By Stanley Foodman
May 2025
In 1942, science fiction writer Isaac Asimov introduced three laws to govern intelligent machines. While visionary, these laws ultimately fell short because they couldn’t account for context, loopholes, and the inherent flaws in human-designed systems.
Today, financial institutions across Latin America and the Caribbean face a real-world parallel: How do we govern machines that learn and make decisions?
For compliance professionals in Latin America and the Caribbean, the stakes are real and rising. Institutions are now expected not only to implement AI, but also to govern it with transparency, integrity, and adaptability.
Artificial Intelligence (AI) is increasingly integrated into various banking operations, from credit risk modeling to anti-money laundering (AML) tools. As we approach a new computational era, with quantum processing on the horizon and synthetic DNA being explored as a storage medium, the urgency for robust, forward-looking AI governance intensifies.
This challenge transcends technology. It’s fundamentally about compliance, risk management, and institutional credibility.
Understanding AI Governance: Beyond Policy Documents
AI governance refers to the framework by which an institution oversees the development, deployment, monitoring, and auditing of AI systems. Key components include:
- Transparency: Can the decision-making process be clearly explained?
- Accountability: Who is responsible for the outcomes produced by AI?
- Integrity: Does the AI model function as intended without bias or error?
- Auditability: Can regulators and internal auditors trace and test the system effectively?
Relying solely on internal policies or review committees is insufficient. True governance is dynamic and evolves alongside the AI systems it oversees.
The Risks of Inadequate Governance
Consider a scenario where a bank implements a third-party AI tool for transaction monitoring, trained predominantly on data from the U.S. and EU markets. While it may effectively flag certain high-risk behaviors, it could miss patterns prevalent in the Caribbean corridor or misinterpret legitimate remittances from countries like Venezuela, or overlook red flags tied to typologies specific to high-volume jurisdictions like Panama or the Dominican Republic.
These risks are not due to malicious intent, but rather from insufficient localization and contextual oversight.
Emerging Technologies and the Need for Adaptive Governance
The future promises advancements like quantum processing, enabling AI to analyze vast, probabilistic datasets which is a boon for fraud detection but potentially opaque to human understanding. Additionally, innovations like DNA-based data storage and neuromorphic chips will further complicate the auditability of AI systems.
Financial institutions must proactively question: Are our governance frameworks equipped to handle the next generation of computational technologies?
Implementing Effective AI Governance in Practice
- Establish a Dedicated AI Risk Framework: AI governance should be a standalone program involving cross-functional teams from compliance, legal, technology, audit, and business units. Define approved and prohibited AI use cases, set controls for procurement and deployment, and outline human oversight requirements.
- Demand Explainability: Engage with vendors who can transparently explain their AI systems. This aligns with guidelines from bodies like the Financial Action Task Force (FATF) and regional AML expectations.
Key questions include:
- What are the sources of training data?
- Can the AI’s decisions be traced and justified?
- Is the system adaptable to specific regional regulations?
- Can the vendor demonstrate compliance with data residency and privacy laws across LATAM and the Caribbean?
- Incorporate Regional Intelligence: AI tools developed for other markets may not account for Latin America’s unique risk indicators. Localization of logic, thresholds, and alert criteria is essential.
- Monitor for Model Drift: AI models can evolve over time. Regular performance reviews and logging systems should be in place to detect changes in thresholds, suppressed alerts, and variations in false positive/negative rates.
- Invest in Training for Accountability: Compliance teams should be equipped to understand and oversee AI tools. Continuous training ensures that human oversight remains effective.
Latin America’s and the Caribbean’s Opportunity to Lead in AI Governance
Latin American and Caribbean financial institutions, often more agile and digitally native than their counterparts in other regions, are well-positioned to pioneer effective AI governance. By embracing oversight frameworks, these institutions can:
- Mitigate non-compliance risks under evolving regulations.
- Strengthen relationships with regulators and correspondent banks.
- Lead in the adoption of trusted, explainable AI systems.
- Prepare infrastructure for future technological disruptions.
Conclusion: Governance as a Competitive Advantage
In the evolving landscape of financial services, trust has become a paramount currency. As AI systems take on more decision-making roles, institutions that can demonstrate control and transparency will stand out.
AI governance is not merely a compliance requirement; it’s a strategic asset that reinforces credibility and fosters trust among stakeholders.
As Asimov suggested, machines don’t need to be malevolent to pose risks—they simply need to be misunderstood. Effective governance ensures understanding and, by extension, safety and reliability.
As regulatory expectations evolve, FIBA member institutions have an opportunity to not only comply, but to lead. Proactively investing in explainable, regionally adapted AI systems is not just smart risk management. It’s a credibility advantage.
This article is intended to provide insights into the importance of AI governance for financial institutions across Latin America and the Caribbean. For further discussion or to explore how Foodman CPAs & Advisors supports the implementation of effective AI oversight frameworks, please contact Coleen at coleen@foodmanpa.com on behalf of Stanley Foodman.
