The escalating costs of global financial crime compliance

financial crime compliance

The digital revolution, spearheaded by digital banking, cryptocurrency, artificial intelligence (AI), and digital payment systems, has significantly contributed to the exponential rise in global financial crime compliance costs. According to the recent findings of the True Cost of Financial Crime Compliance Study by LexisNexis Risk Solutions for 2023, the increasing costs have surpassed a staggering $200 billion.

The surge in financial crime compliance costs is primarily attributed to the digital transformation connecting institutions with digital payment platforms, cryptocurrencies, and AI. This innovation, while offering unparalleled benefits, has posed severe compliance challenges, particularly in the Know Your Customer (KYC) processes during onboarding. As a result, the cumulative financial crime compliance costs have now exceeded an impressive $206 billion.

The significant escalation in compliance expenses is rooted in various factors impacting financial institutions globally. As discovered in the study, staffing costs have surged, affecting 72% of the survey respondents. Simultaneously, software expenses have witnessed a noticeable increase for 69% of institutions, aligning with the rising costs of remote working-related technology, affecting 71% of the participants. Moreover, financial institutions are grappling with the increasing costs associated with staff training for financial crime compliance tasks and outsourcing, impacting 69% of the institutions.

An Era of AI: Opportunities and Challenges

The study underscores the expanding usage of Artificial Intelligence (AI) in the financial sector. With 71% of organisations adopting advanced analytics, institutions are leveraging AI to optimise data usage and enhance compliance procedures. However, this technological advancement has also caught the attention of criminals, leading to a significant uptick in financial crimes associated with AI, digital payments, and cryptocurrencies.

“AI is still relatively new and the industries have been somewhat slower to adopt it,” noted Cynthia Printer, Director of Market Planning for Financial Crime Compliance and Payments at LexisNexis Risk Solutions. “However, the high numbers reported in this study indicate the growing willingness of industries to embrace and explore these novel technologies.”

Regional Disparities in Compliance Costs

The study sheds light on regional variations in compliance costs, with EMEA (Europe, Middle East, and Africa) financial institutions facing the most substantial financial burdens. EMEA’s overall financial crime compliance costs are nearly 39.8% higher than those in the United States and Canada. EMEA institutions cite complex regulations and sanctions as a significant constraint to their business operations, with four out of five institutions encountering these challenges. In contrast, APAC’s (Asia-Pacific) compliance costs are 25.5% lower than those in the USA and Canada, while LATAM’s (Latin America) costs are a modest 24.7% compared to the USA and Canada.

Balancing Compliance and Customer Experience

Amidst these rising compliance burdens, 85% of financial institutions are actively prioritising enhancing the customer experience (CX). This emphasis on CX is increasingly becoming a primary focus across most industries, indicating the rising customer-centric approach in financial institutions. Cynthia Printer highlighted, “Customer experience is evidently the primary focus of financial institutions, guiding their decision-making process.”

The Focus on Compliance Roadblocks and Mitigation Strategies

Financial institutions are re-evaluating their current financial crime compliance processes and devising strategies to enhance data quality, KYC, AML (Anti-Money Laundering), internal compliance, and transaction monitoring. As the market moves towards real-time payments (RTP), over 75% of respondents view current compliance models as significant obstacles hindering the RTP transition. Additionally, supply chain operations pose growing concerns, with trade-based money laundering and supply chain corruption on the rise. Bribery and corruption remain among the top-five global issues, exploited by criminals through document manipulation.

Top compliance roadblocks faced by institutions include navigating KYC during account onboarding, customer risk profiling, and timely and accurate reporting. These challenges are further complicated by complex and ever-evolving procedures, regulatory pressures, and increasing alert numbers.

Efforts and Benefits: Insights and Impacts

Despite these formidable challenges, institutions are reaping significant benefits from their compliance efforts. Institutions are increasingly gaining deeper insights into customer behaviour and risk tolerance through enhanced compliance processes. Approximately 40% of institutions expect improved reputations as a result of their compliance activities.

Mitigating Escalating Compliance Labour Costs

The study highlights the role of labour expenses as a primary driver behind the substantial cost increase in various regions. While staff are crucial, institutions are increasingly considering external providers to enhance efficiency. Cynthia Printer emphasised, “The verification of identities in this digital world is becoming complex. Many organisations are considering outsourcing, realising that it’s impossible to handle everything internally.”

The Imperative of Effective Onboarding Strategies

Given the surge in compliance costs, institutions are focused on optimising internal resources and industry-wide efforts to fortify their systems. A significant emphasis is placed on improving onboarding processes to prevent downstream damage caused by criminals. Printer advised, “A robust due diligence process and sanction screening at the initial onboarding stages can effectively mitigate potential risks in the future.”

The financial sector is navigating a challenging landscape, balancing customer-centric experiences with the pressing demands of robust financial crime compliance. The study by LexisNexis Risk Solutions highlights the critical areas demanding attention and strategies to mitigate rising compliance costs and associated challenges.

How 123signed can help

The financial industry is facing substantial challenges in complying with evolving regulations, particularly concerning KYC and onboarding processes. 123signed offers specialised solutions to help businesses enhance their KYC processes and streamline onboarding, significantly reducing the complexities and time-consuming nature of these critical functions. Through our cutting-edge technologies and expertise, we empower organisations to efficiently navigate these challenges, ensuring compliance with industry regulations while providing a seamless and swift onboarding experience for customers. Our 123signed technology takes a multi-layered approach to financial crime compliance, ensuring your regulatory AML and monitoring requirements are covered in a quick and easy process. As an automated tool which aggregates multiple solutions, 123signed provides everything you need in one cost effective application. Contact us today to find out more.