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Financial crime compliance a $57B task: LexisNexis Risk Solutions Report

In a new report, LexisNexis Risk Solutions finds that financial institutions are pressured by increasing costs and regulatory burdens that impact their business to the tune of $56.7 billion.

The True Cost of Financial Crime Compliance Study can be downloaded here.

The study has six key findings, beginning with the cost of financial crime compliance increasing compared to pre-pandemic times (though that may be levelling off). The Anti-Money Laundering Act of 2020 has affected compliance costs, particularly for large American financial institutions.

This occurs as American and Canadian financial institutions are continuously more exposed to crimes with digital payments, trafficking proceeds, and trade-based money laundering schemes. That produces compliance challenges such as regulatory reporting, customer risk profiling, and digital identity verification. The combination impacts productivity, due diligence times, and new customer acquisition. Overall, it’s a $56.7-billion problem; that is a 13.7% increase in just one year.

Smart firms take a more comprehensive approach to financial crime compliance

While the easy takeaway is that people are investing in more technology, so the costs are naturally increasing, that’s an oversimplification, Leslie Bailey, vice president of financial crime compliance at LexisNexis Risk Solutions, said. A better analysis is assessing how institutions consider meaningfully using these products to reduce costs.

Ideally, financial firms should leverage data and technology to support goals such as reducing false positives or improving labor efficiency, Bailey explained. Companies are fine with employing staff to address compliance issues, and personnel knows it’s necessary. Still, both have reasons for wanting the process to be as efficient as possible.

Leslie Bailey headshot
Leslie Bailey

Companies want to make the best use of their staff. Having highly paid personnel addressing elementary issues is a waste of money. For their part, the staff, especially in tech, want challenging work. If they don’t get it here, they’ll find plenty of other options, especially in this market, where it exists.

An increasingly popular approach for solutions providers like LexisNexis Risk Solutions is to educate clients to view these providers as partners that help them leverage technology in a way that allows them best reach those goals through product customization. The impetus is for them to learn how client businesses are structured so they can highlight opportunities across the enterprise.

“I think we were seeing a shift in more technologies and having a seat at the table to help drive business decisions,” Bailey said. “I think that fits business owners; it turns the tables slightly because business owners just didn’t make the decisions. Now you have CTOs (too).”

LexisNexis Risk Solutions is well-positioned to engage in comprehensive partnerships, Bailey explained. They have trusted technology, an established brand, and have completed a series of acquisitions that have augmented their in-house technologies.

What drives outsourcing decisions?

The report describes how some companies outsource onboarding, due diligence, and KYC technologies. One of the drivers is the high turnover companies experience when handling monotonous tasks in-house. Repeatedly training staff saps productivity.

“There are more skilled employees who do the due diligence and investigative work because what person in that role doesn’t get excited by the investigative process and looking for the bad guy?” Bailey said.

Bailey said that more companies are seeing the importance of leveraging the data generated by these tasks to produce value. One area is managing risk within portfolios. Human trafficking and child exploitation are growing concerns, and properly deployed technology can help identify meaningful patterns. LexisNexis Risk Solutions participated in Project Umbra, an initiative that brings together financial institutions, solution providers, regulators, non-profits, and law enforcement in the fight against online child sexual exploitation.


How to best deploy your workforce for increased regulatory activity

Bailey said that the number of regulatory enforcements will increase as technologies that can trace computer IP addresses improve. If an IP address emanates from a sanctioned country, why are some IP addresses in, for example, the United States engaging with them? Who are those American IP addresses engaging with? What is the portfolio risk?

Bailey added that freeing up those employees for more challenging tasks is crucial if these new technologies identify risks in your portfolio. If you find suspicion of human trafficking, you have to report it and potentially deal with law enforcement. That’s important but also time-consuming. Having the right technologies and partnerships with external providers makes addressing it easier.

Bailey explained that the COVID-19 pandemic saw millions of customers suddenly thrust online, creating problems. Previously unbanked people were getting PPP loans, so they needed to open accounts – remotely. KYC difficulties surged, as did the number of alerts.

The number of sanctions in 2022 could quadruple the number from 2021. That brings work such as the regular updating of vendor lists. Institutions must constantly check client lists to ensure they are not conducting business with banned entities. There’s a domino effect of responsibility and labor, Bailey said.

How digital identity verification will change the game

As the awareness of digital identity verification spreads, financial institutions are warming to the benefits of consortium data, Bailey said. The technology to protect proprietary information exists, so there is little risk. The incentives are substantial, including much lower chances of fines.

“The more you can visualize networks, the more you can mitigate your risk,” Bailey said. “I think it has been more people who have had an openness and a willingness to experiment. Once people were willing to step out and start trying new things and think about new ways to access information, they thought about the benefits.”

  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.