Whether your system is simple or complex, it must reduce “white noise” and produce meaningful alerts that matter. Regulators hold your banking partners responsible for outsourced compliance functions, meaning that when you take on responsibilities for suspicious activity monitoring, you must meet stringent expectations set by regulatory bodies.

The Financial Crimes Enforcement Network (FinCEN), along with the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA), have outlined what effective BSA/AML monitoring looks like. These expectations include:

• Ongoing evaluation of model performance
• Testing and recalibrating detection thresholds
• Documenting logic changes and system updates
• Reducing false positives while still detecting red flags

These steps support compliance and help maintain the trust of your banking partners, who are subject to model validations every 12 to 18 months.

Validation as a Competitive Advantage

A model validation doesn’t just help satisfy your bank or credit union’s regulatory obligations, it also positions your fintech as a trusted, mature, and reliable partner. Having your BSA/AML model independently validated demonstrates a commitment to compliance and regulatory best practices, which builds trust and supports long-term, sustainable partnerships.

For fintechs performing BSA/AML monitoring functions, some form of model validation is expected.

• Complex systems, such as machine learning engines or custom rules, typically require a full SR 11-7 level validation, a rigorous, regulator-defined standard for managing model risk. This includes assessments of model design, performance, data quality, and governance.
• Simpler models still benefit from a scaled-down independent validation to fit the risk level. These validations assess logic quality, alert precision, and overall effectiveness.

Regardless of your system’s complexity, independent validation is essential for mitigating risk and demonstrates that you meet the high standards expected in the financial industry.

Curious whether your fintech needs a BSA/AML model validation? Read our detailed breakdown here.

Why Validation Matters for Banks and Credit Unions Too

While this article focuses on fintechs, traditional financial institutions are not exempt from these requirements. Banks and credit unions are required to validate their BSA/AML systems regularly, whether they operate them internally or rely on third-party providers like fintechs to manage certain functions.

Outsourcing monitoring responsibilities to fintechs does not eliminate the bank or credit union’s accountability. The regulatory burden, and the expectation for validation, remains with the chartered institution. That’s why banks and credit unions are increasingly demanding that their fintech partners provide evidence of validation and system effectiveness.

If you’re a financial institution relying on external vendors for BSA/AML compliance, it’s essential to determine if those partners are conducting appropriate testing and validation. Partnering with a fintech that cannot demonstrate their system’s effectiveness could put your institution at risk.

What Effective Ongoing Evaluation Looks Like

To assess your BSA/AML system’s effectiveness, consider the following key steps:

1. System Design Review: Evaluate whether your system’s design aligns with your business model, customer risk profile, and transaction types.
2. Threshold Tuning: Adjust detection thresholds to determine if they capture relevant activity without producing excessive false positives.
3. Alert Quality Testing: Measure how many alerts lead to meaningful investigations, suspicious activity reports (SAR) filings, or dismissals. Poor alert quality is a red flag.
4. Governance and Documentation: Maintain detailed records of all system updates, rule logic changes, and calibration decisions.
5. Ongoing Model Validation: Engage independent reviewers on a routine basis—ideally annually—to perform a model validation appropriate to your system’s size and complexity.

We Can Help

At Elliott Davis, we work with both fintech companies and traditional financial institutions to evaluate and enhance the effectiveness of BSA/AML programs. Our team understands the regulatory pressures you face and offers validation services tailored to your risk profile and system complexity. As regulatory scrutiny increases and fintech-bank partnerships grow, the question isn’t just whether you have a BSA/AML system, you must also consider if your system is truly effective.

Whether you need a full SR 11-7 validation, a scaled review, or a system performance assessment, we can design an approach that fits your needs. Contact us today to learn how we can support your compliance goals and help you stand out in a highly regulated industry.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice.  The information above is subject to change.

What will happen to your company when you retire? If you’re like most business owners, the thought of stepping away from the company you built isn’t easy. However, delaying the inevitable can come at a cost.

Whether you are a third-generation family business owner, a partner in a growing firm, or a solo entrepreneur nearing retirement, one day, you will leave your business. Transitions often happen out of crisis or necessity. The real question is how prepared will you be?

Succession planning, often referred to as business transition or exit planning, is the intentional process of preparing to part ways with your company on your own terms. It brings your personal, financial, and operational goals into focus while laying the groundwork for a smooth leadership handoff. Yet according to PwC’s 2023 U.S. Family Business Survey, nearly two-thirds of family-run companies lack a formal plan, leaving many at risk of disruption or even liquidation when the time comes to move on.

By starting early and planning deliberately, business owners can make more informed decisions, strengthen operations, reduce risk, and increase company value, helping to preserve what they’ve built and leaving a strong legacy behind.

