that what you are saying makes no sense, and would flag this for follow up by some tool in compliance. Here’s an actual example from Digital Reasoning:
Looks like someone is doing some colluding in the foreign exchange market which is a big no-no. Let’s talk a bit more about using Synthesys for compliance.

Digital Reasoning for Compliance
The next time we came across Digital Reasoning was in our article on 9 Regulatory and Compliance Regtech Startups in which we noted that adopting their technology is like adding “the brainpower of thousands of people to your team”, and provided an example from the company in hard numbers:
Synthesys had delivered impressive results to institutions including UBS, Goldman Sachs, Point 72 and many others with documented outcomes such as a 250% increase in detection acuity, 50% reduction in false positives, and a quadrupling in efficiency making it feasible to extend electronic communications surveillance to 100% of employees.
It shouldn’t be news to anyone who works in a publicly traded corporation that every single piece of communication you send on firm equipment is being monitored. What should be news is that now we’re beyond keyword matching, so you can assume that the monitoring system is now able to understand when you tell your cow-orker that the regional MD is being a “fcuk1ng pr1ck”.

Let’s be clear that every single publicly-traded firm out there worries about regulatory bodies like the SEC, and consequently employs some form of protection now. That protection is just so inefficient that it can’t be used to cover all employees, just some. The below table compares the artificial intelligence algorithms from Digital Reasoning to some older forms of monitoring like pattern-matching or keyword-based solutions:
In the olden days, being increasingly watchful of employee communications would often lead to a bunch of false positives that would result in pitting “rules-based John-in-Mumbai” types against “increasingly frustrated front-office” types, leading to a complete waste of resources all around. With AI algorithms, false positives are reduced which means less manpower is needed in your compliance department. Just how much money can be saved here? According to, your average compliance manager makes between $86,658-$121,244 with “top compliance executives” pulling down between $182,650$269,622. Imagine how much budget a 50-person compliance department consumes. 

One of the reasons Digital Reasoning excels at finding crooks is because it has roots in this type of work. Their Synthesys platform was first presented to the U.S. Army back in 2002, and used for whatever war in the Middle East the Americans were fighting at the time. It worked so well that in 2010, In-Q-Tel (the branch of the CIA dedicated to new technologies to protect ‘Murica), made an investment in Digital Reasoning. But this doesn’t mean that the software can’t be put to use in other verticals – like customer service....MORE
And the other scene I sometimes recall?

One of the smaller (assets under management $200mil.) brokers heard about this and calls in and says something to the effect:

"This is Mr. Big at Merrill Lynch, I hear you have a personal investment"

Moi: Merrill who?
"Merrill LYNCH"

Moi: This is Mr. Lynch?
"Listen you idiot, I'm a top producer with Merrill Lynch"

Moi: Merrill Lynch? Ya know Pierce, Fenner, Smith and Beane? CSNY? The ATSF?


Mr. Big, my ass.

I hummed the Judy Garland version of "On the Atchison, Topeka and the Santa Fe"

Warren Buffett bought the successor to the the AT&SF in February 2010.
See post immediately below: "Berkshire Hathaway as Idealized Private Equity"