Is your BSA/AML system working for you? How to evaluate effectiveness

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.