A

Project Report

On

How Artificial Intelligence is Revolutionizing Compliance in the Financial Services

Industry

In partial fulfillment of the requirements of

Masters of Management Studies

Conducted by

University of Mumbai

Through

Rizvi Institute of Management Studies & Research

Under the guidance of

Prof. Umar Farooq

Submitted by

Aafreen Javed Mulla

MMS

Batch: 2018-2020
 CERTIFICATE

This is to certify that Ms. Aafreen Javed Mulla, a student of Rizvi Institute of Management
Studies and Research, of MMS III bearing Roll No. 001 and specializing in Finance has
successfully completed the project titled.

“How Artificial Intelligence is Revolutionizing Compliance in the Financial Services

Industry”

Under the guidance of Prof. Umar Farooq in partial fulfillment of the requirement for Masters
of Management Studies by University of Mumbai for the academic year 2018-2020.

Prof. Umar Farooq Prof. Umar Farooq Dr. Kalim Khan

Project Guide Academic Coordinator Director

 ACKNOWLEDGEMENT

I cannot express enough thanks for their continued support and encouragement: Dr.Kalim
Khan our director; Prof. Umar Farooq; my project guide for encouraging and allowing me to
present the project on the topic ‘How Artificial Intelligence is Revolutionizing Compliance
in the Financial Services Industry’.

My completion of this project could not have been possible without his valuable inputs,
guidance, encouragement, whole-hearted cooperation and constructive criticism throughout
my project. I offer my sincere appreciation for the learning opportunities provided by my
institution; Rizvi Institute of Management Studies and Research.

I take this opportunity to extend my heartfelt thanks to all the faculty of the institution, batch-
mates, friends and family who have supported me for the duration of this project.

Aafreen Javed Mulla

Date Place
 Table of Contents

Page
Sr. No Chapters
No.

1 Overview of the Financial Services Industry 1

2 Artificial Intelligence and its Subsets 12

3 Data and its Types 17

4 Introduction to Regulatory Technology 24

5 Introduction to Compliance 30

6 Types of Risk 35

Implementation of Artificial Intelligence in the

7 40
Compliance

8 Financial Services Regulatory Challenges 44

9 Observations and Learning 47

10 Conclusions 50

Bibliography
 Executive Summary
The Financial Services industry has been constantly evolving.
 Chapter 1 - Overview of the Financial Services Industry
"Money is a great master but an excellent servant", P. T. Barnum, the nineteenth-century
showman and politician, once quoted that. He was only articulating the facts which he and the
mankind had seen centuries before him, and what centuries will see after him. Indeed, the
people who have access to wealth and are well-to-do, know the ways to multiply it. People who
don't have access to wealth end up in poverty. A business idea which thus could have been
implemented dies because of the constraints attached to them being financially included.

The term financial system is a set of inter-related activities/services working together to achieve
some predetermined purpose or goal. It includes different markets, the institutions, instruments,
services and mechanisms which influence the generation of savings, investments, capital
formation and growth.

Christy has opined that the objective of the financial system is to "supply funds to various
sectors and activities of the economy in ways that promote the fullest possible utilization of
resources without the destabilizing consequence of price level changes or unnecessary
interference with individual desires."

From the above definitions, it may be said that the primary function of the financial system is
the mobilisation of savings, their distribution for industrial investment and stimulating capital
formation to accelerate the process of economic growth and development.

Though the Britishers looted our country and left us in a miserable state, they established a
financial system which had clearly defined rules governing listing, trading and settlements, a
well-developed equity culture if only among the urban rich, a banking system with clear
lending norms and recovery procedures, and better corporate laws. The 1956 Indian Companies
Act, as well as other corporate laws and laws protecting the investors’ rights, were built on this
foundation.

However, there were huge flaws in the financial system at that point of time. “Most banks were
state owned and had negligible equity capital. Basic concepts of accounting, asset
classification, and provisioning were absent. The largest of the local stock exchanges, Bombay
Stock Exchange (BSE), was a closed market. The exchange focused on the interests of broker
members, did not have outreach across the country, and did not have appropriate structures for
governance and regulation.
Financial transactions were controlled by the RBI (setting interest rates on various products)
and the Ministry of Finance (controlling the price at which securities were issued), with a
bundle of price and quantity restrictions. The financial industry was full of entry barriers in
every sub-industry.

It was extremely difficult to start a bank, a mutual fund, a brokerage firm, an insurance
company, a pension fund, a securities exchange or a broking firm. Apart from banking, foreign
firms could not operate in any of these areas.

A comprehensive system of capital controls was in place, which ensured that domestic
households and domestic firms had to go to the domestic financial system, in order to access
financial services. Few areas of the Indian economy were as dominated by the State as was
finance.” Trying to raise capital through the means of financial market was not at all feasible
due to the complexities involved.

Apart from the financial sector other sector seemed to be equally constrained due to the
economic policies. The public sector grew very large and the irony was that it couldn’t generate
enough income to meet the requirements of the country as a result we had large borrowings.
By the time the people in the power came to know about the implication of their decisions, it
was too late. The deficits were huge, the public sector industries were turning out to be
unprofitable and at a point of time the foreign reserves of the country were so less that it could
only have supported countries needs for near about 2 more weeks. In this case the ‘lender of
the last resort’, World bank and IMF were approached which granted 7 billion dollars as a loan
but on the terms that India would reforms its stringent economic policies and liberalize its
economy.

The new economic policy was adopted which focused on three main aspects: liberalization,
privatization and globalization. From being a more socialist than capitalists it tilted to being
majorly capitalists and less socialists. There was a complete drift in economic policies i.e. basis
on which the economic policies were earlier drafted were no longer in existence and liberal
policies were adopted. This also brought about a sea change in the financial system of the
country. Narsimhan committee was also established which looked at the major areas in the
financial sector which needed reforms such as; reduction in statutory liquidity ratio and cash
reserve ratio (they were astoundingly high which was also one of the major reasons that few
commercial banks were in existence), the determination of interest rate should be according to
the market forces, the public sector banks should have autonomy.
Due to ease of operation more private players entered the market. There was no more ‘License
Raj’ which acted as a stimulus for foreign direct investment. More and more commercial banks
and asset management institutions started emerging and also utilized the opportunity to raise
debt with the backing of insurance sector. And due to stiff competition in the market there was
check and balance mechanism prevailing with relation to the interest rates. “In addition, foreign
institutional investors (FIIs) were allowed, beginning in 1992; and Indian firms were allowed
to issue global depository rights (GDRs) offshore. These additional resources provided finance
for India’s private sector-led growth in the mid-1990s, and contributed to a stock market
boom.” MRTP act was abolished which increased the net quantity of imports and exports.

The success of NSE was evident from the fact that the trading volume increased tremendously
and BSE mended its trading ways as per the norms. It can be suitably drawn that Indian
Financial system has been refurbished by the 1991-1992 reforms with financial regulators
coming into place.

LIST OF FINANCIAL REGULATORS IN INDIA

(A) Statutory Bodies via Parliamentary Enactments:

1. Reserve Bank of India (RBI):

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions
of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially
established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is
where the Governor sits and where policies are formulated. Though originally privately
owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of
India. It regulates the issue of Bank Notes and keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage.

2. Securities and Exchange Board of India (SEBI):

SEBI Act, 1992: Securities and Exchange Board of India (SEBI) was first established in the
year 1988 as a non-statutory body for regulating the securities market. It became an
autonomous body in 1992 and more powers were given through an ordinance. Since then it
regulates the market through its independent powers.

3. Insurance Regulatory and Development Authority (IRDA):

The Insurance Regulatory and Development Authority (IRDA) is a national agency of the
Government of India and is based in Hyderabad (Andhra Pradesh). It was formed by an Act
of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate
some emerging requirements. Mission of IRDA as stated in the act is to protect the interests of
the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and
for matters connected therewith or incidental thereto.

(B) Part of the Ministries of the Government of India:

4. Forward Market Commission India (FMC):

Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority

which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt.
of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act,
1952. This Commission allows commodity trading in 22 exchanges in India, out of which three
are national level. Shri Arun Jaitley, Hon’ble Union Finance Minister, unveiled the historic
merger of Forward Markets Commission (FMC) with Securities and Exchange Board of India
(SEBI).

5. Pension Fund Regulatory and Development Authority (PFRDA):

PFRDA was established by Government of India on 23rd August, 2003. The Government has,
through an executive order dated 10th October 2003, mandated PFRDA to act as a regulator
for the pension sector. The mandate of PFRDA is development and regulation of pension sector
in India.

The financial services industry consists of different types of businesses which consist of
managing wealth, which is money. They facilitate the setting up of big and small businesses
and the expansion of businesses. Employment and entrepreneurship created with the help of
the services enable people to earn and save financial services show the poor ways out of poverty
and of leading better lives as it increases the money supply of the economy. The financial
services industry is the largest-earning sector in the world. To the wealthy, financial services
offers opportunities to make money grow. The industry as a whole is very broad and it includes
companies engaged in activities such as investing, lending, insuring, securities trading and
issuance, asset management, advising, accounting, and foreign exchange.
THE FINANCIAL SERVICES SECTOR COMPRISES OF THE FOLLOWING:
Indian Banking sector comprises of 27 public sector banks, 21 private sector banks, 49 foreign
banks and 56 regional rural banks. Indian Banking sector has registered strong growth in the
past decade.

Demand for loans has grown for both corporate & retail, particularly in services, real estate,
consumer durables & agriculture allied sectors. Government efforts to promote banking
technology and expansion in rural areas have significantly improved the financial inclusion in
the past few years.

