Anonymous hacker in front of his computer. | iStock photo
Anonymous hacker in front of his computer. | iStock photo

Global financial crime compliance costs analyzed in LexisNexis Risk Solutions study

The digital banking shift, digital payments, cryptocurrencies and artificial intelligence (AI) are critical factors behind escalating global financial crime compliance costs that exceed $200 billion. Those are among the findings in LexisNexis Risk Solutions’ True Cost of Financial Crime Compliance Study for 2023.

Thanks to the digital shift, which connects institutions with digital payments, cryptocurrencies and AI, financial crime compliance costs are rising for 98% of institutions. They come as market participants grapple with increasingly cumbersome KYC processes during onboarding. Mix these issues, and you get global financial crime compliance costs topping $206 billion.

Why have those costs risen so sharply? Staffing costs are soaring, with it affecting 72% of respondents. Software costs have increased for 69%, with remote working-related technology costs up for 71%. Staff training for financial crime compliance tasks and outsourcing impact 69% of institutions.

AI use is growing, in good and bad ways

Most institutions have quickly caught on to AI. Advanced analytics are used by 71% of organizations. That helps them to make better use of their data. A similar number, 72%, employ analytics to enhance compliance procedures.

Criminals have also caught on to AI. More than half of institutions have seen significant increases in crimes related to AI, digital payments and cryptocurrencies.

“While it’s been around, (AI) is still new,” LexisNexis Risk Solutions’ director of market planning for financial crime compliance and payments spaces Cynthia Printer said. “It’s water cooler talk. 

“At times, these industries have been a bit slower to adopt some of that. Seeing the numbers so high and represented in this report shows that the willingness of spaces to adopt and consider new technologies like that is growing.”

Compliance costs vary by region

Compliance burdens vary by region, with EMEA financial institutions seeing the steepest bills. EMEA’s overall cost of financial crime compliance is 39.8% higher than the United States’ and Canada’s. Four out of five EMEA firms say the complex network of regulations and sanctions constrain their businesses. Compare that to APAC’s, which are 25.5% lower than the USA’s and Canada’s and LATAM’s, which are a paltry 24.7% of the USA and Canada’s.

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Evaluating the compliance paradox between CX and security

These trends are happening as 85% of financial institutions prioritize enhancing the customer experience (CX) while also contending with growing compliance burdens. Most businesses, regardless of industry, also expect a seamless CX. Printer has seen that CX focus inch up over the past two years. It’s strongly reflected in many responses this time.

“It’s clearly the main drive and focus of financial institutions,” Printer said. “What that is doing is driving that next layer of decision-making from an organization, knowing that customers can change a vendor or provider now with that click of a button on their phone.”

Amplifying that customer focus is one key area institutions focus on in their battle against financial crime. More than 80% seek to maintain their reputations by strengthening governance practices and adhering to these growing compliance standards. Many (83%) use enriched payment data to produce faster processing times, fewer payment rejections, and better risk management. Done correctly, they address both regulator and customer expectations.

What institutions are most concerned about

Institutions are re-evaluating their current financial crime compliance processes in this changing environment and planning enhancements to data quality, KYC, AML, internal compliance and transaction monitoring. They must prepare for future macroeconomic events to maintain continuity and reduce recovery time.

Cynthia Printer said verification in the digital era is a more challenging but achievable task.

The next step businesses expect is real-time payments (RTP), which won’t be a smooth transition. More than 75% of respondents feel that current compliance models are significant enough of a hurdle to obstruct the transition to RTP. Those creaking systems are further strained as rising payment volumes produce equally growing screening alert rates.

Supply chain operations are another concern. Exposure to trade-based money laundering schemes has grown by 57%, while supply chain corruption is up by 56%. Bribery and corruption are top-five issues worldwide. Criminals capitalize on this by manipulating various shipping documents.

Top compliance roadblocks

Navigating KYC during account onboarding is the top impediment for decision-makers. Complex and time-consuming procedures can slow the process as consumers expect quick and seamless approvals. The top three KYC factors are identifying direct and indirect relationships between business entities (45%), the lack of critical identifying attributes of a business (44%), and the lack of effective KYC risk profiling of business entities (42%). North and Latin American institutions say KYC during onboarding is their biggest challenge.

Executives fret about customer risk profiling, which depends on many ever-changing factors. Maintaining accuracy and updating profiles can present significant roadblocks. Successfully identifying sanctioned entities and politically exposed persons is another. Constantly changing sanctions and PEP status make it hard to keep records current.

Institutions know the importance of timely and accurate reporting. It provides regulators with transparency. However, frequently changing and complex regulations and data and technology challenges make this a significant pain point. As alert numbers rise, institutions are struggling to resolve them. False positives, data fragmentation and regulatory pressure are contributors.

Benefits begin with increased insights into customers

Thankfully, these efforts bring benefits. They help institutions better understand customers overall (identified by 46%) and specifically their risk tolerance (54%). Many institutions are learning that compliance processes deliver deep insights into customer behavior and risk tolerance. More than 40% expect their reputations to improve.

How to combat rising compliance labor costs

Labor expenses are behind the most significant cost increases in APAC, EMEA and Latin America. Staff are necessary, but they can be complemented by external providers, who may bring improved efficiency.

“Verifying the identity of someone is not so simple now that we’re in this digital world,” Printer said. “But it’s doable. These are things that an organization can outsource. More organizations are looking to outsource over the next three years because they realize they can’t do everything well.”

While executives are rightly concerned about cost control, show them the benefits, and they’re prepared to act. They wish to avoid the damage sustained by others.

“What they’re spending their money on has shifted,” Printer said. “There’s a proactive perspective in addressing the financial crimes that a criminal might conduct on our business because they now have access to advanced technologies.”

Taking steps at onboarding is crucial

Those rising costs have led executives to look inward to optimize the use of existing resources from across the organization. There also are more industry-wide efforts. 

Printer sees much of that playing out at onboarding, as the downstream damage criminals inflict is well-documented.

“If you can perform adequate due diligence around confirming an individual’s identity and financial standing and then perform that sanction screening… as the very first step, you’re going to identify people you do not want to do business with upfront,” Printer said. It saves you a lot of exposure further down the road.”

  • 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.