Why Transitions Fail

Sometimes even thoughtful plans fall apart due to undefined goals, competing priorities, or poor execution. Common pitfalls include:

• Not understanding all exit options
• Overlooking owner goals
• Weak alignment among stakeholders
• Unaddressed operational gaps
• Unclear about tax implications
• Failing to provide support after the transition

These issues can erode value and stall momentum. A successful ownership transition plan addresses both business and personal readiness, which starts long before the actual change in leadership takes place.

Determining Your Priorities

Before you can build a plan, you need to understand what matters most to you, your stakeholders, and your organization. Priorities shape every decision, from choosing a successor to structuring the deal. Taking time to define them early creates a foundation for a smoother, more intentional transition.

Quick Checklist: What Matters Most?

• Have you defined your personal and professional goals for life after the transition?
• Do your stakeholders understand and support your long-term vision?
• Have you identified the financial, operational, and leadership gaps that could affect your ability to move forward?

With your priorities clearly defined, you’re ready to explore what can go wrong and how to avoid the most common pitfalls that derail even the most well-crafted plans.

Readiness vs. Attractiveness: Why You Need Both

Every great transition begins with a clear understanding of what’s ahead. Your first step is to prove that you and your company are ready for the change.

• Attractiveness: Would someone want to buy or take over your operation?
• Readiness: Could the transition happen today without disruption?

These two factors are both important and together shape the details of your succession plan.

So, how do you provide proof that you and your company are ready to move forward?

Our Four-Pillar Framework for Building a Transition Roadmap

We help business owners gain clarity on personal priorities, as well as transition readiness and attractiveness, by focusing on four core pillars: Personal, Financial, Operational, and Governance.

We leverage these pillars to build a customized roadmap that educates business owners about transition options, outlines key details, and defines recommended actions to take beforehand.

Personal Pillar: Define Your Exit Goals

• What are your personal financial goals?
• Are you hoping to meet a specific exit timeline?

Partner and family dynamics often play an important role during this phase, especially in family-owned businesses. It’s helpful to have open discussions about expectations, perceived roles, and long-term visions with everyone involved. Unspoken assumptions can quickly lead to misunderstandings, so addressing them early can help ease tension and build trust throughout the process.

Financial Pillar: Know Your Numbers

• Determine the current value of your company.
• Explore how to reduce taxes and fees through strategic deal structuring.
• Evaluate the strength and accuracy of your financial reporting and accounting systems.

Having a clear view of your company’s financial position supports better decision-making, helps attract potential buyers or successors, and contributes to a smoother handoff. Strengthening financial reporting and operational performance can also make your business more appealing and easier to transfer.

Operations Pillar: Prepare the Business

• Identify ways to make your operation more attractive to potential buyers.
• Define roles and responsibilities of team members.
• Document processes and procedures.
• Recommend appropriate compensation plans to retain top talent.

Changing leadership can be emotional. Long-tenured employees or relatives may have different visions or assumptions about their future place in the organization. By clearly documenting responsibilities and encouraging accountability, you can preserve relationships while positioning successors to take the reins.

Governance Pillar: Protect the Enterprise

• Review buy/sell agreements, operating agreements, and shareholder documents.
• Prepare current corporate compliance documentation.
• Develop a business continuity plan in case of sudden departure.

When it comes to a family firm, governance structures keep everyone on the same page, outlining the roles, rules, and boundaries needed to reduce friction while protecting both relationships and outcomes.

Execution Support

Once the foundation is set, it’s time to progress from plan to execution.

• Provide deal negotiation support.
• Introduce clients, partners, and top talent.
• Help to identify, develop, and train the next generation of leaders.
• Monitor, revise, and assist with the execution of your business transition plan.
• Remain a trusted strategic advisor.

We Can Help

The sooner you start planning for your transition, the more options you have to consider. Whether you’re retiring soon or simply want to future-proof your company, we’ll work with you to build and execute a comprehensive and tailored transition roadmap, designed to increase value, reduce risk, and bring peace of mind.

We can help you:

• Understand the current value of your business.
• Explore ownership change options.
• Establish your priorities.
• Assist with the development and implementation of your business transition roadmap.
• Move forward with purpose and a well-structured approach.

At Elliott Davis, we believe your legacy deserves more than a last-minute decision. We help business owners build transition strategies that protect what they’ve built and the people who helped build it. Contact us today to start designing your roadmap.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice.  The information above is subject to change.

What's inside today's Tax Thursday in Three? The meaning of the "Byrd" bath, the compromises still to come on the tax bill, and an IRS staffing update. Bergin Fisniku, Director of our National Tax practice, shares more in today's edition.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice.  The information above is subject to change.