Building a Custom AI Agent for KYC and AML Automation

KYC (Know Your Customer) and AML (Anti-Money Laundering) are two key components that work together to prevent fraud and financial crime. Today, with the sophistication of fraud, regulated institutions require enhanced protection against non-compliance and relevant penalties. That is where agentic AI comes to help with identity verification automation, hidden pattern analysis, continuous monitoring, and automation of reports.

In this article, we discuss AI in regulatory compliance and how you can build an AI agent that will help you stay compliant, improve customer experience, and save costs. We discuss the benefits, core capabilities, and provide a step-by-step guide on building a robust and functional AI agent for KYC/AML automation.

What are KYC and AML, and how do AI agents help with them

KYC (Know Your Customer) is a part of a broader concept of AML (Anti-Money Laundering) and refers to the requirement to verify a person’s identity by checking their documents. AML is aimed at preventing the misuse of finances, such as terrorist financing and money laundering. AML usually starts with KYC identity checks.

Today, regulated entities, such as financial institutions, money service businesses, insurance companies, casinos, and more, must perform KYC and AML checks, as such organizations are at a high risk of financing crime. Besides the regulations, such checks are a common necessity in today’s digital world, given the increased possibilities for fraud. As organizations aim to win more clients, they need to verify that the person is who they claim to be, is not on the sanctions list, and is not a PEP (Politically Exposed Person).

In this realm of strict regulation and compliance, accuracy is of utmost importance. Hence, using AI agents is a feasible approach that is being tested by entities. AI’s capabilities to process massive amounts of data and spot patterns and anomalies are an invaluable asset. As today’s checks are done manually, automation with AI can bring both compliance with strict regulations and enhancement in customer experience. Let’s explore these aspects of AI agents in more detail.

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Why automate KYC and AML with AI agents?

Essentially, there are two approaches to compliance control: manual and automated. Why do organizations switch to automation? Below are a few reasons.

Challenges in manual KYC/AML compliance

Despite advances in technology, many financial organizations rely on manual data entry when verifying customer identity. Manual processes are slow, error-prone, and expensive, especially at scale. They pose the following hurdles:

• Time and resource intensity. Collecting and updating customer data takes time and resources. In fact, 94% of banks state that manual workloads are the primary challenge in their AML/KYC strategies.
• High operational costs. Organizations need qualified staff and invest in training employees on current laws and regulations, which increases expenses even more.
• Security and data privacy risks. Storing customer data manually poses security risks, as such systems without due protection are prone to vulnerabilities.
• Inefficiencies and human errors. Typos or misinterpretations are common downsides of manual data entry. They can result in incorrect assessments and compliance issues.
• Inconsistent record-keeping and monitoring. Inconsistencies resulting from inaccurate record-keeping can lead to missing suspicious transactions or changes in customer behavior.

Key benefits of AI automation in compliance

In today’s cross-border financial realm, where customers come from any country in the world, speed and accuracy at scale are uber vital. In this context, AI automation in compliance ensures efficiency, cost reduction, faster onboarding, fewer false positives, and real-time threat detection. Here is how you can achieve those with AI automation:

• Enhanced efficiency and speed. AI automates data processing and analysis, facilitating regulatory reporting and informed decision-making.
• Improved accuracy and reduced human error. Thanks to minimized manual intervention, AI ensures better compliance through regular checks.
• Cost savings. Less manual input requires fewer resources and time, which can be reallocated to more valuable activities.
• Proactive risk management. Through continuous monitoring of transactions and activities, AI can flag potential compliance risks.
• Comprehensive audit trails. The automatic generation of audit reports facilitates the creation of transparent and verifiable records.
• Scalability and adaptability. Automated AI systems can process rapidly growing or spiking data volumes and adapt to new regulations as needed.

Real-world examples of KYC/AML AI platforms

Lucinity. Provides comprehensive transaction monitoring, a data-based, holistic view on customers, and autofill and handling of SARs reports.

ComplyAdvantage. Covers sanctions and watchlists, PEPs, RCAs (Relatives and Close Associates), and adverse media by providing continuous monitoring.

Trulioo. A global identity verification service that combines AI KYC solutions and KYB (Know Your Business), PEP/sanctions screening, and fraud detection.

Sumsub. Provides compliance automation software that handles all sides of verification processes, including user and business verification, transaction monitoring, and fraud prevention.

Fenergo. A SaaS solution that includes all steps of the customer journey and streamlines KYC processes, saving $16 million over four years in regulatory costs.

