Nasdaq's CEO outlined 3 ways firms can put up a better fight against financial crime

• Nasdaq CEO and Chair Adena Friedman spoke about how regulators can help banks fight financial crime.
• Data sharing, using algorithms, and creating a feedback loop were among her suggestions.
• Friedman spoke at Bloomberg Invest in New York on Wednesday.

A Wall Street executive has a three-point plan for regulators to consider to help banks tackle financial crime.

Adena Friedman, Nasdaq's CEO and chair, said roughly $4 trillion is laundered through the financial systems globally, with only 1% of that typically getting uncovered.

"It's a massive problem for the global economy," Friedman said while speaking at Bloomberg Invest in New York on Wednesday. "Frankly, the banks are being put on the front lines to combat this problem, so they have to have the best tooling available to do that."

The exchange operator is "challenging the regulators" to think of different ways to help firms in that fight, she added.

Friedman, whose company acquired an anti-financial crime management tool a little over two years ago, said it starts with data sharing between financial firms.

"Criminals don't just bank in one bank," she said, adding that pooling of information can help firms suss out patterns of bad behavior across different systems. 

And while that's possible to do in the US, regulations in Europe don't currently allow for that type of data sharing, she said. As a result, European banks are "hamstrung."

A big hangup overseas is concerns regarding privacy. Friedman, though, pointed to encryption techniques and said personal identifiable information — a customers' most sensitive data — wouldn't need to be exposed.

"You're basically maintaining the integrity of the privacy while still being able to leverage the right amount of data in an encrypted fashion to root out the criminals," she added.

Friedman also cited artificial intelligence as a valuable tool in the fight against financial crime, as the cutting edge tech can suss out patterns of behavior. 

"Explainability," or understanding how the AI model works as opposed to deploying a so-called black box, is critical here, Friedman said. And while regulators and banks expect complete explainability of their models, Friedman hinted that she hopes the former will be willing to reconsider its position as the tech progresses.

"We want to engage with the regulators to say, 'What's the next generation of AI going to do that's going to make it even more effective? And, therefore, maybe it's not totally explainable, but you understand we're using it for the right purpose,'" she said. "And so changing the regulatory, I would say, process around the use of AI is going to be an important next step for every industry and certainly for the financial industry."

Finally, Friedman said providing a feedback loop whereby regulators let financial firms know about the result of reported criminal activity could go a long way.

Understanding what was indeed a criminal act and what was just a false positive would help firms in how they fine tune their tools.

"We could then make the algorithms either even smarter," Friedman said of getting feedback from regulators on the result of criminal reports. "We could say, 'Oh, we've got validation that this was a real criminal act, so let's make sure that we can use that to kind of be smarter."