AML-regulated companies in the UK spend billions on compliance each year, and this amount is expected to grow with each new regulation and directive.
The cost of AML compliance can be staggering.While some firms see the costs as necessary for combatting the significant issue of money laundering, others don’t agree. They believe these expenses aren’t in line with the level of risk they are exposed to.
This guide will cover how businesses can cut their AML compliance costs, including:
However, before we can understand future implications let’s look at the current state of AML in the UK.
Anti-money laundering continues to be a major talking point for regulators and financial institutions in the UK due to the prevalence of criminal activity.
The Pandora Papers was the largest document leak in history. It was a joint investigation between 150 news outlets and hundreds of journalists.
They uncovered 12 million documents linked to over £8 trillion in offshore dealings and hidden assets.
Individuals involved in the leak involve politicians, public officials, presidents and former presidents, billionaires and other influential people. And while having offshore assets isn’t illegal in and of itself, it sparks the debate around whether these individuals legally acquired the assets or not.
Due to its anonymous nature and the lack of regulation, cryptocurrencies are seen as potential facilitators of criminal activity, particularly for terrorist funding. As a result, Coinbase launched an inquiry into the risk of terrorist funding through digital assets.
The cryptocurrency exchange found that current terrorist funding through digital assets makes up only 0.05% of transactions, an extremely low number.
However, it did find that companies that operate in Afghanistan or with businesses based there could be at increased risk of being involved in money laundering and terrorist financing.
In a bid to continue operations, criminals are finding ways to obtain new vessel registration numbers for sanctioned ships.Some criminals make physical alterations to vessels, while others use non-sanctioned ships to avoid checks.
Once new registrations are obtained these criminals gain access to financial institutions and other businesses, posing risks of unintentional money laundering facilitation for these firms.
UK authorities are beginning to take AML regulation and enforcement more seriously.
Even though many have only just managed to meet the requirements of the 5AMLD (Fifth Anti-Money Laundering Directive), which was launched in 2015.
While the consultations have concluded, the results have not been announced.
As the UK clamps down on money laundering, there are some changes, trends and challenges to be aware of in 2022.
While money laundering is rising, increasing regulatory complexity is cited as the primary reason for growing compliance costs.
Fear of non-compliance is also driving costs up, as businesses do all they canto avoid the reputational harm of money laundering allegations and the fines associated with convictions.On top of this, the UK plans to implement anew levy to fund its Economic Crime Plan strategies. The levy aims to raise £100 million per year and will operate on a tier-based system with small companies (under £10.2million revenue per year) exempted and the largest firms (over £1 billion in revenue) paying£250,000 per year.
Implementing new technologies is also driving up costs, as businesses maintain complex legacy systems while investing in innovation.
As the government combats money laundering, new regulations and amendments will be added in 2022.
Regulation updates for 2022 include:
The Covid-19 pandemic has seen increased criminal activity. Institutions have struggled to deal with the number of suspicious transactions and subsequent alerts.
On top of that, work-from-home mandates have made AML compliance more tedious.
Other notable difficulties include:
If the pandemic restrictions begin to relax, some of these difficulties will become easier to manage. However, with a new Covid-19 variant recently detected it’s impossible to know when these challenges will subside.
The FATF (Financial Action Task Force) outlined the benefits and potential of technology regarding AML compliance in their recent report, Opportunities and Challenges of NewTechnologies for AML/CFT.
They believe that cutting-edge technology like AI (Artificial Intelligence) and DistributedLedger Technology, among others, are the keys to improving AML compliance.
The FATF highlights some critical benefits of implementation, which include:
Note: The FATF’s risk assessment recommendations have been updated to include virtual assets and their role in proliferation financing (the financing of weapons of mass destruction).
You can find the complete list of current recommendations on their website.
AML compliance costs UK companies around £28.7 billion each year, and this figure is expected to rise to £30 billion per year by 2023.
The average large institution spends around £300 million, while smaller companies spend over half that at £186.5 million each year.
UK firms struggle to keep up with implementation costs, with yearly updates and amendments to regulations.
Estimates suggest that 5AMLD implementation alone cost the average UK financial institution £75,000. However, firms across many sectors are still struggling to implement the directive, so there’s every chance that this figure could increase.
With each new layer of regulation also comes the upkeep costs.
The average UK firm reported having at least38 FTEs (Full-Time Equivalents) working on AML compliance, with large institutions having over 100.
As a result, surveyed firms spend around 70% of their compliance budgets on human resources, with wages accounting for 55% and training initiatives for 15%. Technology costs only accounted for roughly 25% of the AML budget, signalling an over-reliance on employees.
The repercussions of regulatory noncompliance are steep. Regulation breaches can see businesses subject to civil penalties, criminal sanctions and significant fines.
The value of the fines varies widely, starting at £2,500 and reaching hundreds of millions of pounds.
AML non-compliance penalties vary depending on the:
However, every non-compliant business will face a £1,500 administration penalty excluding the cost of any fines.
On top of this, businesses may have to cease operating while investigations are underway, resulting in significant losses.
AML compliance costs are only expected to grow as regulations continue to layer on top of each other.
Scarce human resources are also likely to drive costs up if firms prioritise employees rather than technology in the fight against money laundering.
There is immense demand for compliance personnel in AML and KYC (Know YourCustomer), which has resulted in employee job-hopping.
This trend prevents employees from becoming familiar with money laundering trends in specific sectors, reducing the effectiveness of AML measures. If this trend continues, compliance training costs are also likely to grow.
Keeping abreast of the latest criminal techniques is also becoming more complex in the digital age, which further increases costs.
These factors mean it’s an excellent time to review your AML compliance measures before human resource costs become too high.
With compliance costs growing, your business may be looking for opportunities to save costs.
The current state of over-reliance on human resources leaves businesses vulnerable to employee scarcity and the resulting wage increases.
To combat this leading firms have been leveraging data and technology, with most firms confirming good returns on technology investments.
In particular, there are three key factors to address if you want to reduce AML compliance costs in 2022 and beyond.
Firms that implement advanced technology during their AML processes report lower compliance costs than employee-focused companies. On top of this, technology is expected to slow the growth rate of compliance costs.
The FATF highlights machine learning asa potential technology that can reduce manual monitoring and automate many AML processes.
Consequently, 39% of firms plan to implement new compliance software soon, while 34% look to follow suit over the next few years.Another way to leverage automation is through our AML background check technology which verifies your customers within seconds, providing a frictionless onboarding process.
Currently businesses spend most of their money on human resources, while technology spending lags significantly.
As a result, 41% of firms now plan to up skill staff in the data science and technology realms, while 31% plan to recruit staff with those existing skills.
With these skills, businesses will be able to invest in and leverage technology to reduceAML compliance costs in the long run.
A significant challenge highlighted by the FATF was data quality and its effect on the effectiveness of technology and AML processes.
Improving data quality is also a priority for43% of businesses in 2022, while 32% plan to focus on data quality over the next few years.
At Red Flag Alert, we use industry-leading high-quality, real-time data in our AML compliance software.
Our data comes from over a hundred sources both in the UK and overseas and includes information like:
Among other things, these data points allow you to monitor potential AML risks in realtime, ensuring you catch potential issues before they arise. On top of this, high-quality data provides you with a secure audit trail, making potential investigations simple.
AML costs are only expected to grow in the future.
Protect your business by leveraging Red Flag Alert’s capabilities to cut costs on AML compliance by:
Red Flag Alert has over 20 years of experience in saving companies from bad debt, remaining compliant and achieving growth.
Our platform is available on a seven day free trial and will immediately protect and empower your business.
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