Global spending on financial crime compliance at financial institutions is forecast to reach US$213.9 billion in 2021, according to new research from LexisNexis Risk Solutions.
LexisNexis Risk Solutions' annual True Cost of Financial Crime Compliance Global Report surveyed 1015 financial crime compliance decision makers at financial institutions including banks as well as investment, asset management and insurance firms globally. It found the projected total cost of financial crime compliance across all financial institutions reached $213.9 billion in 2021, surpassing the $180.9 billion recorded in 2020.
The decision makers who took part in the study oversee financial crime compliance processes such as sanctions monitoring, know your customer (KYC) remediation, anti-money laundering (AML) and transaction monitoring.
The report found Western European countries and the U.S. continue to represent 82.7% of global total projected costs. Germany and the U.S. bear the bulk of cost increases at $9.6 billion and $8.8 billion respectively with Germany outsizing all other countries by a considerable amount. Mid to large financial institutions lead this growth where all regions, excluding South Africa and the Middle East, show double digit percentage increases in compliance costs.
According to the report, in previous years there has been consensus on the top two or three ranked compliance challenges within financial institutions. There is less uniformity in this years survey. Customer risk profiling, sanctions screening, regulatory reporting, identifying politically exposed persons (PEPs), KYC for account onboarding and efficient alerts resolution are all similarly ranked as key challenges. Different regions see varying degrees to which certain challenges are more heightened, however.
The research found the ongoing pandemic has left a significant imprint on compliance departments, which exacerbated existing issues and led to an increase in the time and spending needed for due diligence. Mid and large firms in the U.S. and Canada and parts of LATAM experienced sizeable pandemic-related cost increases. Key operational challenges became heightened in these markets since the start of the pandemic, including increased alert volumes and suspicious transactions, inefficiencies with alert resolution and due diligence, more manual work and limitations with proper risk profiling/sanctions screening/PEP identification.
Financial institutions implementing technology solutions to support financial crime compliance efforts have been more prepared and less impacted overall by increasing regulatory pressures and COVID-19, the report says. Compared to firms that distributed more of their annual compliance costs to labor, those that allocated costs more toward technology are seeing smaller year-on-year financial crime compliance operations cost increases, lower costs per full-time employee and fewer pandemic-related challenges.
"Financial institutions across APAC that allocate more financial crime compliance expenditure to technology realize smaller increases in cost compared to those with lower technology spend," says Douglas Wolfson, director, financial crime compliance for LexisNexis Risk Solutions.
"Firms with above average compliance spend on technology solutions are less challenged during the customer acquisition process," he says..
"A large majority of APAC financial institutions surveyed expect the COVID-19 pandemic to further increase compliance costs over the next 12 to 24 months," says Wolfson.
"The use of more comprehensive risk-management technology platforms will help ensure compliance and lessen financial crime compliance expenditure."