Growth in Credit take-overs (US $ Billion)

1347.18
1400
1124.86
1200
894.16
1000
800
600 429.92

400
200
0
FY 07 FY 11 FY 15 FY 18

Source: Ministry of Commerce and Industry

Figure 1: Growth in Credit

BANKING AND ITS TYPES:

 Commercial Banks:

Commercial Banks are those banks whose main work is receiving of deposits, lending of
money and financing the trade of a country. They give short-term credit to trade and commerce
and they are not in position to grant long-term loans to industries because their deposits are
only for a short-period. In India, majority of the banks are commercial banks.

 Central Banks:

The Central Bank is the organ of government that undertakes the major financial operations of
the government and by its conduct of these operations and by other means influences the
behaviour of financial institutions, so as to support the economic policy of the Government.
The important responsibility of the Central Bank is to control the credit of the country in
accordance with the needs of business and with a view to carrying out the board monetary
policy adopted by the state. The Reserve Bank of India (RBI) is such a Bank in our country

 Foreign Exchange Banks:

Foreign Exchange Banks are that types of banks which normally finance foreign trade. They
deal in international business of payments through the purchase and sale of exchange bills.
They convert home currency into foreign currency and viva-versa. It is on this account that
these banks have to keep in reserve with themselves stock of currencies of various countries.
They try to open branches in foreign countries to carry on their business. Majority of the foreign
exchange banks working in India are under the control of foreigners.

 Industrial Banks:

Industrial Banks are those banks, which grant long-term loans to industries. There are a few
Industrial Banks in India. Industrial Banks mostly have a large capital of their own. They accept
deposit for longer periods. In India, to help industry and to advance long-term loans the Central
Government set up as Industrial Finance Corporation of India (IFCA) in 1948. The States have
also set up State Finance Corporations (SFC).The Central Government has also established the
In-dustrial Credit and Investment Corporation of India (ICICI) and the National Industrial
Development Corporation for the financing and promotion of industrial enterprises. In 1964,
the Industrial Development Bank of India (IDBI) was established as the apex or top term
lending institutions.

 Saving Banks:

There banks perform the services of mobilising the savings of men of small means. The idea
behind opening this type of bank is to encourage thrift and discourage hoading. In India, Post
Offices are also doing the work and they have opened in their premises the “Savings Bank
Account” counter.

 Agricultural Banks:

The main work of the Agricultural Bank is to provide loans and advances to farmers. They
work on co-operative principles.
  The Indigenous Banks:

The Indigenous Banks work as an individual or private firm receiving deposits and dealing in
Hundies or lending money. They do business operations in different parts of the country under
different names.

In the Punjab and U.P. Sahukars, Mahajans and Khatris, in Madras (Chennai) they are called
Chettys, in Mumbai Shroffs and Marwaris and in Bengal Seths and Baniyas.

 International Banks:

International Level Banks are the International Bank for Reconstruction and Development
(IBRD) also called World Bank; International Monetary Fund (IMF); International
Development Association (IDA) etc. The main aim of the above written institutions is to
provide long-term loans to different countries for various projects at minimum possible interest.

 Exim Banks:

EXIMS Banks popularly known as Export-Import Bank is another type of bank which was set
up in India in January 1981. Its Authorised capital was Rs. 200 crores which can be raised to
Rs. 500 crores. Its main work is to provide long-term finance to exporters and importers.

 Payments Bank:

A payments bank is like any other bank, but operating on a smaller scale without involving any
credit risk. In simple words, it can carry out most banking operations but can’t advance loans
or issue credit cards. It can accept demand deposits (up to Rs 1 lakh), offer remittance services,
mobile payments/transfers/purchases and other banking services like ATM/debit cards, net
banking and third party fund transfers.

PROFESSIONAL ADVISORY:

The term advisory management refers to the provision of professional, personalized investment
guidance. Advisory management services allow private individuals to consult with investment
professionals before making changes to their portfolios. Advisory management professionals
have expertise in one or more investment areas and provide guidance that is tailored to an
individual's specific situation.
TYPES OF PROFESSIONAL ADVISORY:

 Financial Advisors:

These professionals provide guidance and financial advice including investment management,
tax and estate planning.

 Portfolio Managers:

This group comprises of one or more people who invest in any number of and manage day-to-
day portfolio trading to maximize returns.

 Investment Bankers:

Investment banking is a special segment of banking operation that helps individuals or

organisations raise capital and provide financial consultancy services to them. They act as
intermediaries between security issuers and investors and help new firms to go public. They
either buy all the available shares at a price estimated by their experts and resell them to public
or sell shares on behalf of the issuer and take commission on each share. They provide various
types of financial services, such as proprietary trading or trading securities for their own
accounts, mergers and acquisitions advisory which involves helping organisations in M&As,;
leveraged finance that involves lending money to firms to purchase assets and settle
acquisitions, restructuring that involves improving structures of companies to make a business
more efficient and help it make maximum profit, and new issues or IPOs, where these banks
help new firms go public.

INVESTMENT ADVISORS:

Clients who turn to investment advisors receive highly specialized advice and guidance for
investment and financial planning.

WEALTH MANAGEMENT:

Wealth management combines both financial planning and specialized financial services,
including personal retail banking services, estate planning, legal and tax advice, and investment
management services. The goal of wealth management is to sustain and grow long-term wealth.
The net worth needed to qualify for wealth management services vary among institutions.
MUTUAL FUNDS:

A mutual fund is an investment security that enables investors to pool their money together
into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash or
a combination of those assets. The underlying security types, called holdings, combine to form
one mutual fund, also called a portfolio.

INSURANCE:

Insurance refers to a contractual arrangement in which one party, i.e. insurance company or the
insurer agrees to compensate the loss or damage sustained to another party, i.e. the insured, by
paying a definite amount, in exchange for an adequate consideration called as premium. It is
often represented by an insurance policy, wherein the insured gets financial protection from
the insurer against losses due to the occurrence of any event which is not under the control of
the insured. There are two types of Insurance; Life Insurance and Non-Life Insurance.

India’s Life Insurance sector is the biggest in the world with about 360 million policies. Indian
Insurance Industry comprises of 57 insurance companies of which 24 are life insurance
business and 33 are non-life insurers. Indian Insurance services has recorded significant growth
in the past decade and is expected to reach US$ 280 billion by 2020 owing to the solid economic
growth and higher personal disposable incomes in the country.

Share of private sector in life insurance segment has grown significantly over the years, from
around 2% in FY03 to 30.6% in FY18.

Life Insurance Corporation of India, the only public sector life insurer in the country, continues
to be the market leader. HDFC Life Insurance has the leading share of 6.4 per cent in new
business premium, followed by SBI Life Insurance and ICICI Prudential Life Insurance.

Non-Life insurers include general insurers, standalone health insurers and specialized insurers
such as Motor, Fire, Marine Insurance, etc.

Gross direct premiums of non-life insurers have reached Rs. 1.51 trillion in the FY18. Over
FY12- 18, non-life insurance premiums increased at a CAGR of 16.65%.

The number of policies issued increased from 65.55 million in FY08 to 161.17 million in FY17.
 Figure 2: Source IRDA

CAPITAL MARKETS/ STOCK MARKETS:

The stock market refers to the collection of markets and exchanges where regular activities of
buying, selling, and issuance of shares of publicly-held companies take place. One can buy and
sell shares either in the primary market or in the secondary market.

TAX/AUDIT CONSULTING:

A tax consultancy is a business that provides expert advice to tax filers. A good tax consultant
understands tax laws, and is able to advise strategies that minimize obligations while also
reducing the chance of an audit that could lead to a conflict with the IRS or with a state tax
agency. In addition, tax consultants can prepare tax returns and other documents on behalf of
their clients.

PORTFOLIO MANAGEMENT:

The portfolio is a collection of investment instruments like shares, mutual funds, bonds, FDs
and other cash equivalents, etc. Portfolio management is the art of selecting the right
investment tools in the right proportion to generate optimum returns with a balance of risk from
the investment made.

CAPITAL RESTRUCTURING:
The modification of the firm's capital structure either in response to changing business
conditions or as a means to procure funding for the organization's growth initiatives. Capital
restructuring is a corporate operation that involves changing the mixture of debt and equity in
a company's capital structure. It is performed in order to optimize profitability or in response
to a crisis like bankruptcy, hostile takeover bid, or changing market conditions. In essence,
capital restructuring takes place in order to change a company's holdings and finances. The
goal is for the business to achieve its objectives while operating more efficiently. Before
embarking on capital restructuring, a business's owners or managers may want to make
changes to improve the company's general prospects. In some cases, the restructuring is
influenced by the economic changes such as the start of a recession or bankruptcy.
 Chapter 2 - Artificial Intelligence and its Subsets

INTRODUCTION:

The modern definition of artificial intelligence (or AI) is "the study and design of intelligent
agents" where an intelligent agent is a system that perceives its environment and takes actions
which maximizes its chances of success.

Artificial Intelligence (AI) is referred to the field of science aimed at providing machines with
the capacity of performing functions such as logic, reasoning, planning, learning, and
perception. Despite the reference to “machines” in this definition, the latter could be applied to
“any type of living intelligence”.

Nowadays, the term AI encompasses the whole conceptualisation of a machine that is

intelligent in terms of both operational and social consequences. A practical definition used is
one proposed by Russell and Norvig: “Artificial Intelligence is the study of human intelligence
and actions replicated artificially, such that the resultant bears to its design a reasonable level
of rationality”.

John McCarthy, who coined the term in 1956, defines it as "the science and engineering of
making intelligent machines."

