Anti-money laundering compliance is costing UK financial institutions £28.7 billion ($39.6bn) annually, according to LexisNexis Risk Solutions research.
The findings reveal that regulatory burden, rather than a rising criminal threat, is the primary cause of the growth in compliance costs, as firms struggle to keep up with ever-increasing and changing regulatory requirements. The implementation of the Fifth Anti-Money Laundering Directive (5MLD) alone, is estimated to be costing the average UK financial institution around three quarters of a million pounds.
The cost may be more justified considering the size of the money laundering problem facing UK plc, which a financial crime intelligence leader of one of the top tier UK banks cited in the report described as “absolutely massive”: “If you look at some of the key threats that we’re seeing as a bank, and then if you multiply that by the number of banks that are out there and all the other players that play as part of the process of executing transactions that can be susceptible to money laundering, I think we’ve got a considerable problem on our hands.”
Firms in the survey reported an average AML compliance cost of £186.5m per annum. For larger institutions average costs are closer to £300m, or more. In the past three years, firms reported that financial crime compliance costs have increased broadly in line with business inflation (up by 5.4%), however future cost inflation for AML and CFT (combating the financing of terrorism) compliance is expected to be more severe over the next three years, at nearly 10%.
Changes in data privacy requirements, customer demand for faster payments and increasing geo-political risks were all cited as key external drivers of increased compliance costs. Rising costs are compounded by significant AML inefficiencies, the report found, including data quality, system failures, gaps in IT infrastructure, ineffective internal tools and outdated technologies. Adding unnecessarily to the burden, the report also found that firms are creating more work for themselves by erring on the side of caution, as a consequence of a fear of regulatory repercussions, if something is missed.
Steve Elliot, managing director, Business Services UK & Ireland at LexisNexis Risk Solutions, said in a statement: “The fact that increasing AML regulations, rather than an evolving criminal threat is the primary driver for increased compliance costs in the UK is a clear sign that the UK’s current AML approach requires wholesale change. Building on past solutions is evidently becoming too costly and ineffective, and so they need to be redesigned for the modern age, using big data and technology instead of rules and manual processing.”
Two in five firms are planning data quality initiatives in the coming year and a similar number are planning to implement new compliance software. Elliot noted in the statement that “what’s holding the sector back from more widespread change is reassurance from regulators that the technology they’re adopting is fully endorsed.”
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Diving deeper, the research reveals that over half (53%) of compliance budgets are spent on processes required to onboard new clients, such as Customer Due Diligence (CDD) checks, remote ID & verification checks and risk assessments, driven in part by the shift in demand for online services fuelled by successive lockdowns. A further 14% of budget is consumed by investigations and evidence gathering relating to enhanced due diligence checks.
If unaddressed, the research reveals that the rapidly increasing cost of compliance to firms is expected to continue to rise in the next three years, with predictions putting the total cost at over £30 billion by 2023. Added to that, financial institutions expect the UK’s exit from the European Union to result in more regulation2, fuelling an even steeper AML compliance cost rise in the coming years.
Elliot said in a statement: “Tech-enabled big data and analytics tools can help businesses transform the detection of financial crime and shift their focus towards prevention rather than detection. Good quality data alone can significantly transform a firm’s AML process effectiveness by reducing data silos and providing a far clearer picture of the risk a potential customer presents, reducing false positives and associated remediation tasks in the process, which as this report highlights, accounts for a further fifth of firms’ AML costs.”
A group head of Financial Crime for a UK specialist lending bank, said in the report: “Some of these changes are like turning a super-tanker, particularly for the larger organizations. Processes are embedded, so the sooner you can get the guidance out, the better.”