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Setting Scoring Thresholds Based on Risk for Automated Customer Identification Program (CIP) Screening Software Tools
Answer by Kristine Regele, CAMS, Sr. Compliance Analyst - ChoicePoint
Question: What threshold for customer identification program (CIP) screening should I use in my automated CIP screening solution?
Answer: Scores should vary depending on risk. What one organization uses will not be right for another. In fact, what works in one department might not be right in another. Scoring thresholds usually vary depending on several factors.
Today, because of the risk-based approach to compliance promoted by various authorities (regulators, internal auditors or risk managers, etc.) many financial institutions conduct a risk analysis and consider its results before they configure automated tools for purposes of flagging high-risk accounts or transactions. They will then configure the tools to greater sensitivity in areas of highest risk. This is a wise approach, as understanding your organization’s risks will assist you in designing a software scoring threshold that best suits your risk needs.
If you opt to design your scoring threshold based on risk, refer to your risk analysis documents. The risk analysis has likely identified those areas deemed to be most vulnerable and likely has quantified both the likelihood of an event and the severity of the consequence. Risk areas may include your organization’s size and business volume, your customers, your products and business lines, and the geographic locations where you do business. Understanding the risks in these areas will help you set up your software to best mitigate risk.
A good software solution will contain several features designed to help you identify and subsequently manage risk. One of the most important features of any software is the matching algorithm used to generate potential matches. However, depending on the number and completeness of the records in your customer database, software packages may return a large number of potential matches and, possibly, a significant workload. The challenge with any software is to find the balance between reporting the potential matches that you want to see and passing over the ones that you don’t want to see. Therefore, another critical feature of your software tool is its false positive reduction capability.
Compliance software frequently allows you to determine at what threshold (score) you want to have potential matches reported or returned in results to you. There are advantages and disadvantages to setting scores either too low or too high.
Low Score
Advantage: Cast a wide net to catch every possibility
Disadvantage: High number of false positives requiring human resources to disposition
High Score
Advantage: Low number of matches to see
Disadvantage: You might miss a potential match
Use these advantages and disadvantages, to your advantage as you set scores for risky and less risky product lines, customers, and geographic areas. Take, for example, a financial institution that has software that scores the closeness of a match on a scale of 0 to 100, with 100 being the closest match. The institution might determine that it wants to be alerted to potential matches for new checking account customers, at say, a match score of 90 out of 100, but wants to cast a wider net for private banking customers, so it drops the threshold to 80. When looking at real-time scanning of international wire transactions, it is decided to drop the score even further to 70, due to the risk associated with such transactions. These are all examples of aligning a compliance program to the risk analysis.
In summary, your risk analysis can greatly assist in efforts to design a scoring threshold. A risk-based design allows you to flag items that may pose risk to your organization. Determining the appropriate scoring thresholds may take time. You should test the software and understand its scoring methodology before assigning thresholds. Quality software will permit some degree of configuration so that you can better align your compliance program to your risk analysis.
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About ChoicePoint
ChoicePoint (NYSE: CPS) provides businesses, government agencies and non-profit organizations with technology, software, information and marketing services to help manage economic and physical risks as well as identify business opportunities. Each year, we help more than 100 million people who are seeking to obtain jobs, fairly priced home and auto insurance, and who wish to rent apartments. Our authentication and anti-fraud tools improve efficiency and instill confidence in the decision-making process for our customers and consumers. Consumers have free access to the reports we create at www.ChoiceTrust.com. Learn what we do to protect consumer privacy by visiting www.PrivacyatChoicePoint.com and, for more information on our company, go to www.ChoicePoint.com.
First published on BankersOnline.com 7/09/07
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