As this publication has often observed, the main result of governments' drive to force financial institutions to do police work has not been the apprehension of money launderers in significant numbers but the expenditure of vast sums of money on the part of those institutions on investigators, consultants, compliance officers and IT. Fresh figures appear to bear this out.
LexisNexis Risk Solutions, the giant AML software vendor, has released a report entitled Cutting the Cost of AML Compliance which suggests that financial firms spend almost £29 billion per annum on AML compliance. The company believes that this is a conservative estimate.
The figure, according to the IT giant, is equivalent to more than half of Britain's defence budget in 2020 (£53.3 billion). It is also equivalent to most of the estimated £37 billion that the UK's National Crime Agency believes that organised crime costs the country each year.
The research, produced in partnership with an agency called Oxford Economics (not to be confused with Cambridge Analytica), is a comprehensive AML cost analysis.
IT to the rescue?
The report makes the obvious point that firms' rocketing expenditure on compliance staff and AML/know-your-customer software is not a response to any increase in crime. It is, instead, merely a response to greater demands on the part of regulators. It estimates that the implementation of the European Union's fifth Anti-Money Laundering Directive alone is costing the average British financial institution about £750,000.
LexisNexis blames recent increases in the cost of compliance on the augmentation of data-privacy rules, a higher demand for faster payments on the part of customers and a rise in "geo-political risks."
In its report, the software vendor takes the opportunity to remonstrate with firms about their "significant AML inefficiencies...data quality, system failures, gaps in IT infrastructure, ineffective internal tools and outdated technologies."
It adds: "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...fulfilling their short-term compliance requirements and are tending to throw people at the problem, rather than investing in technology.”
Counting the cost
The research reveals that 53% of compliance budgets are devoted to the processes (such as customer-due-diligence or CDD checks, remote ID checks, the verification of information and risk assessments) that firms need to help them 'onboard' new customers. A further 14% of budgets are consumed by the investigations and evidence-gathering that underpin every EDD or "enhanced due diligence" check.
The investigation of alerts accounts for only 6% or so of AML budgets. The burden is nevertheless high even in this area, as another LexisNexis report revealed in 2017. Back then, and perhaps today also, the average firm was spending more than 20 hours and 3.7 members of staff checking customers who posed standard risks, 90% of which turned out to be based on false alarms.
LexisNexis believes that the total cost of compliance may reach £30 billion by 2023. The financial institutions to which Oxford Economics spoke (301 firms that included retail banks, challenger banks, wholesale/commercial banks, investment banks/securities houses and MSBs or money service businesses) expected 'Brexit' to result in more regulation, although it is also a safe bet that countries that remain in the European Union will experience much more regulation also.