Goldman Sachs Turns to Digital Surveillance to Catch Rogue Bankers

Analytics software promises to spot suspicious behavior

Between allegations that they manipulated benchmark interest rates or wrote faulty mortgages, banks have racked up more than $170 billion in litigation costs since 2008, according to an estimate by the Macquarie Group. So some financial institutions are investing in technology that can sift through millions of e-mails, instant messages, and transcripts of telephone calls to spot suspicious behavior before it explodes into a mess of lawsuits and fines.

“What the banks want is a way to surveil and read all these things as they happen,” says Tim Estes, chief executive officer of Digital Reasoning, a data analytics firm that on Oct. 8 announced a $24 million investment from a group of banks led by Goldman Sachs and Credit Suisse. “If you’re working on a mergers-and-acquisitions team at a bank and giving information to a trader, that ought to be flagged when it happens, not in an investigation three years later.” (Investment banks are supposed to have so-called Chinese walls between staff making investment decisions and those working on deals.)

Digital Reasoning, founded in 2000 in Franklin, Tenn., specializes in software that takes into account the context of written communications—for example, knowing when a person is referring to apple the fruit vs. Apple the stock. As it works its way through the material, the program builds a store of knowledge that it can delve into to map relationships between individuals or events—a process called machine learning. The U.S. government has been a Digital Reasoning customer since 2000, says Estes, and In-Q-Tel, a venture capital firm affiliated with the CIA, is an investor.

In 2012, Digital Reasoning’s founders got to pitch their product to representatives from Goldman Sachs, Credit Suisse, and JPMorgan Chase as part of a New York program that supports financial tech startups. The bankers’ interest was piqued. “One of the bank executives ran down the hall to get their card,” says Maria Gotsch, president of the Partnership Fund for New York City, which manages the program and is an investor in Digital Reasoning. Goldman and Credit Suisse signed up for trials that have since turned into annual contracts, starting at half a million dollars. The company has 25 to 50 customers.

Estes says one client told him that Digital Reasoning’s software had flagged traders in Europe planning to take clients to pricey shows or soccer matches, then failing to report the expense—which went against the spirit if not the letter of their firm’s policies. Since banks run the software themselves, Estes and his staff don’t know the errant bankers’ identities or whether they were disciplined.

Digital Reasoning says it will use some of the proceeds from its latest round of fundraising to develop software to help banks monitor their communications with customers, so they can figure out whether clients might be interested in buying other products and services. “The same technology that identifies risks is also well-suited to finding opportunities,” says Rob Metcalf, the company’s president.

Government investigations, such as the one resulting in Barclays’s $470 million penalty for rigging the London interbank offered rate, have triggered a spate of new rules at banks. Last month, Goldman Sachs barred some employees from owning individual securities. Barclays earlier this year banned employees from accepting gifts or entertainment from brokers. Digital Reasoning’s CEO says bankers can at least take comfort that their communications are being monitored by machines instead of humans (he claims that the latter method yields more “false positives”). Says Estes: “The machine isn’t going to go blab.”