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    Culture of Compliance | Fintech & Anti-Money Laundering with NASDAQ

    As financial criminals get smarter, so does technology. Sabrina Serafin interviews Valerie Bannert-Thurner, Head of Anti-Financial Crime Technology at NASDAQ to discuss the NASDAQ’s annual compliance survey as well as their anti-financial crime efforts.

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    Culture of Compliance™ was named #1 in “Top 25 Regulatory Compliance Podcasts You Must Follow in 2020” by Feedspot and named one of the “20 Best compliance Podcasts of 2021” by Threat.Technology.

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    Culture of Compliance | Fintech & Anti-Money Laundering with NASDAQ

    This transcript was assembled by hand and may contain some errors.

    It has been edited for readability.

    Sabrina Serafin Welcome to Frazier & Deeter’s Culture of Compliance podcast series where we discuss compliance as a competitive advantage in today’s marketplace.

    I’m Sabrina Serafin, Partner in Frazier & Deeter’s Process, Risk & Governance Practice. Today, we’re talking to Valerie Bennett Thurner,Senior Vice President of Market Technology at Nasdaq. Valerie was recently appointed as Nasdaq’s head of Anti Financial Crime Technology and is an expert in the fintech space with a deep understanding of underlying trading, risk and compliance technologies. She’s repeatedly been named one of the 100 most influential women in finance and we are so happy to have Valerie on our podcast. Welcome, Valerie.

    Valerie Bannert-Thurner Thank you very much for having me, Sabrina. It’s a great honor to be here.

    Sabrina Serafin Thank you, let’s get started. For those who aren’t specifically working within financial markets, what is the overall impact of financial crime and why are we concerned about money laundering and technology around financial markets?

    Valerie Bannert-Thurner Sure. Let’s start with explaining, what is financial crime? For example, according to the FCA, it’s really any kind of criminal misconduct or conduct relating to money to financial services and markets. There are really four types of financial crime that we look at. One is fraud, so, fraudulent behavior. Think of elderly abuse as a business email compromise as two horrible examples. Nurse fraud, unfortunately, all over the place in the financial services industry. As we all engage with the financial services industry, there is a real misbehavior within markets or with regards to information within markets, things like insider trading or activities that manipulate markets. There, you can really think of people that are moving markets and moving prices in these markets. We have money laundering in two forms. One is the handling of proceeds of crimes, so you conduct a crime, it’s big business, unfortunately, all of that money and a lot of it’s roughly $4.4 trillion annually is being laundered throughout the financial services industry to be used in normal business conduct again. The other side of money laundering is basically when money is moved to actually do terrorist financing. So, it’s actually moving money often out of criminal activity, but could also be legitimate resources to then be used for that behavior, terrorism.

    So, how does all of that affect us? And, as you say, some think of this as quite remote and it doesn’t really touch us and maybe an agony when we have to fill out a form from our bank. But in what way does it really catch us? Unfortunately, it really touches all of us in different ways, and it touches us in different levels. There’s an individual level, a corporate level if you want, but also big society impact and impact on whole governments as well as the whole world. If you think about fraud, several companies as well as individuals can often lose money because of fraudulent activity and often the bank is not necessarily standing up for those losses. So, in these cases, companies sometimes have to either incur the losses as far as employees or individuals can actually use quite a bit of money. That is on the very direct and individual level and how it affects us.

    Market Manipulation, we all have our savings accounts and hopefully within our pension funds there are traders to make sure that we do continue to increase our pension over time. If the markets are being manipulated, if they are unfair, if they’re not transparent, then you don’t get what you deserve. You don’t get the prices you should be deserving. Ultimately, there is a loss for all of us invested in markets, directly or indirectly. And money laundering, if you think about the horrific impact that criminal activities such as drug trafficking, human trafficking could have on the individual, hopefully that doesn’t affect us directly but that, obviously, is a huge impact on society. But also think about the cost to the whole governance of taxes that have not actually been applied to all of these proceeds.