It has been well recognised that AI amplifies human potential as well as productivity and this
is reflected in the rapid increase of investment across many companies and organisations. These
include sectors in healthcare, manufacturing, transport, energy, banking, financial services,
management consulting, government administration and marketing/advertising. The revenues
of the AI market worldwide, were around 260 billion US dollars in 2016 and this is estimated
to exceed $3,060 billion by 2024.This has had a direct effect on robotic applications, including
exoskeletons, rehabilitation, surgical robots and personal care-bots. The economic impact of
the next 10 years is estimated to be between $1.49 and $2.95 trillion. These estimates are based
on benchmarks that take into account similar technological achievements such as broadband,
mobile phones and industrial robots. The investment from the private sector and venture capital
is a measure of the market potential of the underlying technology.

Major technological firms are investing into applications for speech recognition, natural
language processing and computer vision.

A significant leap in the performance of machine learning algorithms resulting from deep
learning, exploited the improved hardware and sensor technology to train artificial networks
with large amounts of information derived from ‘big data’. Current state-of-the-art AI allows
for the automation of various processes and new applications are emerging with the potential
to change the entire workings of the business world. As a result, there is huge potential for
economic growth, which is demonstrated in the fact that between 2014 and 2015 alone, Google,
Microsoft, Apple, Amazon, IBM, Yahoo, Facebook, and Twitter, made at least 26 acquisitions
of start-ups and companies developing AI technology, totalling over $5 billion in cost.

SUBFIELDS AND TECHNOLOGIES THAT UNDERPINNINGS ARTIFICIAL

INTELLIGENCE:

 Neural Networks:

Neural networks are a means of doing machine learning, in which a computer learns to perform
some task by analysing training examples. Usually, the examples have been hand-labelled in
advance. An object recognition system, for instance, might be fed thousands of labelled images
of cars, houses, coffee cups, and so on, and it would find visual patterns in the images that
consistently correlate with particular labels.
Modelled loosely on the human brain, a neural net consists of thousands or even millions of
simple processing nodes that are densely interconnected. Most of today’s neural nets are
organized into layers of nodes, and they’re “feed-forward,” meaning that data moves through
them in only one direction. An individual node might be connected to several nodes in the layer
beneath it, from which it receives data, and several nodes in the layer above it, to which it sends
data.
To each of its incoming connections, a node will assign a number known as a “weight.” When
the network is active, the node receives a different data item — a different number — over
each of its connections and multiplies it by the associated weight. It then adds the resulting
products together, yielding a single number. If that number is below a threshold value, the node
passes no data to the next layer. If the number exceeds the threshold value, the node “fires,”
which in today’s neural nets generally means sending the number, the sum of the weighted
inputs, along all its outgoing connections.
When a neural net is being trained, all of its weights and thresholds are initially set to random
values. Training data is fed to the bottom layer, the input layer, and it passes through the
succeeding layers, getting multiplied and added together in complex ways, until it finally
arrives, radically transformed, at the output layer.
During training, the weights and thresholds are continually adjusted until training data with the
same labels consistently yield similar outputs.
Below is the diagram of a simple neural network with five inputs, 5 outputs, and two hidden
layers of neurons.

Figure 3: Neural Network with Five Inputs

DEEP LEARNING:

The field of artificial intelligence is essentially when machines can do tasks that typically
require human intelligence. It encompasses machine learning, where machines can learn by
experience and acquire skills without human involvement. Deep learning is a subset of machine
learning where artificial neural networks, algorithms inspired by the human brain, learn from
large amounts of data. Similarly to how we learn from experience, the deep learning algorithm
would perform a task repeatedly, each time tweaking it a little to improve the outcome. We
refer to ‘deep learning’ because the neural networks have various (deep) layers that enable
learning. Just about any problem that requires “thought” to figure out is a problem deep learning
can learn to solve.
SOME EXAMPLES OF DEEP LEARNING:

1. Virtual assistants:

Whether it’s Alexa or Siri or Cortana, the virtual assistants of online service providers use deep
learning to help understand your speech and the language humans use when they interact with
them.

2. Translations:

In a similar way, deep learning algorithms can automatically translate between languages. This
can be powerful for travellers, business people and those in government.

3. Vision for Driverless Delivery Trucks, Drones and Autonomous Cars:

The way an autonomous vehicle understands the realities of the road and how to respond to
them whether it’s a stop sign, a ball in the street or another vehicle is through deep learning
algorithms. The more data the algorithms receive, the better they are able to act human-like in
their information processing—knowing a stop sign covered with snow is still a stop sign.

4. Chabot’s and Service Bots:

Chabot’s and service bots that provide customer service for a lot of companies are able to
respond in an intelligent and helpful way to an increasing amount of auditory and text questions
thanks to deep learning.

5. Image Colorization:
Transforming black-and-white images into colour was formerly a task done meticulously by
human hand. Today, deep learning algorithms are able to use the context and objects in the
images to colour them to basically recreate the black-and-white image in colour. The results
are impressive and accurate.

6. Facial recognition:

Deep learning is being used for facial recognition not only for security purposes but for tagging
people on Facebook posts and we might be able to pay for items in a store just by using our
faces in the near future. The challenges for deep-learning algorithms for facial recognition is
knowing it’s the same person even when they have changed hairstyles, grown or shaved off a
beard or if the image taken is poor due to bad lighting or an obstruction.

7. Medicine and pharmaceuticals:

From disease and tumour diagnoses to personalized medicines created specifically for an
individual’s genome, deep learning in the medical field has the attention of many of the largest
pharmaceutical and medical companies.

8. Personalized shopping and entertainment:

Ever wonder how Netflix comes up with suggestions for what you should watch next? Or where
Amazon comes up with ideas for what you should buy next and those suggestions are exactly
what you need but just never knew it before? Yep, it’s deep-learning algorithms at work.

LOGIC-BASED ARTIFICIAL INTELLIGENCE:

Logic-based artificial intelligence is an area of AI commonly used for task knowledge

representation and inference. It can represent predicate descriptions, facts and semantics of a
domain by means of formal logic, in structures known as logic programs. By means of
inductive logic programming hypotheses can be derived over the known background.
Statistical Learning is aimed at AI employing a more classically statistical perspective, e.g.,
Bayesian modelling, adding the notion of prior knowledge to AI. These methods benefit from
a wide set of well-proven techniques and operations inherited from the field of classical
statistics, as well as a framework to create formal methods for AI.
 Chapter 3 - Data and its Types
DATA:

Data is distinct pieces of information, usually formatted in a special way. All software is
divided into two general categories: data and programs. Programs are collections of instructions
for manipulating data.

Data can exist in a variety of forms: as numbers or text on pieces of paper, as bits and bytes
stored in electronic memory, or as facts stored in a person's mind. Since the mid-1900s, people
have used the word data to mean computer information that is transmitted or stored.

Data is any set of characters that is gathered and translated for some purpose, usually analysis.
It can be any character, including text and numbers, pictures, sound, or video. If data is not put
into context, it doesn't do anything to a human or computer.

TYPES OF DATA:

Nominal
Categorical
Ordinal

Data Types Discrete

Continuous
Numerical
Interval

Ratio
Figure 4: Data Types
1. Categorical Data:

It is the data collected is collected in the form of numbers, but we don't often know what those
numbers mean. Categorical data puts a meaning to those numbers. If I gave you the numbers
4, 10 and 12, you wouldn't know what to do with them or what they mean. However, if I said
there are 4 blondes in a class, 10 redheads and 12 brunettes, you would have a better
understanding of what those numbers mean. That's because I grouped those numbers into
categories.

Let's review what to look for when identifying categorical data.

Categorical data, as the name implies, is grouped into some sort of category or multiple
categories. For example, if I were to collect information about a person's pet preferences, I
would have to group that information by the type of pet. Categorical data is also data that is
collected in an either/or yes/no fashion. For example, if I were to ask the people in my office
to check 'yes' or 'no' on whether they had children, then I can display that information in a bar
graph or a pie chart comparing co-workers that had children versus co-workers that do not have
children.

Its subsets are:

Nominal Data

Nominal data is defined as data that is used for naming or labelling variables, without any
quantitative value. It is sometimes called “named” data - a meaning coined from the word
nominal. There is usually no intrinsic ordering to nominal data. For example, Race is a nominal
variable having a number of categories, but there is no specific way to order from highest to
lowest and vice versa. Examples of nominal data include country, gender, race, hair colour etc.
of a group of people. Nominal data give the respondents the freedom to freely express
themselves and give adequate information. Nominal data collection does not include rating
scales

Ordinal Data

Ordinal data is a type of categorical data with an order. The variables in ordinal data are listed
in an ordered manner. The ordinal variables are usually numbered, so as to indicate the order
of the list. However, the numbers are not mathematically measured or determined but are
merely assigned as labels for opinions. Examples of ordinal data include having a position in
class as “First” or “Second”. Ordinal data, does not give respondents the freedom to express
themselves. Ordinal data collection include rating scales.
1. Numerical Data

Numerical data is a data type expressed in numbers, rather than natural language description.
Sometimes called quantitative data, numerical data is always collected in number form.
Numerical data differentiates itself with other number form data types with its ability to carry
out arithmetic operations with these numbers.

For example, numerical data of the number of male students and female students in a class may
be taken, then added together to get the total number of students in the class. This characteristic
is one of the major ways of identifying numerical data.

One of the ways you can identify numerical data is by seeing if the data can be added together.
In fact, you should be able to perform just about any mathematical operation on numerical data.
You can also put data in ascending (least to greatest) and descending (greatest to least) order.
Data can only be numerical if the answers can be represented in fraction and/or decimal form.
If you have to group the information into categories, then it is considered categorical.

• Discrete Data

Discrete Data is a type of numerical data which represents countable items. They take on values
that can be grouped into a list, where the list may either be finite or infinite. Whether finite or
infinite, discrete data take on counting numbers like 1 to 10 or 1 to infinity, with these group
of numbers being countably finite and countably infinite respectively.

