A recent report from LexisNexis Risk Solutions highlights that escalating Anti-Money Laundering (AML) regulations are driving up compliance costs for financial institutions in the UK, surpassing the financial burdens posed by criminal threats themselves.
The report, titled “Cutting the costs of AML compliance,” surveyed over 300 financial institutions and revealed that a cautious approach towards suspicious activity has led to excessive reporting, resulting in increased workloads. Institutions indicate that media coverage surrounding money laundering and Covid-19 scams adds further pressure on their compliance efforts, prompting legislative reactions.
Overall, the compliance costs for UK financial institutions amount to approximately £28.7 billion annually, projected to exceed £30 billion by 2023. Surveyed firms reported average annual AML compliance costs of £186.5 million, with larger entities reporting expenses nearing £300 million per year.
Steve Elliot, the managing director of LexisNexis Risk Solutions for the UK and Ireland, expressed surprise over the significant costs associated with AML compliance. To provide context, he noted that the entire UK defense budget for the year ending March 2021 was £53.3 billion, indicating that financial institutions are spending almost half of that budget on AML compliance alone.
Moreover, the National Crime Agency (NCA) estimates the annual cost of serious organized crime in the UK economy at around £37 billion, suggesting that AML compliance costs closely parallel the financial impact of criminal activities. Research has shown that despite substantial expenditures, anti-money laundering policies have a minimal effect, with less than 0.1% impact on criminal finances, while compliance costs often exceed recovered criminal funds by more than a hundredfold.
Elliot pointed out that the ongoing evolution of regulations introduces complexity and organizations often respond by increasing their workforce rather than embracing technology and data-driven solutions. This results in inefficient and costly arrangements aimed at tackling financial crime and ensuring compliance.
The report details that the challenge lies not only in adhering to regulations but also in the time involved in interpreting intricate legislation. For instance, the integration of the Fifth Money Laundering Directive in 2020 has led UK firms to estimate implementation costs at around £750,000 on average.
Quoting a group head of financial crime for a UK lending bank, the report emphasizes that regulatory changes can be likened to “turning a super-tanker,” particularly for larger organizations. Swift guidance is essential as processes become deeply embedded within these companies.
Elliot noted that Brexit has further complicated compliance for financial institutions, as they face the dual challenge of aligning with both EU and UK standards. He remarked that the UK financial sector has generally been proactive in ensuring compliance, often moving more rapidly than many EU nations.
Additionally, the report indicated that regulators may not fully grasp the specific impacts of the changes they implement, leading to compliance costs that may not align with the size and risk profile of certain firms.
For example, recent changes to sanctions screening regulations required firms to adapt systems to comply with both UK and EU sanctions lists. What might seem like minor adjustments can have substantial implications for operational processes.
Elliot believes that the current detection rate of just 1% can be improved through a data-driven approach, utilizing algorithms and machine learning to identify genuine financial crime. By analyzing extensive datasets, firms can uncover patterns of illicit behavior, significantly enhancing detection effectiveness compared to existing rules-based monitoring systems, which often generate high false-positive rates.
He cautioned that instead of adopting innovative technologies and leveraging larger datasets, many large financial institutions are simply adding personnel to address compliance issues. While this may enhance quality checks, it is costly and limited in effectiveness. Elliot advocates for the integration of advanced technology and comprehensive data solutions to resolve compliance challenges rather than perpetuating ineffective practices.