Context-Aware Pre-Deployment Evaluation of AI Systems: A Regulatory Framework for Nigerian Fintech

U.S. financial institutions deploying AI-based fraud detection face a fragmented compliance landscape spanning four regulatory frameworks -- OCC Bulletin 2011-12, SR 11-7, the CFPB AI circular, and FinCEN BSA/SAR requirements -- with no integrated governance life cycle connecting these requirements to model development, validation, and monitoring practice. This paper presents the Regulatory Governance Framework for AI-Driven Financial Fraud Detection (RGF-AFFD), a three-tier governance architecture empirically anchored in a multi-study empirical program. Using the IEEE-CIS dataset (590,540 transactions) and ULB benchmark (284,807 transactions), we benchmark six architectures including an LSTM+XGBoost ensemble, and conduct ablation, temporal drift, SHAP interpretability, and BISG fairness analyses. The LSTM+XGBoost ensemble achieves ROC-AUC of 0.9289 (F1: 0.6360) with a benefit-cost ratio of 6:1. XGBoost demonstrates the strongest temporal stability (delta-AUC = -0.0017 versus -0.0626 for LSTM). The RDT-FG Regulatory Digital Twin meta-model translates metrics into four regulator-specific health scores and a composite Regulatory Fitness Index for continuous compliance monitoring. The RGF-AFFD is the first integrated deployment blueprint to simultaneously satisfy OCC, SR 11-7, CFPB, and FinCEN requirements, supported by a community bank implementation vignette and four evidence-based policy recommendations.

Large language models are increasingly deployed in financial applications that combine retrieval, proprietary data, tool use, orchestration logic, monitoring, and human escalation. Yet evaluation often remains model-centric: benchmark scores, task accuracy, or one-off qualitative reviews are treated as evidence of readiness. In financial settings, this is insufficient. We take the position that financial LLM systems should not be approved for production based on benchmark performance alone. They require system-level validation evidence across the application stack: data, model design, retrieval and generation performance, agent behavior, governance, and implementation. Drawing on industry experience validating GenAI applications in financial institutions, we outline a multi-layer validation view and explain why hybrid evaluation is necessary. We discuss where LLM-as-a-judge methods are useful and why they require controls such as multiple judges, rubrics, agreement, and auditability checks. We also highlight failure modes poorly captured by static benchmarks, including retrieval failures, unfaithful generation, tool misuse, escalation errors, and operational instability. Our position is that financial LLM validation should be an ongoing system discipline rather than a one-time model scoring exercise. Validation should produce decision-ready evidence, not only scores. We conclude with a research agenda for system-aware benchmarks, agent trace validation, judge alignment protocols, and lifecycle validation standards.

As large language models (LLMs) are increasingly deployed in financial services, a single non-compliant interaction can expose institutions to regulatory penalties and direct consumer harm. Existing guard models are built around general harm taxonomies and overlook violations grounded in specific financial regulations. We address this gap with a regulation-driven pipeline that operates directly on regulatory documents, inducing a financial compliance risk taxonomy and synthesizing grounded training data without any predefined violation categories. Instantiating the pipeline on Chinese financial regulations, we release FinGuard-Bench, to our knowledge the first benchmark for financial regulatory compliance detection, with expert-annotated labels at both the query and response levels. We further train FinGuard, a financial compliance detection model built on Qwen3-8B and trained on the regulation-grounded data via supervised fine-tuning and self-play reinforcement learning. On FinGuard-Bench, FinGuard substantially outperforms all baselines, including dedicated guard models and much larger general-purpose LLMs such as Qwen3.5-397B-A17B and GPT-5.1. Furthermore, FinGuard also preserves general safety capabilities and adapts to unseen institution-specific policies using policy documents alone. We will publicly release the code, prompts, and resources used in this work on GitHub.