However, the same annual survey that divulged this trend also saw tangible and intangible returns on such rising costs.
What was the true global cost of complying with financial crime regulations in 2020/2021?
Through an annual survey of 1,015 financial crime compliance decision makers at global financial institutions the projected total cost of financial crime compliance across all financial institutions has been determined to have reached US$213.9bn this year, surpassing the US$180.9bn recorded in 2020.
The majority of this sizeable year-over-year increase is represented by Western Europe and the United States. Other findings by the survey commissioned by LexisNexis Risk Solutions include the following:
- Western countries continued highest spending on compliance
Western European countries and the US represented 82.7% of global total projected costs. Germany and the US bore the bulk of cost increases at US$9.6bn and US$8.8bn respectively, with Germany outsizing all other countries by a considerable amount. Mid-to-large financial institutions led this growth where all regions, excluding South Africa and the Middle East, showed double-digit percentage increases in compliance costs.
- Less consensus on operational challenges
In previous years there had been consensus on the top-two or top-three- ranked compliance challenges within financial institutions. In this year’s survey there has been less uniformity. Customer risk profiling, sanctions screening, regulatory reporting, identifying politically exposed persons (PEP), Know Your Customer protocols for account onboarding and efficient alerts resolution were all similarly ranked as key challenges. Different regions saw varying degrees to which certain challenges were more heightened.
- Massive impact on compliance due to the pandemic
The ongoing pandemic left a significant imprint on compliance departments, exacerbating existing issues and leading to an increase in the time and spending needed for due diligence. Mid and large firms in the US and Canada and parts of LATAM experienced sizeable pandemic-related cost increases. Key operational challenges were 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.
- Technology investment led to better outcomes
Financial institutions implementing technology solutions to support financial crime compliance efforts were more prepared and less impacted overall by the increasing regulatory pressures and the pandemic. Compared to firms that distributed more of their annual compliance costs to labor, those that had allocated costs more toward technology were seeing smaller year-on-year financial crime compliance operations cost increases, lower costs per full-time employee and fewer pandemic-related challenges.
Said Douglas Wolfson, Director (Financial Crime Compliance), LexisNexis Risk Solutions: “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. Firms with above-average compliance spend on technology solutions are less challenged during the customer acquisition process.”
A large majority of APAC financial institutions in the survey expected the COVID-19 pandemic to increase compliance costs further over the next 12 to 24 months. The use of more comprehensive risk-management technology platforms will help ensure compliance and lessen financial crime compliance expenditure, Wolfson opined.