A more practical example of discrete data will be counting the cups of water required to empty
a bucket and counting the cups of water required to empty an ocean—the former is finite
countable while the latter is infinite countable.

• Continuous Data:

This is a type of numerical data which represents measurements—their values are described as
intervals on a real number line, rather than take counting numbers. For example, the
Cumulative Grade Point Average (CGPA) in a 5 point grading system defines first- class
students as those whose CGPA falls under 4.50 - 5.00, second class upper as 3.50 - 4.49, second
class lower as 2.50 - 3.49, third class as 1.5 - 2.49, pass as 1.00 - 1.49 and fail as 0.00 - 0. 99.

A student may score a point 4.495, 2.125, 3.5 or any possible number from 0 to 5. In this case,
the continuous data is regarded as being unaccountably finite.

• Interval Data
This is a data type measured along a scale, in which each point is placed at an equal distance
from one another. Interval data takes numerical values that can only take the addition and
subtraction operations.

For example, the temperature of a body measured in degrees Celsius or degrees Fahrenheit is
regarded as interval data. This temperature does not have a zero point.

• Ratio Data

Ratio data is a continuous data type similar to interval data, but has a zero point. In other words,
ratio data is an interval data with zero point. For ratio data, the temperature may not only be
measured in degrees Celsius and degrees Fahrenheit, but also in Kelvin. The presence of zero-
point accommodates the measurement of 0 Kelvin.

Importance of Data:

• Improve People’s Lives:

Data will help you to improve quality of life for people you support: Improving quality is first
and foremost among the reasons why organizations should be using data. By allowing you to
measure and take action, an effective data system can enable your organization to improve the
quality of people’s lives.

• Make Informed Decisions:

Data = Knowledge. Good data provides indisputable evidence, while anecdotal evidence,
assumptions, or abstract observation might lead to wasted resources due to taking action based
on an incorrect conclusion.

• Stop Problems from Becoming Bigger:

Data allows you to monitor the health of important systems in your organization: By utilizing
data for quality monitoring, organizations are able to respond to challenges before they become
full-blown crisis.

Effective quality monitoring will allow your organization to be proactive rather than reactive
and will support the organization to maintain best practices over time.

• Get the Results you want:

Data allows organizations to measure the effectiveness of a given strategy: When strategies are
put into place to overcome a challenge, collecting data will allow you to determine how well
your solution is performing, and whether or not your approach needs to be tweaked or changed
over the long-term.
• Find Solutions to Problems:

Data allows organizations to more effectively determine the cause of problems. Data allows
organizations to visualize relationships between what is happening in different locations,
departments, and systems. If the number of medication errors has gone up, is there an issue
such as staff turnover or vacancy rates that may suggest a cause? Looking at these data points
side-by-side allows us to develop more accurate theories, and put into place more effective
solutions.

• Back up your Arguments:

Data is a key component to systems advocacy. Utilizing data will help present a strong
argument for systems change. Whether you are advocating for increased funding from public
or private sources, or making the case for changes in regulation, illustrating your argument
through the use of data will allow you to demonstrate why changes are needed.

• Stop the guessing Game:

Data will help you explain (both good and bad) decisions to your stakeholders. Whether or not
your strategies and decisions have the outcome you anticipated, you can be confident that you
developed your approach based not upon guesses, but good solid data.

• Be Strategic in your Approaches:

Data increases efficiency. Effective data collection and analysis will allow you to direct scarce
resources where they are most needed. If an increase in significant incidents is noted in a
particular service area, this data can be dissected further to determine whether the increase is
widespread or isolated to a particular site. If the issue is isolated, training, staffing, or other
resources can be deployed precisely where they are needed, as opposed to system-wide. Data
will also support organizations to determine which areas should take priority over others.

• Know what you are doing well:

Data allows you to replicate areas of strength across your organization. Data analysis will
support you to identify high-performing programs, service areas, and people. Once you identify
your high-performers, you can study them in order to develop strategies to assist programs,
service areas and people that are low-performing.

• Keep Track of it all:

Good data allows organizations to establish baselines, benchmarks, and goals to keep moving
forward. Because data allows you to measure, you will be able to establish baselines, find
benchmarks and set performance goals. A baseline is what a certain area looks like before a
particular solution is implemented. Benchmarks establish where others are at in a similar
demographic, such as Personal Outcome Measures® national data. Collecting data will allow
your organization to set goals for performance and celebrate your successes when they are
achieved.

• Make the Most of Your Money:

Funding is increasingly outcome and data-driven. With the shift from funding that is based on
services provided to funding that is based on outcomes achieved, it is increasingly important
for organizations to implement evidence-based practice and develop systems to collect and
analyse data.
 Chapter 4 - Introduction to Regulatory Technology

The evolution of FinTech has unfolded in three stages. The first, which we call FinTech 1.0,
occurred from 1866 to 1967, when the financial services industry remained largely analogue
despite being heavily interlinked with technology. The next period, FinTech 2.0, extended from
1968 to 2008, an era characterized by the development of digital technology for
communications and transactions and thus the growing digitization of finance. Since 2009, in
the period we call FinTech 3.0, new start-ups and established technology, ecommerce, and
social media companies have begun to deliver financial products and services directly to the
public as well as to businesses, including bank.

Essentially, the recent growth of FinTech is attributable to a bottom-up movement driven by

tech firms and start-ups.

FinTech has expanded in scope, now covering the full spectrum of finance and financial
services. It can be delineated into five key areas: finance and investment, internal operations
and risk management, payments and infrastructure, data security and monetization, and
consumer interfaces. A common image of FinTech is that of alternative financing mechanisms,
such as P2P lending (facilitated by a platform). But FinTech also encompasses the integration
of technology in such financial transactions as crowdfunding and algorithmic trading. And
FinTech plays a large role in institutions’ internal operations, as evidenced by the high levels
of spending that large financial institutions invest in enhancing their IT capabilities. For
example, one-third of the current staff at Goldman Sachs are engineers, and 60% of the staff
have STEM (science, technology, engineering, mathematics) backgrounds. FinTech is also
being used by IT and telecommunications firms to disintermediate the trading and settlement
of securities (and OTC derivatives).

Today, FinTech affects every area of the global financial system, with perhaps the most
dramatic impact in China, where such technology firms as Alibaba, Baidu, and Tencent have
transformed finance. China’s inefficient banking infrastructure and high technology
penetration make it a fertile ground for FinTech development.
FinTech is supported by (1) high penetration of mobile devices (especially with broadband
internet access) among the young and technologically literate, (2) the growth of the middle
class, (3) untapped market opportunities, (4) a lack of physical banking infrastructure,
(5) Consumers increasingly valuing convenience over trust, (6) low levels of competition, and
(7) weaker data protection requirements. The spike in the number of graduates with engineering
and technology degrees in such economies as China and India has also played a role in planting
FinTech firmly in the soil of those economies.

INTRODUCTION TO REG-TECH:

Instead of being seen as an evolving subcategory of FinTech, RegTech should be viewed as a

separate phenomenon. In contrast to FinTech’s inherently financial focus, RegTech has the
potential to be applied in many regulatory contexts. Possibilities include monitoring
corporations’ compliance with environmental regulations and real-time tracking of the location
of airliners, to name but two simple examples of how technology could be used to improve not
only regulation but also the regulated industry itself. Further, the development of FinTech and
the development of RegTech have been underpinned by different driving forces. FinTech
growth has been fuelled by start-ups, which have leveraged public distrust in the financial
services industry, the commoditization of technology, and the recent rise in unemployed
professionals seeking new ways to apply their skill sets. In comparison, RegTech has emerged
in response to top-down institutional demand arising from the exponential growth of
compliance costs.

THE EVOLUTION OF REGTECH:

1. RegTech 1.0

Global financial regulation has historically been reactive, evolving primarily in response to
crises. For example, the first Basel Accord was the result of financial deregulation in the 1970s
and the ensuing Developing Country Debt Crisis of 1982.

More recent regulatory changes have similarly been in response to the GFC. The period from
the late 1960s through 2008 was characterized by the growing scope and scale of financial
institutions and markets. Global conglomerates arose from organic growth and a string of
mergers and acquisitions—the 1999 merger of Travelers Group and Citicorp being a quint
essential example.

As institutions grew and became more global, they increasingly encountered operational and
regulatory challenges, catalyzing the development of large compliance, legal, and risk
management departments in the 1990s and early 2000s.
By the 1980s, financial technology was being used to facilitate risk management as finance
itself became increasingly quantitative and reliant on rapidly developing IT systems. Financial
engineering and value at risk (VaR) systems became embedded in major financial institutions,
ultimately proving to be among the greatest risks underlying the GFC.

By the beginning of the 21st century, both the financial industry and regulators suffered from
overconfidence in their ability to use a quantitative IT framework to manage and control
risks. Regulator overconfidence was evident in the unduly heavy reliance that the Basel II
Capital Accord placed on the internal quantitative risk management systems of the financial
institutions themselves. This reliance provided a false sense of security that was brutally
exposed by the GFC(Global Financial Crisis) and that ended the first iteration of RegTech.

Another illustration of RegTech 1.0 can be found in the monitoring of public securities markets.
To detect unusual behavior, such as insider trading, regulators often rely on the trade-reporting
systems maintained by securities exchanges. Once such behavior is detected, regulators can
then investigate the activity for any misconduct. Clearly, however, the GFC also exposed the
limitations of these systems—notably, they cannot shed light on transactions that occur off the
exchange, such as trading via ECNs (electronic communication networks) and dark pools.

