Study finds AML compliance costing UK firms over £28bn a year

A study by LexisNexis Risk Solutions has found anti-money laundering (AML) compliance is costing UK financial institutions £28.7bn and will raise to £30bn by 2023.

International Investment highlighted that the research – executed by Oxford Economics – was carried out between October and December of last year and consisted of a survey of 301 UK-based financial services organisations that looked to identify widespread inefficiencies in AML compliance processes in the financial services sector.

According to LexisNexis, the study found regulation is the primary driver behind the rising compliance costs as opposed to criminal threats, as many companies are struggling to keep up to date with new regulatory requirements.

For example, the implementation of the Fifth AML Directive alone is estimated to be costing the average UK financial institution around £750,000. In addition, data privacy requirements, customer demand for faster payments and increasing geo-political risks were all cited as key external drivers of hiked compliance costs.

The report also found rising costs are compounded by substantial AML inefficiencies such as data quality, gaps in IT infrastructure, ineffective internal tools, system failures and outdated technologies.

Furthermore, the study found that many companies create extra work for themselves by erring on the side of caution due to the fear of regulatory repercussions if something is missed.

To deal with these challenges, many UK companies are increasing their spend on teams rather than technology, with up to 70% of budgets committed to boosting expertise.

The study discovered that 53% of compliance budgets are currently spent on processes required to onboard new clients. These processes include Customer Due Diligence checks, remote ID and verification checks and risk assessments, which is driven in part by the shift in demand for online services aided by the successive lockdowns due to Covid-19.

A further 14% of compliance budgets are being spent on investigations and evidence-gathering relating to bolstered due diligence checks.

According to International Investment, financial institutions also expect the UK’s exit from the European Union to result in more regulation which will fuel an even steeper AML compliance cost rise in the coming years.

LexisNexis managing director of business services for UK & Ireland Steve Elliot said, “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.”

“This report appears to show that, under the strain of increasing regulatory burden, firms are spending time and cost on fulfilling their short-term compliance requirements and are tending to throw people at the problem, rather than investing in technology, data and analytics, which could bring about longer-term and more transformational benefits.”

Elliot added that tech-enabled big data and analytics tools can aid businesses in transforming the detection of financial crime and shift their focus towards prevention instead of detection.

He said, “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.

“Over-reliance on people is expensive and clearly unsustainable in the long term, however the answer isn’t to reduce human resource, it’s to employ technology to do the repetitive tasks that can then free up people’s valuable knowledge to be deployed where it’s most effective, applying a robust and regulator-approved risk-based approach that will really make a difference to the effectiveness of AML activities.”

Elliot concluded that the report should be a ‘rallying call’ for UK regulators to combine efforts and work together with the industry to ensure the right processes, tools and technology is in place to stand a chance of detecting and deterring money laundering in all forms.

He said, “As part of this, there needs to be a deliberate move towards a far more considered risk-based approach to AML that draws the best elements of big data, technology-assisted processing and human knowledge and experience together to truly understand and prevent the constantly evolving criminal threat.”

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