Model validations are expected by regulators.
Here are five tips to ensure that your model is consistent with regulatory expectations:
1. The model must be validated by an independent 3rd party if these components point to the AML system as a model:
- information input component: delivers assumptions and data to the model;
- processing component: translates inputs into estimates;
- reporting component: translates estimates into useful business information;
- governance component: documents the roles and responsibility of the model.
2. 3rd party must be qualified to conduct a full model validation. The 3rd party must not have any conflicts of interest with the model it is validating.
3. Understand the data: a data integrity review will ensure that all appropriate customers and transactions are flowing into an institution’s monitoring system.
4. Calibration testing of parameters should be part of a model validation: the evaluation of existing rules, parameters, and thresholds should be tested to ensure suspicious activity is being detected without having too many false positives.
5. Ensure the AML scenarios work as intended: this part of the model validation is to ensure that parameter algorithms work as designed.
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