In their characteristically reactive fashion, major regulators around the world have begun
mandating the reporting of all transactions in listed securities, regardless of where they take
place. Such reporting requirements will have to be met with enhanced regulator IT systems to
analyze the reported information—an enhancement that is being made as part of the next stage
of RegTech’s development.

RegTech 2.0 has emerged in response to the increasingly heavy post-GFC global financial
regulations. Post-crisis regulatory reforms, including anti–money laundering (AML) and KYC
requirements, have transformed the operations of financial -institutions—reducing their risk
taking, profitability, and scope of operations. Post-2008 waves of complex, prescriptive, and
lengthy regulation have drastically increased the cost of compliance and have been
accompanied by steep increases in regulatory penalties. Regulatory fines and settlements have
increased a staggerin-fold; in one survey, 87% of banking CEOs indicated that the costs of
compliance were a source of disruption. Let’s Talk Payments LLC reported that “the annual
spending by financial institutions on compliance is estimated to be in excess of US$70 billion.”

Adding to rising costs is the increasing fragmentation of the regulatory landscape. Despite
attempts to establish similar post-crisis reforms, different markets can have substantially
different rules for implementing those reforms. Regulatory overlaps and contradictions are not
uncommon, and financial institutions have, unsurprisingly, looked to RegTech to optimize their
compliance management. The constantly evolving regulatory landscape has also introduced
uncertainty regarding future regulatory requirements, prompting financial institutions to invest
in improving their own adaptability.

In essence, the implementation of far-reaching, extensive regulatory reforms has driven the
evolution of IT and compliance in major financial institutions worldwide. Compliance costs
present a powerful economic incentive for the development of more efficient compliance
systems—and innovative technologies present a natural solution. Indeed, traditional financial
institutions (particularly large global banks) have driven RegTech’s post-2008 evolution by
developing centralized risk management and compliance functions to address a dynamic
regulatory landscape.

Regulators in need of greater granularity and precision in dealing with data aggregation and
analysis are now exploring the applications of RegTech. From a regulatory perspective,
digitization and datafication of processes would empower regulators to cope more effectively
with the increasing types and volumes of data reported by companies. RegTech can also help
regulators understand innovative products and transactions, market manipulation, and risks in
closer to real time.50

The global investment bank’s Bangalore operations, with 5,400 people, is already the largest
outside its New York headquarters, where it has 12,000 employees. The Bangalore office,
established 10 years ago, has seen its headcount rise at a compounded annual growth rate of
about 19% over the past five years. Early signs of more efficient and effective regulatory
regimes are already beginning to emerge. However, the digitization and datafication of
regulatory processes represent only an incremental evolution toward a more efficient regulatory
framework. RegTech potentially offers more: Deep learning and artificial intelligence filters
could provide continuous -monitoring and close-to-real-time insights, which identify problems
in advance rather than support enforcement action later. The uptake of RegTech among
industry participants requires regulators to apply technology to their own internal processes,
which constitutes a fundamental element of what we call RegTech 2.0.

Although RegTech development has been driven predominantly by industry participants

aiming to reduce their compliance costs, the next stage is likely to be driven by regulators
wishing to improve their supervisory capacity.

2. RegTech 2.0
RegTech has evolved rapidly in the financial industry, especially in large global financial
institutions and such infrastructure providers as securities exchanges. But a disconnect exists
between the uptake of RegTech among industry participants and the uptake among regulators,
of which the latter are becoming acutely aware.52 RegTech provides the foundation for a shift
toward a proportionate, risk-based approach—RegTech 2.0—underpinned by efficient data
management and market supervision.53 AI (artificial intelligence) and deep learning are just
two examples of new technologies that demonstrate the potential for automating consumer
protection, market supervision, and prudential regulation.54

RegTech 2.0 primarily concerns the digitization and datafication of regulatory compliance and
reporting processes. Not only does it represent a natural response to the digitization of finance
and the fragmentation of industry participants, but it also has the potential to minimize the risks
of the regulatory capture that occurred before the GFC. Regulators in the United States, the
United Kingdom, Australia, and Singapore have already begun attempts to develop a fresh
regulatory approach that caters to the dynamics of the FinTech market.

Examples of fertile areas for RegTech development include (1) application of big data
approaches, (2) the strengthening of cybersecurity, and (3) the facilitation of macro prudential
policy. With respect to big data, regulators are starting to consider technological solutions for
the management of AML/KYC information produced by industry participants—notably,
suspicious transaction reports. Strong IT capabilities for analysing data provided in response
to reporting requirements are paramount if regulators are to achieve the requirements’
underlying objectives.

Cybersecurity represents one of the most pressing issues facing the financial services
industry — one that has attracted the attention of the Financial Stability Board (FSB) and the
Basel Committee and that further underscores the necessity of continued regulatory
development. The shift toward a data-based industry is inevitably accompanied by a rising
threat of theft and fraud.

Macro prudential policy offers yet another promising ground for the evolution of RegTech. It
ultimately seeks to soften the severity of the financial cycle by using large volumes of reported
data to identify patterns, interconnections, and changes over time. Central banks, including the
European Central Bank, the Bank of England, and the Federal Reserve, are making progress in
identifying leading indicators of financial instability. This progress has taken the form of data
“heat maps,” which alert regulators to potential problems identified through a process of
quantitative analysis and stress testing of large masses of data.
These early efforts indicate the probable direction of RegTech toward the area of macro
prudential policy, occurring against the backdrop of regulators continually identifying needs
for ever more data. The additional reporting requirements for institutions further drive the need
for the refinement of RegTech processes and the establishment of centralized support services
to manage both the data and the required formats. Risk data aggregation requirements have
been established by the Basel Committee (in “BCBS 239”), which also encourage institutions
and regulators to focus their internal processes on near-real-time delivery and analysis. The
need to streamline data analysis by harmonizing reporting templates has also been identified
by the FSB and the IMF (International Monetary Fund).

3. RegTech 3.0

The regulatory framework for finance is in need of rethinking. And RegTech 3.0 is our term
for the future of RegTech. The FinTech sector is shifting its focus from the digitization of
money to the monetization of data, making it necessary for new frameworks to accommodate
new concepts, such as data sovereignty and algorithm supervision. A sequenced approach to
the development of FinTech within a RegTech framework is necessary.

The primary barrier to RegTech’s development is not technological limitations but, rather, the
ability of regulators to process the large volumes of data that the technology itself
generates. Regulators need to adopt a coordinated approach that seeks to harmonize financial
regulations and support the continued development of RegTech.

The new data centricity underpinning the evolution of both FinTech and RegTech represents
the early stages of a profound paradigm shift from a KYC approach to a KYD approach. As
this shift unfolds, regulators must invest heavily in the development of proportionate, data-
driven regulation in order to deal effectively with innovation without compromising their
mandate.
 Chapter 5- Introduction to Compliance

In today’s time all the systems in the world have become so complicated and crucial that
keeping a track of what is right and wrong has become equally difficult. Even though the
systems are properly checked and tracked properly, the ultimate reason of doing proper
surveillance is to reduce risks. Similarly, in financial organization’s there exists some risks
such as leakage of material information, documents, etc. which can cause huge financial and
reputational loss to the firm. These risks are important to be looked upon from the firm’s point
of view. But the biggest question arises even though such risks are identified who will monitor
these risks and who can be given the authority to control such risks? Then the compliance in
picture who act as “police” in an organization and check that the employees and senior
management adhere to the rules of the company. If the employees comply with the rules and
policies of the company, no escalations are made against those employees and also a sense of
satisfaction prevails that the employees are willing to take “care” of the company.

In general, compliance means adhering to the established policies of the company and to
conform to the rules, standards or law set by the regulators. Due to changes in regulation and
introduction of new regulations, compliance is a must for financial organization. Compliance
is a way through no breach is committed. Compliance makes no difference among any
employee whether it be senior, middle or lower management of the company. Compliance can
be broken down into two areas: -

Regulatory compliance – this means that the business conducted by a company is within the
legal parameters set by the regulators and to ensure that all reasonable actions have been taken
in case of any breach.

Internal compliance – this means that the firm adheres to the internal policies and standards
and makes sure that the firm operates according to its own created culture.

NEED OF COMPLIANCE:
There are various reasons why compliance is needed. Some of the reasons are discussed as
follows: -

 Flexibility of operations

Compliance should not be taken as something which is strict in its operation, but it is for the
benefit of the entire company. The policies and procedures established can help the employees
in many ways. In case there is some breach, such cases will be reviewed by compliance.
Communication with and between various departments concerned helps in better
understanding of the problem and thus, proper investigation leading to a proper conclusion can
be achieved.

 Mitigation of risks

Compliance helps to identify those problems which can pose a threat to the firm. Such risks
identified is properly investigated and all necessary steps are taken to mitigate risk. For
example- when a new client is on-boarded for some business purpose, proper scrutiny is done
by compliance to check on various important parameters such as the background of the
customer, his past business records, category of the customer whether he is high risk/medium
risk/low risk customer. All these investigations are made so that any risks present can be
identified beforehand and loss can be avoided.

 Reduced legal problems

The most obvious consequence of compliance is that it decreases the risk of fines, penalties,
work stoppage, etc. Failure to meet legal obligations can have serious implication on the firm.
Thus, compliance expert can make the firm understand all the legal obligations of the firm and
how to comply with them

 Higher employee retention-

Internal compliance mainly deals with protecting employees. When the employees are
satisfied that they are working in a safe and professional environment and all their concerns
are raised and taken into consideration and investigated upon, the chances of them leaving the
organization becomes less and chance of losing valuable workers go down. Compliance
handbook including the policies and procedures should be given to all the employees so that
they are aware of their obligations towards the firm and as an individual.