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Core capabilities of KYC/AML AI agents

Knowing the benefits of automation with AI, we can now discuss the exact features your AI agent should include to perform proper checks.

Identity verification and document parsing

An AI agent can help check a person’s identity by reading their ID documents automatically. When someone uploads a photo of their ID, the system cleans up the image and reads the text from it, like their name, date of birth, and document number. This analysis is called Optical Character Recognition (OCR). After OCR for document parsing is complete, AI then turns this data into digital information that can be safely used to confirm who the person is.

Sanctions list and PEP screening

False sanctions lists and PEP monitoring may result in fines for financial organizations, even if there was no intent to do so. That's why it's crucial that your AI agent provides careful PEPs and sanctions screening. In this case, AI agents extract data from ID documents and make it machine-readable. Then, the data is checked against sanctions lists from OFAC (Office of Foreign Assets Control), the EU, or the UN. Thanks to advanced algorithms, AI can analyze different variations to detect potential matches in sanctions and PEP list screening.

Transaction monitoring and risk scoring

Another feature for KYC and AML AI agents is the ability to spot anomalies in transactions and potential risks. Atypical transaction amounts or frequencies can indicate fraudulent activity, and agentic fintech AML tools help organizations respond promptly to relevant alerts. Moreover, transaction monitoring agents assign dynamic risk scores to customers and transactions based on past data and current processes.

Continuous customer due diligence (CDD) automation

Ongoing customer due diligence involves continuous monitoring of customers’ transactions and managing the risks associated with money laundering. Anti-money laundering AI can analyze customers’ transactions and flag alerts to analysts if it detects anomalies. It also simplifies customer onboarding, as AI agents flag only high-risk customers, while low-risk customers receive a simplified procedure.

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Step-by-step guide to building a KYC/AML AI agent

When building solutions through our AI development services, we aim for precision and compliance. This is especially crucial in relation to KYC/AML agents, which handle high-priority checks subject to stringent standards. Hence, let’s break down the steps to build these compliant and sophisticated solutions.

Step 1: Define use cases and compliance scope

Be aware that each country may have its local regulations, which you should be familiar with. For example, in the USA, the Financial Crimes Enforcement Network (FinCEN) provides AML regulations under the Bank Secrecy Act. In the EU, the standards are the EU Anti-Money Laundering Directives. For international regulations, consider the regulations of the Financial Action Task Force (FATF), which provide international guidelines on AML.

When planning your KYC/AML AI agent, also consider customer types to analyze, along with relevant risk profiles and risk assessment criteria. These include high- and low-risk customers, depending on transaction patterns, location, or industry.

We provide you with the necessary guidance on your AI agent planning during product discovery. This step is not a formality, but a thorough and comprehensive analysis of what is required to create a functional and compliant AI agent. During the project discovery phase, we ensure that your development path is in the right direction from the start. Thus, you stay on your budget and get a robust solution.

Step 2: Choose the right tech stack and frameworks

The tech stack forms the foundation of your AI agent’s robustness and functionality. Our experts have prepared an overview of the necessary tools for developing an AI agent. Hence, the core tech stack for a KYC/AML AI agent includes the following:

Step 3: Integrate data sources and APIs

Connecting your AI for fintech compliance to global databases gives all-around support in risk assessment, enhanced screening accuracy, and updates on the latest regulatory standards. Among these sources, LSEG World-Check One API and Dow Jones Risk & Compliance APIs stand out.

The World-Check One API provides tools for screening case management with a full audit trail. It allows for on-demand screening. So, if unnecessary, you do not have to store data on the LSEG platform. It’s perfect for simple solutions. Also, the API helps you reduce false positives and improve match accuracy.

On the other hand, Dow Jones Risk & Compliance APIs provide a comprehensive screening and monitoring against risk databases. You can search by your criteria and find specific compliance requirements with these APIs. Additionally, the platform offers seamless integration with various systems. So, the APIs support both automated workflows and on-demand searches.

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Step 4: Develop NLP models for identity parsing and anomaly detection

Training models is not a piece of cake. It requires well-structured, cleaned, and normalized data, qualified staff, and time. The high quality of your data ensures that your models operate properly. For compliance, models should be trained to extract data from identity documents, detect anomalies in transactions, and perform behavioral anomaly detection.

