Anti-money laundering (AML) compliance is costing UK financial institutions a hefty £28.7bn annually, and is set to rise to £30bn by 2023 according to new report -Cutting the Cost of AML Compliance – by LexisNexis Risk Solutions, the global data and analytics provider in conjunction with Oxford Economics.
Putting it into perspective, the report said the figure is equivalent to more than half the 2020 UK defence budget of £53.3bn and a significant proportion of the roughly £37bn the National Crime Agency estimates that organised crime costs the UK each year.
The research, which is a comprehensive analysis of AML compliance spend since Brexit, pointed to regulation as the primary driver behind the rising compliance costs and not criminal threats.
It noted that firms struggle to keep pace with ever-increasing and changing regulatory requirements. The implementation of the Fifth Anti-Money Laundering Directive (5MLD) alone, is estimated to cost the average UK financial institution around £75,000.
Other reasons for soaring compliance expenses include changes in data privacy requirements, customer demand for faster payments and increasing geo-political risks.
The report also showed the situation is exacerbated by significant AML inefficiencies including data quality, system failures, gaps in IT infrastructure, ineffective internal tools and outdated technologies.
It added 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.
Firms are addressing the problems by increasing spend on teams rather than technology, with 70% of budgets directed to the human element.
The research further revealed 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 partly by the shift in demand for online services fuelled by successive lockdowns.
An additional 14% of budget is taken by investigations and evidence gathering relating to enhanced due diligence checks.
Steve Elliot, managing director, business services UK & Ireland at LexisNexis Risk Solutions, 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.”
He added: “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.”
Wayne Johnson, CEO and co-founder of KYC solution provider, Encompass is also not surprised at the rising AML compliance cost. “Going forward, there must be improvements made when it comes to overall AML compliance processes, and how the latest solutions are utilised, if we are to see significant changes,” he adds.
Johnson believes “regulation technology will continue to play a significant role in the fight against financial crime, particularly as new legislation and regulatory guidance is born from the pandemic, remote working, and the popularisation of new payments technologies, such as cryptocurrency and blockchain.”
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