IMPORTANCE OF COMPLIANCE

 Advices:

The compliance function should advice senior management and employees about any laws,
regulations and standards also keep them informed about any developments which take place
in that area.
  Guidance and Education:

The compliance function should provide necessary guidance to the employees about any
compliance issues and act as a point of contact within the firm for compliance related doubts
and queries.

 Identification, Assessment and Measurement of Compliance Risks:

The compliance function should on a proactive basis identify any risks associated with the
firm’s business including the risk of proposed business and its relationship with other
customers. Compliance should be given representation in every department’s committee as all
the internal checks and approvals are given by compliance before any transaction, contract or
for any other purpose. While assessing the risks, technology plays an important role as it can
help in figuring out the various indicators with the help of filtering data that may be indicative
of compliance problems. After identification and assessment of risks, various amendments by
formulating policies where applicable should be done by compliance.

 Monitoring, Testing and Reporting:

The risks assessed and measured should be reported on a regular basis to the senior
management and the departments concerned and the issues should be resolved and corrective
measures taken to implement such breaches.

 Free Communication:

Compliance function should be free to report to its management about any breach which has
taken place without the fear of disfavour from any of its staff members or senior management.

Maintenance of records- It is the duty of compliance department to maintain certain records for
monitoring purpose. Some of the records which are maintained are as follows: -

 Customer application
 Contract Notes
 Telephone recordings
 Suspicious Transaction Report (STR)
 Anti-Money Laundering documents
 Control reports
 Tax vouchers
 Providing approvals to new business
Where there’s an independent compliance department, there also tends to be advising on the
new business.

It is essential that compliance provides necessary approvals and thereby help to avoid problems
later on. Before initiating any new business, it is essential that compliance provides necessary
approvals and carry out due diligence on any new products or service.

 Compliance Demands Grow with Your Business:

In its business sense, “compliance” refers to a company meeting its legal obligations, often to
protect the health, safety and welfare of others.

Simple examples of compliance include obtaining a business license in your town and paying
your taxes. The importance of compliance is more evident as issues become more complex
when your business grows. You will have expanded responsibilities regarding your workers,
covering hiring, firing, discrimination, harassment, safety, wages, payroll and benefits. The
way you make and sell your product and service might fall under the auspices of a government
agency, such as a restaurant needing to meet health department guidelines.

 Reduced Legal Problems:

The most obvious consequence of compliance is that it decreases your risk of fines, penalties,
work stoppages, lawsuits or a shutdown of your business. When you don’t meet some
compliance requirements, such as posting an employment poster in the wrong area of your
office, you might get a warning and a chance to correct the problem. In other situations, you
might face costly sanctions. Failing to meet your legal obligations, such as in your
manufacturing procedures or advertising methods, can also help someone suing you strengthen
his case. Hire a compliance expert to make sure you understand all of your legal obligations
and how to comply with them.

 Improved Operations and Safety:

Many business rules and regulations can help you more than harm you. For example, rules
regarding discrimination and harassment help you create a better working environment for your
employees, which can lead to more worker productivity. Following safety and security rules
helps prevent injuries, fires or building evacuations that hurt your profitability. In addition to
learning the bare minimum you need to do to meet your legal obligations, review suggested
business practices at the websites of such agencies as the U.S. Occupational Safety and Health
Administration and U.S. Equal Employment Opportunity Commission to learn more ways to
strengthen and safeguard your company’s operations.
  Better Public Relations:

When you meet your legal obligations, one of the benefits of compliance is the ability to tout
these on your website and in your marketing materials.

For example, when you place job advertisements, include the fact that you are an equal
opportunity employer. If you post your mission statement on your website, state that you do
not discriminate based on race, sex, creed or sexual orientation. When you recruit new workers,
highlight your company's commitment to both physical safety and mental health by referencing
key policies and benefits dedicated to proactive healthcare and wellbeing, such as extended
maternity and paternity leave or free gym memberships.

 Higher Employee Retention:

Many business compliance issues deal with protecting employees. The more employees feel
they work in a fair, professional and safe environment, the more likely they will be to stay with
you. Even if you don’t harass or discriminate against any employees, if you don’t take steps to
ensure none of your employees do, you can lose valuable workers. Include policies and
procedures in your employee handbook that mirror your legal compliance obligations.
Remember, a policy is only strong if it is enforced. Your policy should not only present the
rules but also specify the procedure for dealing with infractions, such as a reprimand and
additional training on a first infraction and suspension or termination for a second. Check in
with middle managers or supervisors regularly to ensure complaints are handled properly.
 Chapter 6 – Challenges and Risk

1. Continuing Regulatory Change:

The biggest change in 2018 was of course the General Data Protection Regulation (GDPR) -
which impacts every company, every department and practically every employee. It created a
complex web of rules that few could get their heads around.

With the continuously evolving governance, risk management and compliance landscape,
compliance officers need to keep pace. As new regulations emerge, they need to be ready with
the appropriate training programmes to get their staff up to speed on new regulations and re-
educate them about the changes to the existing one.

To achieve this, the training/e-learning management system is becoming an indispensable tool

for compliance officers - and the choice of this system is critical for the smooth running of your
compliance culture, as well as your own personal productivity and time management.

2. Increasing Monitoring and Reporting Requirements:

Organisations across the board are under pressure to provide absolute transparency and
accountability around compliance, whether to meet government regulations, industry
standards, or to maintain qualifications and certifications.

Compliance officers are expecting to spend more time liaising with regulators and will need to
have appropriate systems in place to help them monitor compliance and report back.
Technology, and more specifically Learning Management Systems are making this easier.

PwC’s State of Compliance study shows that 70% of 'dynamic' compliance officers are using
technology to monitor employees’ policy compliance. Certainly, these systems are valuable for
allowing instant access to data and reports at the click of a button.

3. Technology Developments:

As well as driving efficiencies in compliance management, technology developments are also

having a considerable impact on compliance in other ways.

With the emergence of Fintech and Regtech solutions and the expected benefits associated with
them, compliance officers are spending more time considering solutions for their business.

However, this is balanced against the heightened regulatory risks associated with cyber
resilience and data privacy. The remit of the compliance function is expanding to cover cyber
risks and the assessment of new technology to help manage regulatory risk.
 4. Increasing Emphasis on a Compliance Culture:

“Compliance and Ethics” is expected to become the typical remit for the compliance function,
as an increased emphasis is placed on culture within the business and providing direction on
ethical business practices and principles.

With growing scrutiny from both regulators and stakeholders, the pressure is on for the
compliance function to take a broader responsibility for policies, procedures and controls to
create a truly ethical business.

5. Personal Liability:

Compliance officers today are not only responsible for protecting their organisation but also
their own reputation. Personal liability is, and will remain, high. In fact, 60% of compliance
professionals expect personal liability to increase in the next 12 months. This will come as no
real surprise given the planned expansion of SMCR to all financial sector firms by the end of
2019.

We are already seeing the evidence of the FCA’s increased focus on individuals being held
personally accountable for corporate misconduct. In 2016, 64% of the years’ enforcement
notices were issued to regulated individuals, versus just 37% two years earlier. So far in 2019,
the FCA has fined five individuals and nine firms.

Continuing regulatory change, greater regulatory scrutiny, technology developments, along

with the growing emphasis on both culture and personal liability means compliance officers
are facing more pressure than ever. Against this backdrop, knowing how to leverage
compliance solutions to make their jobs easier is key.

6. Political Uncertainty:

Political parties greatly influence regulation and put into place laws that can change how
business must be conducted.

When the climate is uncertain, it means that the types of rules that may take effect are also
unknown, which can cause stress on a business’ operations.

Political risk is the risk an investment's returns could suffer as a result of political changes or
instability in a country. Instability affecting investment returns could stem from a change in
government, legislative bodies, other foreign policymakers or military control. Political risk is
also known as "geopolitical risk," and becomes more of a factor as the time horizon of
investment gets longer. They are considered a type of jurisdiction risk. Political risks are
notoriously hard to quantify because there are limited sample sizes or case studies when
discussing an individual nation. Some political risks can be insured against through
international agencies or other government bodies. The outcome of political risk could drag
down investment returns or even go so far as to remove the ability to withdraw capital from an
investment. Aside from business factors arising from the marketplace, businesses are also
impacted by political decisions. There are a variety of decisions governments make that can
affect individual businesses, industries, and the overall economy. These include taxes,
spending, regulation, currency valuation, trade tariffs, labour laws such as the minimum wage,
and environmental regulations. The laws, even if just proposed, can have an impact.
Regulations can be set at all levels of government, including federal, state and local, as well as
in other countries.

Some of the political risks may be found in a company's filings with the Securities and
Exchange Commission (SEC) or a prospectus if it is a mutual fund.

7. Data Protection:

With the rise of data storage and the expansion of technology, rules around privacy and
protection are growing. Take for example new regulations like GDPR. The speed of technology
is moving rapidly that changes must be put into place to protect customer information. Data
protection has long relied on risk management as a critical tool for complying with data
protection laws and ensuring that data are processed appropriately and the fundamental rights
and interests of individuals are protected effectively. Yet these risk management processes,
whether undertaken by businesses or regulators, have often been informal, unstructured and
failed to take advantage of many of the widely accepted principles and tools of risk
management in other areas.
In addition, institutional risk management in the field of data protection has suffered from the
absence of any consensus on the harms for individuals or negative impacts that risk
management is intended to identify and mitigate in the area of data protection. This is the
starting point for effective risk assessment in other fields. As a result, despite many examples
of specific applications, a risk-based approach still does not yet provide a broad foundation for
data protection practice or law. This presents both an opportunity and a challenge. The
opportunity is to develop modern, effective risk management tools and a framework of
impacts—both harms and benefits—building on decades of experience with risk management
broadly. The challenge is to do so quickly to keep pace with dramatic changes in technology
and human and institutional behaviour.

