Woman using a magnifying glass showing the projected global cost of financial crime compliance reaching over $180 billion

Global Cost of Financial Crime Compliance Over $180 Billion, Report Reveals

The projected total cost of financial crime compliance across the global finance sector amounts to around $180.9 billion, a new report by legal research and risk solutions firm LexisNexis Risk Solutions reveals.

By facilitating a survey of 898 relevant business leaders and decision-makers across all major regions of the world, researchers at LexisNexis Risk Solutions also noted several trends driving corporate governance in the financial sector. These were derived from “responses on processes such as sanctions monitoring, know your customer KYC remediation, anti-money laundering and transaction monitoring, among others,” the team said.

According to the researchers, the report’s findings illustrate how businesses that are “utilizing targeted financial crime compliance technology tools” are the very same businesses finding ways to “capture enterprise efficiencies” and “overcome the negative cost and operations impacts of compliance.”

Key findings

The report, entitled the ‘True Cost of Financial Crime Compliance Study Global Report’, reveals five overarching findings:

First and foremost, the researchers found that financial crime compliance challenges have a negative impact on productivity and employee retention.

This is so much the case, in fact, that compliance teams are stressed “to a degree where managers worry about retaining skilled professionals”, and 67% of compliance decision-makers are “concerned with job satisfaction within their workforce”. These trends have a negative effect on financial institutions in Latin America, Europe, the Middle East and Africa in particular, the report suggests.

Also notable is that the regions of the world hardest hit by financial crime compliance costs in general are Europe and U.S. This is because, the report reveals, there are a significantly larger number of financial institutions that exist in these regions when compared to the rest of the world. According to LexisNexis Risk Solutions, the average annual financial crime compliance costs are highest for mid- to large-sized financial institutions in the U.K., Germany, France, Italy and the Netherlands. (These are defined as institutions possessing more than $10 billion in total assets).

The report also found that labor is the single largest driver of high compliance costs. While there are indeed a whole host of different factors which contribute to higher financial crime compliance costs—chief among them being increasingly complex regulations, data privacy limitations and penalties for sanctions violations—labor costs nevertheless take the cake.

On average, the global distribution of compliance costs stands at 57% for labor, 40% for technology and 3% for other factors, according to the survey.

Notably, Europe, the Middle East and Africa lead on labor expenses, which sit at 62% for the three regions combined. Additionally, the cost of labor for financial institutions rose by, on average, 9% to 10% during the past 24 months across the Asia Pacific region—indicating a potential large-scale strengthening of corporate governance over the financial sector in this region.

The report also found that when companies pursue due diligence, it takes them longer and increases the costs involved. This is especially the case in Europe, where taking steps to comply with “increasingly complex regulations” causes financial firms in the continent to “take longer than any other market to complete business account due diligence which increases the cost of financial crime compliance overall.”

To this effect, the average time that is taken for a new employee to onboard into mid-sized corporation has increased sharply from around 21 hours in 2017 to 36 hours in 2019.

Additionally, a final major finding of the survey suggested that financial institutions identify non-bank payment providers as a source of risk. These providers create “additional compliance challenges and risk” for companies in the financial sector.

According to the researchers, while this is particularly the case in Latin America and in Canada, the negative impact is “broad”, and includes “increased alert volumes, more correspondent banking risk, greater compliance team stress, and higher technology and labor costs.”

Old drawbacks, new benefits

Central to the bolstering of compliance to financial crime requirements around the world is the age-old problem of criminality targeting the financial sector. Today, with an emergence of a complex system of cybercriminality to which companies the financial sector risk falling victim, mitigating the risks associated with crime is more important than ever before.

According to Daniel Wager, the vice president of global financial crime compliance strategy for LexisNexis Risk Solutions, “as criminals become more sophisticated, a multi-layered solution approach to financial crime compliance is crucial to facilitating a more cost-effective, efficient compliance approach, as well as one that provides benefit to the larger organization.”

Wager believes that financial institutions should “investigate both the physical and digital identity attributes of their customers,” making use data analytics to “assess risks and behaviors in real time.”

In this way, compliance can help spur forward new technologies that can help to reduce costs and facilitate efficient operations.

“There is now an increased recognition among financial institutions that financial crime compliance initiatives provide broader benefits,” Wager continues, pointing out that the right technologies can help to decrease the cost of compliance per employee, and ease the steep costs associated with onboarding.

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“Keeping [labor] costs lower is essential to profitability,” he adds, “since labor tends to account for significant increased compliance expenses year-over-year.”