On April 7, LexisNexis© Risk Solutions issued a report on the true cost of anti-money laundering (AML) compliance for financial services firms. The report (available here) is based on a survey of 898 decision-makers across four regions who oversee financial crime compliance and compliance operations at their companies.
Key findings in the report include the following:
- The projected total cost of financial crime compliance for countries in four regions and South Africa is $180.9 billion. The breakdown of that total is as follows:
- Europe – $136.5 billion (United Kingdom – $49.5 billion, Germany – $47.5 billion, France – $21.0 billion, Italy – $15.8 billion, Netherlands – $2.7 billion);
- North America – $31.5 billion (United States – $26.4 billion, Canada – $5.1 billion);
- Asia-Pacific (APAC) (Indonesia, Malaysia, Philippines, and Singapore) – $6.1 billion;
- Latin America (LATAM) (Brazil, Mexico, Argentina, Chile, and Colombia) – $4.5 billion; and
- South Africa – $2.3 billion.
- Average annual financial crime compliance costs are highest for midsize/large United Kingdom and European financial institutions. These costs “are 3–4 times the level for mid/large financial firms in North America and APAC, and up to nearly 7 times for those in LATAM.” A number of factors – “including increasingly complex regulations, data privacy limitations, sanctions violations and labor costs” — make financial crime compliance more costly in Europe.
- While regulatory compliance and minimizing reputational risk “are common financial crime compliance drivers across regions,” each global region “has its own unique risks and challenges with money laundering and financial crime compliance.” For example, in LATAM the report cites risks associated with the TriBorder Area (TBA) between Argentina, Brazil, and Paraguay, which “presents high risk for narcotics trafficking,” and therefore to financial firms; transnational criminal organizations operating throughout Brazil and laundering proceeds from drug trafficking operations and human smuggling; and Mexico’s concern “with crime and money laundering methods that hide beneficial ownership and cash smuggling across the U.S.-Mexican border.” In contrast, in Europe the General Data Protection Regulation, high-profile sanctions violations, and increased compliance regulations, “including stricter focus on ultimate beneficial ownership, have contributed to added pressure and workloads experienced by compliance teams.”
- Non-bank payment providers create additional compliance headaches and risks for financial firms across regions, particularly in LATAM and Canada. The negative impact of non-bank payment providers “is broad, including increases with alert volumes, correspondent banking risk, compliance team stress, and technology/labor costs.” Among other concerns, more than half of APAC, EMEA, LATAM, and North American firms “indicate that non-bank payment providers are impeding the speed of conducting transactions, which slows onboarding new customers.”
- “Financial crime compliance challenges and issues are having a negative impact on financial institutions,” particularly in EMEA, LATAM, and the United States. The report notes that financial crime compliance costs overall “have risen by double-digit percentages during the past two years,” and that EMEA, APAC, and North America expected to see financial crime compliance costs double by the end of 2019. Survey responses also indicated concerns about stress on compliance teams; 67 percent overall indicated concerned with job satisfaction in compliance department
The report concluded that a multi-layered approach to financial crime compliance technology “is crucial to facilitating a more cost-effective, efficient compliance approach.” Such a multi-layered approach, according to Lexis-Nexis, should accomplish four key compliance functions: (1) investigate both the physical and digital identity attributes;; (2) assess both the individual and the transaction; (3) incorporate both KYC (individual) and KYB (business) processes; and (4) leverage data analytics for real-time assessment of risks and behaviors.
Note: AML compliance teams, particularly if they cover multiple global regions, should review this report closely, with particular regard to regional differences in risk factors and compliance costs. Particularly because financial institutions of all sizes will face increasing pressures to reduce compliance costs as they recover from the economic effects of the coronavirus pandemic, AML and other financial-crimes compliance officers will need to be prepared with specific data to argue against drastic cuts in compliance funding and to offer possible ways to maintain the effectiveness of their compliance programs at lower cost.