So, for KYC/AML strategies, your models should be able to convert document text into a machine-readable format, extract entities, and classify documents by type. To train models, we use supervised (with human oversight) and unsupervised (without human oversight) learning. These types of training allow the use of algorithms to analyze legitimate and fraudulent transactions, customer behavior, and identify outliers in transactions.

Step 5: Test and validate with regulatory scenarios

When applying quality assurance services to highly regulated sectors like KYC/AML, we utilize synthetic data for AI. This data mimics real-world scenarios for models without using actual customers’ information. Additionally, we utilize historical data to conduct scenario-based monitoring, as past scenarios help refine the accuracy of a model.

Also, you need regular AML validation of your model. It’s not just a regulatory requirement, it’s a necessity that will save you from penalties. Typically, AML model compliance checks are conducted by relevant authorities:

• OCC (Federal Reserve and Office of the Controller of the Currency);
• NCUA (National Credit Union Administration);
• FDIC (Federal Deposit Insurance Corporation);
• FRB (Board of Governors of the Federal Reserve).

Qualified third-party consultants can also conduct independent testing.

Step 6: Deploy and monitor in production

Ongoing monitoring is necessary to ensure your model’s performance, compliance, and adaptability to arising financial crime tactics. Here are the steps for thorough checks of your AI system:

• Establish real-time monitoring and dashboards to track metrics, monitor for data or concept drift, and maintain logs of user interactions.
• Implement feedback loops for continuous learning to refine model predictions, retrain models with new data, and assess accuracy of alerts.
• Ensure audit-readiness and compliance with the help of recording system activities, regular audits, and keeping detailed model documentation.

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Compliance and ethical considerations

It is vital that, over time, your AI agent stays reliable, relevant, and accurate. To make it real, there are ethical and regulatory aspects to consider that will help you implement responsible AI and avoid reputational risks. The aspects are as follows:

• Collect only the necessary data for compliance to train and maintain your model.
• Protect user data with encryption.
• Clearly inform customers how their data is collected and processed, and obtain their consent if necessary.
• Prevent skewed results with bias mitigation and regular data assessments.
• Ensure that your AI is explainable to non-technical parties, such as stakeholders and customers.
• Develop and enforce policies guiding ethical AI use.
• Use human insights for ongoing improvements in AI systems’ accuracy and relevance.
• Stay informed on changes in regulations, such as FATF Recommendations, Bank Secrecy Act in the USA, and AMLD6, GDPR, and AI Act in the EU.

From rule-based engines to autonomous compliance agents: what’s next?

We can already see how AI agents have evolved from simple task management to advanced technologies that help them be on guard of genuine identities and transparent and lawful transactions. These trends will shape the future of AI agents, so let’s discover them now:

• Agentic AI for autonomous compliance. AI continuously monitors customer behavior and transactions and is capable of generating relevant reports. It will evolve and adapt to new tactics arising in fraudulent financial activities.
• Real-time monitoring and predictive analytics. Agents detect suspicious patterns and can help us spot them before problems arise. AI also helps reduce the number of false positives, allowing for more effective investigative procedures.
• Enhanced Customer Due Diligence (CDD) and KYC processes. When AI scans documents, it not only improves the speed of identity verification but also enhances the overall customer experience. Teams work faster and get better precision in CDD and KYC procedures.
• Privacy-preserving technologies. These include federated learning and homomorphic encryption. These methods keep data local and encrypted to preserve the confidentiality of sensitive customer data.
• Explainable AI (XAI) for transparency. AI should be explainable, and we should avoid models that work like “black boxes”. For us to make decisions, the AI algorithms should be transparent and auditable. So, teams, stakeholders, and customers get a strong foundation for decisions in KYC/AML and a top-notch experience.

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Why now is the time to invest in AI KYC/AML agents

There are several reasons why such investments are feasible. First, it is regulatory compliance. Your organization will be much safer if you know your customers and comply with standards for regulated organizations. Also, consider that financial crimes become more sophisticated, and we need the relevant technologies to combat those activities.

What do you gain with such an investment? It brings you accuracy, efficiency, and cost savings. Though it takes time and effort to create a compliant KYC/AML agent, the payoff is significant. You gain speed in your teamwork, a deeper understanding of financial processes for better decision-making, and the removal of risk associated with penalties for non-compliance.

At Codica, we know how to build an efficient and compliant model. We have over 10 years of experience, with successful projects in domain name sales, real estate, travel, and more, some of which are listed in our portfolio. If you require a robust KYC/AML model, contact us. Our team, which provides custom software development services, will be happy to guide you through the process.