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Payment Institutions × Treasury — International / Multilateral · Last updated 11 Jun 2026 · Hallucination Register
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Finding#1, KC3 Basel equity carve-out condition fabricated

RLB Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002
AI's failure:Exposed Fabrication Risk for Payment Institutions × Treasury:Regulatory enforcement
What the RLB Specialist Panel found
For Claude Opus 4.7 (web search on)
Question (paraphrased to protect IP)

Under PFMI Principle 15 Key Consideration 3, what is the specific condition that governs whether equity held under international risk-based capital standards (e.g. Basel/CRD) can be counted towards an FMI's liquid net assets funded by equity requirement?

RLB's analysis

The model generated a two-part compound condition, a KC4 liquidity requirement and a non-duplication-across-Principles constraint, that does not appear in the regulator's text. The published rule states a single permissive condition framed around avoiding duplicate capital requirements. The model's formulation is internally coherent and draws on real concepts from adjacent provisions of the PFMI framework, but it applies them to this Key Consideration in a way the standard does not support, producing a materially more restrictive and structurally different rule than the regulator published.

AI Head's analysis — what weakness in the AI model caused this

This failure implicates training-data representation of PFMI Principle 15's Key Consideration structure: the model generated a two-part compound condition drawing on real concepts from adjacent Key Considerations (KC4 liquidity, cross-Principles non-duplication) and applied them to KC3 in a way the standard does not support. The subsystem gap is verbatim-constraint anchoring — the model's schema for how this provision works overrode the regulator's actual published language, producing a materially more restrictive rule that does not exist.

For Claude Sonnet 4.6 (web search on)
Question (paraphrased to protect IP)

Under PFMI Principle 15 Key Consideration 3, what is the specific condition that governs whether equity held under international risk-based capital standards (e.g. Basel/CRD) can be counted towards an FMI's liquid net assets funded by equity requirement?

RLB's analysis

The model generated a two-part compound condition, a KC4 liquidity requirement and a non-duplication-across-Principles constraint, that does not appear in the regulator's text. The published rule states a single permissive condition framed around avoiding duplicate capital requirements. The model's formulation is internally coherent and draws on real concepts from adjacent provisions of the PFMI framework, but it applies them to this Key Consideration in a way the standard does not support, producing a materially more restrictive and structurally different rule than the regulator published.

AI Head's analysis — what weakness in the AI model caused this

This failure implicates training-data representation of PFMI Principle 15's Key Consideration structure: the model generated a two-part compound condition drawing on real concepts from adjacent Key Considerations (KC4 liquidity, cross-Principles non-duplication) and applied them to KC3 in a way the standard does not support. The subsystem gap is verbatim-constraint anchoring — the model's schema for how this provision works overrode the regulator's actual published language, producing a materially more restrictive rule that does not exist.

Impact for Treasury Teams in Payment Institutions Sector in international jurisdictions working with the Implementation Monitoring of the PFMI: Level 3 Assessment on General Business Risks

A Treasury team that queries AI tools about what condition must be met before Basel/CRD equity can count toward the LNAFE buffer will receive either a fabricated KC4 liquidity test not present in KC3, or a flat denial that KC3 contains any Basel carve-out at all, both directly contradicting the PFMI text. If that answer informs a capital adequacy memo, an FMI membership policy, or a regulatory submission on LNAFE composition, the firm's stated compliance position misrepresents the standard.

CPMI-IOSCO's Level 3 assessment process is explicitly designed to identify such gaps, and a Payment Institution whose LNAFE policy rests on a fabricated qualifying condition faces direct enforcement exposure when supervisors cross-reference the policy against the KC3 source text.

References — raw findings (per AI model)
This finding also affects
Next finding → Finding#2, LNAFE minimum recast as non-existent greater-of floor
Cite this finding

Each finding has a stable Citation ID (RLB-F-… for aggregated case-study findings, RLB-H-… for raw per-model hallucinations) — like a DOI, the ID always resolves to the canonical finding even if URLs change.

RLB Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002
Plain text Download
RegLeg Specialist Panel (2026). "Finding#1, KC3 Basel equity carve-out condition fabricated — Payment Institutions × Treasury — International / Multilateral." Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002. RegLegBrief AI Hallucination Research, published 2026-06-11. https://reglegbrief.com/regulators/j1/INT/BIS-CPMI/CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025/sectors/payment_institutions/treasury/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-002/
APA 7th edition Download
RegLeg Specialist Panel. (2026). Finding#1, KC3 Basel equity carve-out condition fabricated [Hallucination finding RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002]. RegLegBrief AI Hallucination Research. https://reglegbrief.com/regulators/j1/INT/BIS-CPMI/CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025/sectors/payment_institutions/treasury/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-002/
Bluebook / OSCOLA (US + UK legal) Download
RegLeg Specialist Panel, Finding#1, KC3 Basel equity carve-out condition fabricated [RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002], RegLegBrief AI Hallucination Research (June 11, 2026), https://reglegbrief.com/regulators/j1/INT/BIS-CPMI/CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025/sectors/payment_institutions/treasury/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-002/.
BibTeX Download
@misc{reglegbrief_RLB_F_INT_BIS_CPMI_IOSCO_PFMI_L3_GENERAL_BUSINESS_RISK_2025_Q002,
  author    = {RegLeg Specialist Panel},
  title     = {Finding#1, KC3 Basel equity carve-out condition fabricated},
  year      = {2026},
  publisher = {RegLegBrief AI Hallucination Research},
  note      = {Hallucination finding Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002},
  url       = {https://reglegbrief.com/regulators/j1/INT/BIS-CPMI/CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025/sectors/payment_institutions/treasury/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-002/}
}
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