8. Conflicts of Interest:

This concern particularly plagues the financial industry as investment brokers must steer clear
of acting in their own best interest with insider information or placing their customers’ money
in places that may cause a conflict of interest.

9. Market Risk:

Institutional managers must remain aware of what’s happening in the overall market to gauge
risk, especially when it comes to “safe alternatives” like electronically traded funds (ETFs).
Market risk is the possibility of an investor experiencing losses due to factors that affect the
overall performance of the financial markets in which he or she is involved. Market risk, also
called "systematic risk," cannot be eliminated through diversification, though it can be hedged
against in other ways. Sources of market risk include recessions, political turmoil, change in
interest rates, natural disasters and terrorist attacks. Systematic, or market risk tends to
influence the entire market at the same time.

This can be contrasted with unsystematic risk, which is unique to a specific company or
industry. Also known as “non-systematic risk,” "specific risk," "diversifiable risk" or "residual
risk," in the context of an investment portfolio, unsystematic risk can be reduced
through diversification.
 10. Conduct Risk:

Compliance risk doesn’t only deal with outside forces, but it also requires that employees
remain aware and in line with codes of conduct. For example, sexual discrimination and
harassment issues have internal and external consequences that cannot be ignored.

11. Corruption:

Businesses are responsible such that their employees don’t engage in or are not harmed by
bribery or fraud. Finally, companies who are convicted of corruption face being blacklisted
from contracts. No compliance program is complete, 100% protection against corruption, but
they do go a long way to prevent it - and also can mitigate the company's liability. Without a
compliance program, you open yourself up to instances of corruption rather than protecting
yourself against it. If convicted of corruption, you could be excluded from bidding on contracts;
therefore, damaging your company's reputation and chance for growth. The first thing any anti-
corruption program needs to be effective is commitment from a company's top
management. Top management sets the example for the rest of the company and helps to create
the culture of the company. Those in top management should show support for the company's
policies on corruption. They should also be committed to preventing corruption within the
company.

12. Quality:

Product qualities and services must be created and offered according to specific standards, and
failure to comply could result in penalties, product seizure or business shut-down
 Chapter 7 Implementation of Artificial Intelligence in the Compliance

Regulations are usually created and shared in the form of large documents with pages on pages
of text that must be read thoroughly to take compliant actions. However, compliance officers
and other business leaders who might have a role in ensuring compliance may not have the
time to go through the entire documentation and keep track of the changes in them. They might
have to spend valuable hours on reading regulatory documentation to infer the actions that must
be taken to maintain compliance.

To help in such situations, AI applications that can read and interpret compliance documents
to deliver actionable insights to compliance leaders are being developed and used by leading
corporations. Such applications can condense lengthy and complicated compliance
documentation into a short, easily readable format consisting of just the most pertinent and
critical portions of the document. Thus, compliance officers can get actionable insights without
having to spend hours of time as well as effort trying to figure out what to make of compliance
requirements. They can initiate effective action quickly and ensure that their operations keep
up with all emerging compliance requirements.

AI applications can even help businesses in maintaining compliance by constantly checking

sources of compliance rules and notifying leaders about any changes in regulations. These
systems can use deep learning and natural language processing to read compliance
requirements from the websites of regulators and notify businesses of any changes in
regulations. This can ensure that businesses stay on top of evolving regulatory requirements
and align their processes and reporting procedures with them.

The use of the semantic web, which involves structuring all the data on the internet to make it
machine-readable, can help regulators to communicate regulatory changes to organizations in
a more effective way. Since changes are in a machine-readable format, they can be read by the
AI-driven tools used by organizations.

Technologies like analytics, machine learning, and deep learning can also enable regulators to
monitor entities to ensure compliance. Instead of performing periodic audits, which can be
time-consuming and hassle some for the personnel involved, these agencies can constantly
monitor the parameters of businesses that indicate compliance with regulations. The businesses
themselves can also gain access to such information to take preventive actions if their processes
shift towards non-compliance.
Such systems can also alert authorities about non-compliance immediately and record the
necessary evidence indicating the same. This can help in taking legal action against non-
compliant parties and even act as a deterrent for potential fraudsters, thus gradually minimizing
the occurrence of non-compliance.

Regulations and the need for compliance, although vital for economic and social systems, must
not be the central point of focus for businesses as they are currently turning out to be.

Thus, while the burden of compliance will increase in the coming future, the use of AI in
regulatory compliance will come as a welcome respite for the businesses.

1. Reducing False Positives:

Large banks are experiencing false positives in their compliance systems at alarmingly high
rates. Compliance alert systems based on standard technologies are triggering hundreds – if not
thousands – of false positives every day. More often than not, each of these false alarms must
be reviewed by a human compliance officer, which invites opportunities for inefficiency and
human error.

By using AI and ML to capture, analyse, and filter dozens of data elements, sophisticated
enterprise technology solutions can address the problem of false positives that waste banks’
time and money every day. For example, ML solutions can improve the way compliance
officers manage workflow. By autonomously categorizing compliance-related activities and
alerting them to important updates, events, and activities. Because these technologies are built
to learn from compliance officers’ own data, AI and ML applications can streamline
compliance alert systems to near-perfection. In this way, AI technology can improve the
efficiency of compliance operations and reduce costs in today’s data-driven compliance
environment.

2. Lowering Costs:

Modern financial institutions are being forced to adapt to regulatory requirements that revolve
around the management and analysis of big data. Regtech software developers are using AI
and ML applications to increase the efficiency and lower the costs of compliance by automating
processes that previously required onerous manual work.

Artificial Intelligence, particularly when it’s partnered with Machine Learning, can automate
workflow.
This means less time and human capital are necessary to support compliance operations. This,
taken together with the accuracy gains possible through the effective integration of AI and ML
technology, can save financial institutions millions in annual compliance costs industry-wide.

3. Addressing Human Error:

Whether attributable to poor due diligence, outdated technology, or ineffective processes,

human error costs regulated industries billions every year. Financial regulations passed
following the global financial recession require compliance officers to track, manage, and
analyse detailed data about transactions, customers, and operational activities at large banks.
The sheer volume of this information raises several opportunities for confusion that can easily
give rise to human error. And with regulatory compliance growing more technology-driven by
the day, AL and ML applications can be invaluable in mitigating the impacts of human error.

Just like using a calculator to check manual computations, AI and ML technologies can shed
light on blind spots, reasonable errors, and other things that humans may not necessarily pick
up on. Further, good AI and ML programs can spot trends and patterns, which is particularly
helpful for financial intuitions looking to access savvy millennial and gen-z customers.

4. Make Regulatory Compliance Processes Smart:

The biggest value of using AI is its capability to understand and predict patterns in risk; manage
the data; and gain insights on the data. Banks must adopt a data lake architecture to store data
coming from multiple data sources and deploy a real-time analytics engine for a pattern
recognition solution capable of tracing hidden risks. This technology can be used to comply
with a variety of regulations including those that address financial crimes, money laundering,
fraud (AML, MiFID II, FinCEN) and others.

5. Unified Pool of Data:

The true advantage of AI-based monitoring lies in its ability to harness, cleanse, and validate
data from multiple sources. Data collected from internal and external sources gets aggregated
in a central pool, where it can be consolidated, annotated and enhanced to make it more
searchable, context-sensitive and relevant for specific users. AI and Machine Learning
solutions help facilitate Master Data Management (MDM) – a methodology that delivers a
single view of data from disparate, and often conflicting, sources.
MDM also helps identify relationships between pieces of data, creating a complete view of all
interactions between parties, products and events that help build a more complete, consistent,
360° view of a customer.

6. Probabilistic Matching:

When a financial services company tries to integrate data from multiple sources, they inevitably
run into an issue of duplicate records and inconsistent formats. For instance, Jon Taylor, J.R.
Taylor, and Jonathan R. Taylor may be the same person, but a conventional database isn’t able
to flag these records as possible matches. An AI solution can help implement probabilistic
matching, allowing banks to consolidate and integrate information pertaining to the same
customer, building a more complete picture of whom they are working with.

7. Pattern-Based vs. Rule-Based Analytics:

Consider a situation where a bank’s client transfers a large sum of money to his cousin’s
account overseas, and the cousin’s wife withdraws it. The familial ties between the people
involved in this transaction are not obvious to the client’s bank (the cousins and their spouses
may not share last names, for example), so a rules based engine is not likely to flag this
transaction as suspicious. A pattern-based approach however, can learn that if similar
transactions occur on a regular basis, it might signal possible money laundering activity that
warrants further investigation. AI tools that analyse and learn from patterns without
preconceived

8. Smarter with Time:

Unlike conventional data mining tools, AI technologies can learn from previous cases and
ongoing updates and incorporate this knowledge into future searches and analyses. It can also
add new information to past knowledge, flagging, for instance, transactions linked to regions
that have recently been sets of rules are indispensable in situations where connections between
parties or types of transactions are less-than-obvious and may not trigger red flags, but patterns
of unusual behaviour might still indicate suspicious activity.
 Chapter 8 - Financial Services Regulatory Challenges

1. Divergent Regulation:

As federal deregulation fosters recalibration and tailoring of existing regulations, financial

services providers are facing an increasingly fragmented regulatory landscape. Regulatory
activity will be driven by state actions, other federal regulator rulemakings, nonbank
supervision, and jurisdictional developments.

2. Risk Governance and Controls:

According to the Federal Reserve Board, 40 percent of large financial institutions are rated
“less-than-satisfactory” for risk governance and controls. Financial service providers must
maintain governance and controls within their risk management frameworks for sustainability,
resiliency, and efficiency. Key areas of focus include strengthening risk management practices;
third party risk management; risk governance; change management; information technology
and data governance.