    Also, the costs that actually the banks have to incur. The fight against money laundering is expensive, big banks employ thousands of people to identify this type of behavior. This cost does ultimately come back in terms of services that are more expensive for all of us, but it also means that several banks have stopped providing financial services to whole areas, countries or set of businesses and leading many unbanked So, if we want to drive democratization, if you want to drive access, we got to get better at fighting financial crime and, hopefully, helping to eradicate it. So, it really has a direct impact on all of us.

    Sabrina Serafin Thank you, Valerie. So, when it comes to Nasdaq’s annual compliance survey, which addresses a lot of what you’ve just talked about, can you give us some background around the service purpose and who participates in it?

    Valerie Bannert-Thurner Yes, I would be happy to. So, I think it’s important that you know within the Nasdaq family why we conduct that survey and in what context. So, many know Nasdaq as an exchange many know Nasdaq really as a provider of indexes or many other transactional businesses, the Nasdaq 100 you may be familiar with. Nasdaq also has a very large technology business, and this is where we provide financial services institutions that those could be exchanges and regulators, market infrastructure providers, banks, brokers, market participants, you name it, credit unions. Firms operating within the financial services industry we provide them with technology, so we are technology provided to them and a big part of that is that we provide them with services to fight financial crime and in this particular case, we have a large team that helps to fight a market abuse. That includes market manipulation and insider trading. The survey we conduct every year is really for our community of thousands of users across the world and hundreds of customers that partner with us to fight market abuse. We want to achieve a couple things, so the survey goes out globally. It goes out to compliance specialists, analysts and in the wild of fighting market abuse, we intend to basically give back to the community and share these insights with our customers, so we started this in 2015, and this has been going on every year.

    But it’s also a means for us to gain insights in terms of what are the major trends, the developments over time, where are the tipping points and what’s changing in the industry.

    Sabrina Serafin In the December 2020 report, respondents cited external global factors and, in other words, the pandemic, as the primary driver of compliance process changes. Can you tell us a bit about that shift and where you think this year’s survey might go?

    Valerie Bannert-Thurner 2020 really was an outlier in our survey and we have data now over many years, so that was very interesting and the clear driver behind that, as you just said, Sabrina, was that mimic the external factors.

    If you think about sort of the answers, it’s good to put yourself into the shoes of a head of compliance with one of these banks and really think what happened. There’s a lot of things that changed during the pandemic. On the one hand, trading changed, so the way that market participants interact, on the one hand, you had many more retail participants people were sitting at home doing work from home but also started to trade from home. Suddenly, you saw an influx of new activity that was unseen before. Also, your traders that normally sit together on a big trading floor, a big set of desks, were trading from home, basically. Your perceived oversight started to change, so the way you are monitoring needed to be adjusted. Volumes were going through the roof, so the volumes on the markets, the high amount of uncertainty, the change put a lot of strain on the trading infrastructure, but also on the surveillance infrastructure.

    Basically, you really need to make sure that your systems can keep up with the volume and with the volatility that was going through the whole trading ecosystem globally and your survey analysts that also normally sit together and work together and are efficient together, were sitting at home.

    We’re sitting in India, we’re sitting in many other locations or at home, where you needed to think about, how do I best equip them to do their jobs well? The situation changed fundamentally very quickly.

    Instead of the main driver that we normally see every year of regulation is the main driver, the new rules coming from the different regulators around the world, and how to best adhere to them and make sure you’re compliant, that was not the number one priority anymore. What changed was the processes needed to change the technology needed to keep up. The new way virtual working and trading needed to be captured with your same setup. So, those trends basically changed and hence external drivers. Clearly, we’re at the top of the agenda for our customers.

    Some of the key changes and the new trends that we saw and some of those were very pleasing for us to see. First of all, the role of surveillance and compliance continued to increase in importance over the years, but really in 2020 made a big jump up. So, our respondents commenting on having a seat at the table with the executive teams really develop the importance of surveillance and compliance within the firm. Active reputational management, so the seniority that was attached with surveillance and compliance, it continues to be increased, so the heads of surveillance now really have a seat at the table very much at sea level, and that was very much represented in our survey.

