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The cost of compliance: future trends in AML

Read a summary of the main points covered by LexisNexis' 2020 report on the global cost of compliance, and discover what its findings mean for the future of the AML industry.

Napier AI
August 12, 2021

The LexisNexis global compliance cost report: what it means for the AML industry

LexisNexis Risk Solutions (LNRS) is a global provider of legal, regulatory, and business information and analytics. It regularly undertakes research around the world into all aspects of financial crime and produces annual financial crime compliance reports for their clients.

Their 2020 report on the true cost of financial crime compliance is based on a survey of more than 1000 financial institution decision-makers from representative countries of four economic regions worldwide. These are the Asia-Pacific Countries (APAC); Europe, Middle East, and Africa (EMEA); Latin America (LATAM); and North America.

LNRS identified the driving forces behind increasing compliance costs as being:

  • Areas of current compliance investment (staffing and technology)  
  • Regional trends in the AML field
  • The impact of the COVID-19 pandemic
  • The key challenges facing financial institutions today and in the future

While the soaring costs involved in financial crime compliance may at first glance seem sombre, in the anti-money laundering (AML) space there is light at the end of the tunnel as technological advances emerge as a clear alternative to ever-rising staff costs.

The report reveals six key findings:

1. Cost of financial compliance by region

The total global projected cost of financial crime compliance rose by 18% in twelve months, reaching just short of a massive $214 billion in 2020, with some variation per geographic region. Notwithstanding different market sizes and numbers of financial institutions, the largest cost increase was in North America at 33.3% to $42 billion.  

The smaller LATAM region rose by a similar percentage of 31%, to almost $6 billion, while APAC increased by 27.2%. Significantly, costs in Europe rose by the comparatively lower percentage of 20.9%. However, the European market size and number of financial institutions means that the rise to a whopping $102.5 billion represents 48% of the 2020 projected global cost.  

With increasingly sophisticated methods being employed by money launderers, costs in the AML sector are accelerating and will continue to do so without significant change in how many financial firms in the sector approach AML.

2. The role of labour vs technology in rising compliance costs

It is notable in this age of vast technological advances, that labour costs outstrip technology costs overall, albeit with some variation at regional level. Globally, labour costs rose from 57% of overall compliance costs to 58% while technology remained unchanged at 40%.

Increased entry-level employment, training to combat the financial risks of the COVID-19 pandemic, and harsher regulations and penalties all contributed to the rise in compliance costs.  

Regionally, LATAM’s labour costs rose a sharp 12%, North America is followed with 6%, and APAC's rose by 4%. Except for the EMEA (where compliance labour costs dropped by 3%), each region’s AML technology costs declined, all in the face of an overall 18% increase in the total cost of compliance. This data set is a major indication to us at Napier that innovative approaches to technology in financial services worldwide would result in a streamlined compliance cost profile and would enable financial organisations to stop financial criminals faster and at significantly less cost.

3. AML compliance challenges vary by region

The LNRS report asked the respondents to rank their top three of six AML challenge areas to compare regional perceptions from 2019 to 2020.  

These challenges were:

  • Customer risk profiling
  • Sanctions screening
  • KYC for onboarding, efficient alert resolution, positive ID of politically exposed persons (PEPS)
  • Regulatory reporting

The report noted two main findings:

  1. Consensus over the top three ranks declined between regions. North America appeared settled on what the top three challenges were; APAC, Western Europe and South Africa barely agreed on any; and LATAM agreed on only the first.
  2. The ranking of challenges within regions has shifted significantly. Among North American and South African firms, sanctions screening was rated as the top challenge in 2020, up from 2019, while both regions- along with APAC- noted PEP identification as an increased threat since the previous year. LATAM pointed to customer risk profiling as a more significant challenge since 2019, while Western Europe cited regulatory reporting as being a greater issue than during the previous year.

Against the backdrop of the COVID-19 pandemic’s impact, the regions and countries surveyed have different geographical and economic characteristics, criminal and law enforcement profiles, and legislative reporting requirements.  

The ranking shifts by, and within, regions reflect this: the challenges faced vary enormously by time and place, and the AML responses follow suit. It has never been more critical for financial institutions worldwide to implement holistic AML, constituted of cutting-edge software which can bolt onto and enhance any system.

4. The COVID-19 pandemic has exposed existing compliance challenges, with increasing costs globally

The COVID-19 pandemic has affected lives, livelihoods, societies, countries, and economies globally. Similarly, the virus has impacted AML practitioners throughout the world’s financial system.  

