Anti-money laundering regulations increase compliance costs in the UK


A new report from LexisNexis Risk Solutions has found that increasing anti-money laundering regulations, more than criminal threats, are driving up compliance costs for UK financial institutions.

Survey of over 300 financial institutions across the UK, ‘Reduce AML compliance costs‘reports that a culture of excessive caution leads to over-reporting of suspicious activity, resulting in higher work volumes. Institutions cite media coverage of money laundering and Covid-19-related scams as adding to the burden of the compliance function, as this coverage inevitably provokes a backlash from lawmakers.

This cost equates to an annual expenditure of £ 28.7 billion at UK financial institutions and is expected to reach over £ 30 billion by 2023. The companies surveyed reported an average annual cost of AML compliance of £ 186.5million – large institutions citing costs nearly £ 300million each year.

“We were surprised, almost disappointed, at the cost of AML compliance for the financial services industry,” said Steve Elliot, Managing Director of LexisNexis Risk Solutions, UK and Ireland.

He adds that to put this in perspective, the entire annual UK defense budget for the year ending March 2021 was £ 53.3bn – financial institutions spend around half of the budget. from UK national defense to AML compliance.

Even more striking, Elliot adds, is that the National Crime Agency (NCA) estimates the total annual cost of serious organized crime to the UK economy at around £ 37 billion, “so the cost of compliance is not too far from the cost of the crime itself.

Adding salt to the wound, research indicated that despite these expenses, the intervention of the anti-money laundering policy has an impact of less than 0.1% on criminal finances, and the costs of compliance exceed the criminal funds recovered more than one hundred times.

“It really is the perfect storm,” says Elliot. “We have the problem of changing the regulations that companies try to pass and adopt more and more frequently, these are more and more complex, and we also have companies that are trying to solve the problem by there. putting more and more people instead of changing their approach. with technology and data. We find ourselves with increasingly expensive and ineffective arrangements to solve the problem of financial crime and ensure compliance, and it is costly. “

The report points out that it is not only the regulation itself that is costly, but the time required to interpret complex legislation that increases the bottom line. For example, in 2020 UK money laundering regulations incorporated the requirements of the Fifth Money Laundering Directive (5MLD) and UK businesses estimate it will cost around £ 750,000 on average to implement.

Citing a financial crime group leader for a UK specialty credit bank, the report notes that “some of these changes are like the transformation of a super-tanker, especially for large organizations. The processes are integrated, so the sooner you can get the advice, the better. “

Elliot also points out that Brexit is a sore point for financial institutions that are grappling with the extra layer of complexity it demands with the separation of EU / UK standards. He says that “the UK industry has generally been very active in ensuring compliance. If you compare the old anti-money laundering regulations, many states in the EU did not adopt the regulations as quickly or as completely as the UK. They were running less stringent standards, which means we have a series of concerns again, or a series of issues over there, forcing the UK to bear a lot of costs as it seeks to comply. “

On top of that, the report says the industry is overseen by regulators who “don’t necessarily understand the granular impact of some of the changes they’re making.” He says that for many businesses, the cost of complying with money laundering regulations is grossly disproportionate to their size and level of risk.

To illustrate this point, Elliot highlights the changes to the sanction screening that went into effect earlier this year. “The introduction of a UK sanctions list on top of the existing European sanctions lists may not sound like a big change, but where there are name differences companies have to change their systems as they have to comply with the two standards. What may seem like small changes can actually be quite large. “

Elliot is convinced that the 1% detection rate can and should be improved significantly with the right approach. Using algorithms and machine learning against large data sets means that businesses can actually detect real financial crimes. This is effective because the technology allows companies to use proven financial crime patterns and then model them through the data to look for similar patterns of behavior across attributes.

“It’s much more efficient at finding crime than what’s happening today. For example, looking at transaction monitoring today, there are many rule-based transaction monitors that have false rates. The use of technology will absolutely help identify who the scammers are and detect suspicious transactions in a much more credible way than simply working manually by rules as businesses currently do.

Instead of embracing new technology and larger data sets, Elliot notes that large financial institutions tend to add more people to the process, but of course there’s a limit to what humans can effectively verify. .

“Applying more and more people can make sure you have quality control over what you already have, but it’s a very expensive way to do quality control and it is against a very limited capacity. The real answer is to embrace new technology and bigger data sets and use it to fix the problem instead of just building on what doesn’t.

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