    Another thing that we learned from the survey was in terms of what are people focusing on? What is important? Maybe in the last years some innovative concepts or somewhat exploratory concepts were important in 2020. I think some of it is also 2021 was very much focused refocus back on core, strong, resilient surveillance and so making sure your technologies, robust and capable of scaling. Making sure your data is comprehensive, is properly integrated and the data quality is good. So, really going a little bit back to the core and making sure I need to make sure I have sound surveillance instead is very effective in the way of detecting the behaviors. The other part, that is becoming increasingly important, and I think that has a lot to do with the volumes and volatility is the efficiency.

    So, the surveillance programs are not only set out to make sure you find the market manipulation cases or insider trading but also you do that with less noise levels than before, so making sure you don’t have a large amount of false positives. So, management of false positives, management of alerts became much more important in this virtual setup and when you have high volatility you’ll have more alerts firing our algorithm detecting potential behavior. So, very much a focus on effectiveness and efficiency and data. We did see that our customers had to increase their spend over the 2020 budget so probably a lot of this was to cope with a lot of the changes to address some of the process requirements new process requirements and the technology investment. But we also saw them invest in expertise and analysts and making sure they have a strong team to work with all the different signals.

    I think in terms of going forward, the focus is on core strong, effective and efficient surveillance instead will continue, we do think the data volumes will continue to rise, we do think volatility will be strong. We’re not unfortunately quite through the pandemic yet, so we have a lot of the themes that we have seen emerge over last year. We think it may, it may continue but we don’t have the results yet and we’re super excited that they will actually come out in December. So, very soon we’ll actually gain the next insights and encourage you to look them up and see what’s changed. We look forward to seeing what the new and emerging topics will be as our customers have come to terms with this new virtual set up and learning to evolve in it and looking at what’s next.

    Sabrina Serafin That’s fascinating and looking forward to that next survey. So, shifting gears a bit, you obviously work in a fascinating space as Nasdaq’s head of Anti Financial Crime Technology. Can you talk about some of the examples that you’re seeing in the world of surveillance and some background around why that is so important?

    Valerie Bannert-Thurner It’s been an amazing and fascinating year with many great, new opportunities. I’ll give you a glimpse of what we see coming around the corner and what we are aiming to tackle as we continue to fight market abuse and insider trading. So, one thing is data volumes, data volumes have increased and basically doubled, just over one year so it’s a great opportunity and challenge for everyone involved.

    It’s a good opportunity for our tech team as well to get on top of that, but it’s obviously been something that the whole industry had to stay on top of and be able to scale accordingly to continue protection. The other part that’s really changed is retail participation, so the retail participation in the US in the equities market, for example, so the options through this market has doubled over the last 10 years. We actually think that this trend will continue quite rapidly, so, those markets were mostly traded by institutional or professional firms in the past. Your pool of retail participation is really high, we’re just changing how markets need to be surveyed so think about Game Stop and think about all the other mean stocks. We have basically pump and dumps teams now, which are very public and surveillance teams now have to consider how are they coping with that and what is illegal and how to detect this and, obviously, the social media signals, what is being discussed on platforms like Reddit and others need to start to be considered in terms of understanding overall what’s going on in the market.

    What is the social community saying and how are they partially driving prices up and down as they jointly agree on these platforms? It’s a whole new dynamic, none of that has existed several years ago and basically means for us as we try to make sure that markets are run with integrity and transparency and in a safe manner, it basically means we have to understand these behaviors, we have to be able to link them back with social media and some of our customers. For example, in the exchange world as well as domestic markets themselves, we are linking trading behavior with social media behavior to make sure we understand the bigger picture, to understand when does a stock become a mean stock and how should the market respond accordingly. That’s been fascinating and the next big thing that is coming quickly is trading in digital assets, so the activity on the crypto markets, primarily, but also new types and new forms of digital assets is evolving very quickly. There’s $2.4 trillion market CAP in digital assets today growing super quickly at the moment. instruments of these products are traded like, for example, an equity line on a central limit order book so it’s our job, together with our customers and the markets and the regulators in the long run to make sure that also these markets are run in with integrity. For us, it’s very important to understand how these types of markets are being manipulated, is it different or not? And in what way is it different than? How can we best support the trading community as well as the market operator community to make sure no manipulation happens in these markets as well, so really exciting new opportunity for the surveillance team.