3. Data Privacy:

The proliferation in the sourcing, use, and sharing of consumer data via core business functions
and through vendor and partner relationships necessitates strong consumer data privacy. High
profile data breach and data sharing incidents have spotlighted the need for consumers’
understanding of and permissions for data usage. According to KPMG’s Growing Pains, 89
percent of CEOs prioritize protecting consumer data; however, without an overarching law or
regulation governing data privacy, the debate continues on how data should be protected.
Certain state-enacted laws are adding to the complexity of this legal and regulatory landscape.

4. Compliance Processes:

Financial services providers are focused on bridging business and compliance objectives while
avoiding regulatory, compliance, and ethical risks. At the same time, compliance leaders face
an expanded mandate that increasingly includes culture/conduct, data privacy, and financial
crimes in addition to cost-cutting pressures, expectations for operational resiliency, and a shift
toward real-time risk management. Investments in artificial intelligence and automation can
help meet these challenges, but companies must first reassess their core processes and controls.
 5. Credit Management:

Economic risks and rising interest rates are fuelling speculation that the U.S. economy could
shift in 2019, triggering credit-risk concerns. Both the Office of the Comptroller of the
Currency and the Federal Reserve have identified credit risk among their top supervisory
priorities. Changes to accounting standards (with the implementation of the new Current
Expected Credit Losses (CECL)) and regulatory requirements, as well as trends in leveraged
lending and securitization and the transition toward new benchmark interest rates, are among
the drivers for this concern.

6. Cyber Security:

Financial services providers are challenged to sustain a vigilant and focused defence against
the ever-present and evolving threat that cyber activity poses to their proprietary data,
consumer data, and operations. Federal regulators continue to list cyber security as a top
priority, though the absence of an overarching national standard or law addressing cyber
security risks introduces variability. Some individual states have published regulations and
standards to protect their constituents, and standards are beginning to solidify at the federal
level.

7. Ethics and Conduct:

High-profile regulatory actions and high-dollar civil money penalties have highlighted
nonfinancial risks related to misconduct, including reputational, strategic, and fraud risks,
forcing companies to reassess their measurable conduct risk programs and ensure they are not
inadvertently incentivizing improper behaviour. This is particularly imperative in the areas of
consumer data privacy, product suitability, sales/training practices, and general business ethics
and conduct.

8. Consumer Protections:

A heightened regulatory focus on consumer and retail investor protection will continue – led
by challenges around the protection of consumers’ personal data as well as “personalizing”
their access to financial products and services. Keenly aware of personal data privacy
breakdowns, consumers now seek greater control over their data in addition to an integrated
and personalized online experience. However, connecting with financial services providers on
multiple platforms, heightens data security and privacy risks.

9. Financial Crimes:
Digital transformation, which is changing how firms operate and deliver value to customers, is
driving innovation across financial crimes compliance efforts. Today, greater agility,
efficiency, effectiveness and resiliency are required and financial services providers are
focused on automating and integrating their efforts to achieve these goals. In particular, they
aim to develop data and predictive analytics, automate financial crime processes to identify
misconduct and regulatory violations earlier, and improve agility to evaluate market conditions
and cost containment.

10. Capital and Liquidity:

Most banking organizations will face a shifting landscape of capital- and liquidity-related
regulatory requirements brought about by efforts to tailor supervision and regulation to the size,
systemic footprint, risk profile, and business model of banking entities. Despite this general
trend, the very largest banking organizations will generally experience limited relief and must
prepare for specific new rule requirements.
 Chapter 9 - Observations and Learnings

As with most coming of age stories, there are some unavoidable challenges that will need to be
overcome with AI in compliance: Finding the right problems like any tool, AI will be effective
when it is applied to the right kind of problems. Given the amount of time and money currently
required to implement AI solutions (not to mention disruption caused), it is vitally important
to find problems that are amenable to AI solutions. Hallmarks of such problems are those
involving large amounts of data, disparate data sources, and complex transactions. Conversely,
compliance tasks that are low-volume and non-linear or require human judgement are likely
not good candidates for AI solutions. Overlooking the human element even in the age of AI,
human judgment is still vital to a well-functioning compliance program. By taking into
consideration things like existing interpersonal and business relationships, supplemental verbal
communications and nonverbal cues, as well as irregularities in behaviour, humans have the
ability to make more knowledgeable and precise conclusions and judgments regarding
appropriate courses of action in a compliance setting.

The most successful AI implementations in the compliance space will ensure that the
framework takes advantage of human expertise where appropriate. Getting the Right Data
“Garbage in, Garbage out” is an often-used idiom in Computer Science that is especially true
for AI implementations. Since AI relies heavily on “learning” the right behaviours (as opposed
to a human programming the behaviours), it is vital to any AI implementation to have a good
set of “training data” that can allow the AI system to learn the right outcomes. Showing the
Homework Expect a failing grade if your final exam is turned in with only the answers written.
In the compliance arena, management and regulators will demand to see the work behind
reporting results to understand if a company is actually meeting its requirements. While AI
reaches final outcomes, it doesn’t explain the steps it took to get there.

The importance of interpretability in decision-making processes simply cannot be overstated

in the compliance context. Protecting Privacy Along with the emergence of AI, increased
attention to data privacy is the other big story in compliance. Indeed, almost every aspect of
corporate regulatory compliance implicates in some way data that may be subject to privacy
protections, especially if European data subjects are involved. Accordingly, AI systems for
compliance will have to take into account in the first instance whether certain data subject to
privacy protections can be used to train the AI system and also whether the AI can utilize
specific data to make compliance decisions.

Avoiding the disillusionment like many previously emergent technologies, it is conceivable

that despite the immense promise of AI in compliance, it may take years for the technology to
reach a stage of maturity where it is widely adopted and widely successful. Indeed, even IBM’s
much-vaunted Watson system has had its share of woes. Nonetheless, the promise of AI is too
immense to ignore and eventually compliance systems that don’t utilize AI will become
anachronistic, generate generating more risk than they mitigate, especially in comparison to
AI-enabled compliance programs.

Despite these challenges, the adoption of AI in compliance is both necessary and inevitable.
AI is a fundamentally transformative technology that will help companies more effectively
manage the complexities of today’s business environment, and potentially help compliance
professionals unlock insights and efficiencies that are just out of reach today. Improving
Decision-Making by using AI and big data, you can make your regulatory compliance process
smart. Arguably, the most significant value that AI and big data offer businesses is enabling
them to understand and predict intricate patterns in risk and data management. These are two
of the most crucial aspects of the compliance process. In the financial industry, for instance,
banks can ease their compliance process by adopting data lake architectures that enable them
to store data securely. The banks will only be able to recognize and monitor inherent risks and
compliance pitfalls that they are likely to encounter through the deployment of real-time
analytics tools.

By incorporating such technologies in their RegTech frameworks, organizations can

conveniently automate workflows that hitherto require human interventions. Software as a
Service (SaaS) and other similar AI automated solutions enhance the efficiency of the
regulatory process, besides making it smarter, simpler, and data-driven. Technologies such as
deep learning and machine learning also enable regulatory agencies to monitor entities.

Rather than performing periodic audits, which are often burdensome and time-consuming,
agencies can conveniently monitor the compliance parameters of businesses.

On their part, the business entities can also access such info to take preventive actions in case
their processes move towards non-compliance. AI and big data can process vast volumes of
data with accuracy and speed. In the short term, you can leverage the technology to understand
compliance requirements that govern businesses in your industry efficiently. In the long run,
the use of big data and AI in regulatory compliance can negate the need for human actors in
the process. There has never been a better time for business entities to incorporate AI and big
data into their compliance strategy.
 Conclusion

In today’s time, there exist both pros and cons of carrying out any particular business or a
function. In this complex business market, it is a little difficult to identify which decisions can
result right or wrong in the future. With the availability of technology, these complex structures
become a little flexible at the same time posing a threat to human labour.

Being complaint is also crucial as employees/individuals are indulging more and more into
money making business. Though Compliance is essential for an organization, it also suffers
from some loopholes which need to be addressed.

AI and big data are the backbones of the technology that the institutions can use to comply with
various regulations, including those that relate to money laundering, financial crimes, and
fraud. AI makes regulatory Compliance efficient. In recent years, there have been notable
advancements in big data, AI, and cloud technology.

Compliance is an ongoing process for businesses and the regulatory requirements across most
industries are evolving constantly. This is especially true in heavily-regulated industries such
as financial services. Organisations who neglect the “Compliance” department are exposed to
financial and reputational losses.

Over the last few years, technology has begun to play a much larger role within compliance.
Financial institutions and regulators have realised that by harnessing the power of technology,
and more specifically, the power of artificial intelligence (AI) and machine learning (ML), a
considerable proportion of the compliance function can actually be automated, reducing the
burden on institutions and compliance professionals.

With the advancement in RegTech from version 1.0 to version 3.0 and with the affluent usage
of Artificial Intelligence in the normal course of business, the large volumes of data, also
known as Big Data can be processed with the help of technology eliminating the backlog which
would otherwise require a lot of human hassle and recruitment as it has led to a shift from
knowing the customer to knowing the data.
Technology has reduced the tasks of performing periodic Audits. Technology will impact many
industries in the years ahead, and in some industries, the technology story is about replacing
people. Yet while technology is having a profound impact on the compliance industry, the story
for compliance is not only about machines. Compliance is a unique industry, and when it comes
to implementing technology, it’s more about augmenting people.

With compliance, it’s not about humans versus machines, as both have a vital role to play. The
key is to find the right balance between the two and get humans working with machines. The
biggest gains are likely to come from the two working well together.