GAO Compliance Report Summary
The media coverage of the infamous FinCEN SAR leak has overshadowed a publication of a very insightful compliance survey report authored by the US Government Accountability Office (GAO). The report, issued 22 September 2020, two days after the public FinCEN scandal, details the compliance costs of the regulated sector, and proposes measures to increase the effectiveness and efficiency of the Anti-Money Laundering (AML) regime in the United States.
UBOs and SARs filings most expensive areas
According to the survey results, AML compliance programs account from 0.4 percent to a high of 4.9 percent of the total operating expenses. The cost break down points to the verification of Ultimate Beneficial Ownership (UBOs) and Suspicious Activity Reports (SARs) filings as the most expensive areas—representing 29 and 28 percent, respectively. Small institutions that do compliance manually, typically bear the biggest hit to their bottomline.
In 2018 alone, banks spent an estimated average of $15 per new account to comply with the customer due diligence requirements. Further, personnel required about 30 minutes, on average, to collect and review customer information when opening new consumer (or personal) accounts, compared to over 1 hour for new commercial (or business) accounts.
Such overheads quickly escalate to huge figures for global banks. The report provides an example of a bank with $101 billion or more in total assets, which opened over 36,000 legal entity accounts in 2018 and spent an estimated $3.7 million on implementing the UBO requirements.
Preparing and submitting SARs is another major cost to the regulated sector.
The survey highlights that FIs spend between 6 percent to about 44 percent (or about 25 percent, on average) of their total direct AML costs to meet the SAR requirements; the costs range from $300 to $18,000 for each SAR.
Transaction monitoring and technology
About 83 percent of that cost is in connection with transaction monitoring and investigating suspicious activity alerts.
Smaller banks commonly use manual monitoring to identify suspicious transactions making their compliance costs the higher percentage of the operating cost, compared to larger banks that use transaction monitoring software.
The future role of technology
Increasing the technology effectiveness, therefore, is called out in the report as the greatest potential to reduce the compliance budgetary burden.
To illustrate the opportunity, the report mentions a large community bank that reviewed about 7,000 suspicious activity alerts in 2018, of which 60 resulted in an investigation and nine resulted in a SAR—or about 0.1 percent of the initial alerts.
GAO encourages the regulated sector to critically evaluate available technology providers before purchasing a licence as transaction monitoring tools vary in sophistication and cost. There are standard “rule-based” software vendors that flag activity outside of predetermined rules established by the bank, and there are more “intelligent” approaches that flag suspicious activity in context with the customer profile and continuously evaluate their actual vs expected transactions.
The report further stresses how artificial intelligence-based tools can enhance a bank’s insights into the profile or characteristics of its customers from a variety of sources, including the transactions that the customers execute.
Regulators globally encourage banks to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their AML compliance requirements. GAO confirms that many financial services firms (including those in the banking, securities, and insurance industries) have begun to integrate artificial intelligence and other technology tools into their compliance systems and operations. Such new technologies offer banks opportunities to better manage their costs and increase their ability to comply with the ever increasing AML requirements, rapidly changing customer transactional behaviours, and constantly innovating criminals.
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