The LNRS report notes that global average annual financial crime compliance costs for the pre- and post-COVID 2020 periods increased significantly among all respondent regions and countries. North America’s 8.7% increase to $20 million was the highest, while APAC’s 3.9% rise to $16.1 million was the lowest.

While the variations in cost increases can be explained by regional differences across a range of measurements, what is significant is that which is common to all regions, namely:

  • Increased risks, acts, and types of money laundering and other economic crimes;
  • Surges in suspicious activity alerts
  • A rise in the amount of manual work, whether to analyse suspect activity or perform KYC checks
  • Challenges of implementing efficient remote working protocols
  • The global rise in labour costs, for a multitude of reasons

The ongoing pandemic may well be a turning point for this generation of financial crime fighters. It has unquestionably prompted a reset of how institutions approach fighting financial crime and could motivate them to make greater use of modern AML technology to contain costs while growing profits.

5. Financial challenges of AML compliance are adversely affecting productivity

The LNRS report’s respondents were also surveyed on the current impact of financial compliance on productivity, and what they saw future costs entailing. The results were daunting.

In total, 63% of role-players surveyed felt compliance procedures negatively affected productivity, with LATAM fairing the worst at 77%, and North America the best with 55%. Globally, customer acquisition received the same treatment of 63%, with LATAM again the most afflicted on 75%, and APAC the least on 51%.

Expected rises to average annual compliance costs hovered around an 8 to 9% increase for all regions, with LATAM’s Chile being the least optimistic by country, on 13%, and North America’s Canada the most on 6%.  

With sight of the future obscured by the ongoing pandemic, increasingly sophisticated financial crime through cryptocurrencies and cyber fraud, and the regulatory nooses tightening, even the most positive outlook could be misguided if current AML practices continue.

6. Taking on board the potential of today’s AML technology

Despite the withering array of challenges laid out in the report, it shows that financial institutions which have emphasised the critical role of AML technology in the allocation of their compliance budgets have fared far better than those which have not.

By comparing compliance costs of mid-to-large firms in the EMEA’s highest-spending markets (Netherlands, Italy, France, and Germany), which spent 50% or more of compliance budgets on AML technology, the LNRS report indicated three critical advantages gained:

  1. A significantly lower average annual compliance cost increase than that of similarly sized EMEA firms which spent more than 50% of their compliance budgets on labour;
  2. A lower annual average employee cost of $138 million, compared to $260 million for similar EMEA organisations spending more than 50% on compliance labour (a total saving of $122 million); and
  3. A comparative 17-25% reduction in negative impacts from compliance procedures impacted by the COVID-19 pandemic. The categories covered were customer risk profiling (less 17%), increased manual workloads (less 22%), delayed client-onboarding (less 18%), and KYC data access challenges (less 21%).

While data and technology are already helping to reduce time and costs, they could be doing so much more. Innovative technology and better data management can make AML screening more cost effective and, at the same time, reduce costs and manage risk more effectively. Such technologies constantly adapt to meet new AML regulatory requirements, allow for easy upscaling, and can help organisations to focus their people’s skills more effectively.  

By addressing the accuracy and richness of customer data across the organisation through effective customer data management systems, firms can unlock significant benefits, enable powerful AI, and risk screening technologies which will provide effective and reliable AML processes, both improving their AML service and reducing the spiralling costs of AML compliance.  

Introducing Napier's AML and compliance technology

Napier represents the next generation in anti-money laundering compliance software for the financial sector. Our innovative Intelligent Compliance Platform is shaking up the AML environment and is trusted by leading financial institutions globally.

Our solution focuses on easing the burden on compliance analysts, offering a user-friendly interface for our clients, and future-proofing our service with the ongoing application of technology, automation, and artificial intelligence (AI).

Our transaction monitoring and screening technology integrates rules-based approaches with machine learning to reduce false positives and focus on genuinely suspicious behaviours. Our Client Activity Review and Risk-based Scorecard integrate KYC and transaction monitoring to provide a holistic view of each customer and their risk level.  

We believe embracing cutting-edge technology is the future of solving financial crime. Our big data architecture can be scaled to suit organizations of all sizes, from start-ups to global institutions, while AI and machine learning enables the automation of monitoring and screening, freeing AML teams to focus on investigating only truly suspicious activities.  

Our team offers over 100 years of collective experience and knowledge in the AML compliance, IT, and financial services sectors. Our expertise is second to none, and our testimonials endorse this. Additionally, our customer support services include a dedicated Customer Success Manager for each client, training on use of our platform, and access to constantly updated user guides and resources. Our technical services are upgraded bi-annually.

For a demonstration of how Napier can guide your company on its journey to having the most effective AML compliance, please contact us here.

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