    Sabrina Serafin Okay, Valerie, you’ve mentioned the increase of data, the increase of volume of data and you’ve also mentioned in previous conversation that Nasdaq is also a technology provider. How is NASDAQ supporting the increased amount of information that has to be processed in order to mitigate risk?

    Valerie Bannert-Thurner That’s a really good point, Sabrina, and the efficiency with which you can conduct your fight against financial crime is almost starting to become as important as the effectiveness in terms of finding the actual behaviors because those two really need to come in concert. One particular initiative, which is very interesting and which we have started over a year ago, is a partnership and strategic investment in a company called Caspian. In this particular case, we focus very much on the efficiency with which money laundering alerts can be investigated and mitigated. Many banks around the world, employ thousands of analysts to deal with an enormous amount of alerts that are being generated by partial legacy detection capabilities to identify money laundering and other criminal activities.

    Now, these very large teams, a) it takes them a long time to go through them it’s a very manual process, it’s a very error prone process and it’s often very inconsistent in terms of how different analysts work through these different levels and mitigate them. So, one thing we are working on together with the Caspian team is a capability and the solution under service really where we help to replicate human decision making and really help to automate the mitigation and resolution of alerts. So, our solution which is based on machine intelligence and it’s based on the training data of individuals sampling and labeling the investigators throughout the investigation process.

    So, give input into these machine learning models we use that take that capability to automate the review process, and what that means is, we can reduce the amount of false positives by basically auto mitigating alerts. We can help provide additional information to alert, so that the individuals can be faster in either escalating or mitigating themselves or we can really pinpoint particular alerts and say, “These are quite likely are for escalation” and support the analysts throughout that decision process. So, it’s really a decision support tool, it’s a tool that makes the team significantly more consistent, significantly more efficient and it really helps to reduce the workload that is being generated by these detection systems today.

    We’ve had some amazing results in partnership with some of our customers so far, so it’s a very exciting new project and we’re very excited about the application of machine learning to help this process.

    Sabrina Serafin That’s excellent. You also acquired a company called Verafin, an anti-financial crime management solution. How does that fit into Nasdaq’s overall ambitions in combating financial crime?

    Valerie Bannert-Thurner This is taking us all the way back to where I started around what is anti financial crime. We’ve had solutions for a long time around mitigating market abuse, so insider trading, market manipulation. Together, with Verafin, now we also covered a whole suite of fraud detection and investigation, the management capabilities, as well as money laundering detection capabilities as well additional high risk customer screening capabilities, so we really wanted to make sure we cover all the risks associated with financial crime. We combat all of them and we have to eradicate all of them, this is very important to Nasdaq because we really believe that markets need to work well and need to be effective and efficient in their operation and, hence, that can only be the case if we help to eliminate and eradicate the financial climb out of these markets. We have seen amazing things when markets work well, they really drive prosperity and inclusion and growth for everybody and that’s what we want to achieve. The vision, really, from my team is to help protect all of the financial interactions worldwide, and if we achieve that will make sure financial services industry and markets operate well and we can drive to ultimate purpose of Nasdaq.

    So, that’s why we are in it and that’s also why we acquired Verafin, because this is important to overall Nasdaq strategy. it’s been a super exciting journey, it’s an amazing company based in Newfoundland in St. Johns, and has very advanced cloud-based technology to complement the capabilities we have today around detecting people manipulating markets. Now, we are able to also detect people conducting money laundering, as well as fraud, which is very exciting.

    Sabrina Serafin Well, Valerie, thank you so much for being with us today to help our listeners understand some of the compliance trends in the financial markets and to learn more about the NASDAQ compliance survey, which is going to be released very soon, and the overall efforts to reduce financial crime Thank you so much for your kind explanation.

    Valerie Bannert-Thurner Thank you for having me, Sabrina.

    Sabrina Serafin And to our audience, thank you for listening to Frazier & Deeter’s Culture of Compliance podcast and please join us on our next episode, as we continue to discuss transforming compliance requirements into investments in your business.

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