The stated goal of KYC and AML regulations is to require banks and financial institutions (FIs) to:
- Know who they are doing business with
- Continually look out for suspicious activities
- Report suspicious activities
While this sounds simple enough, AML and KYC processes are complex and costly to implement and maintain.
KYC-AML laws are largely ambiguous. An ever-evolving regulatory landscape means more compliance laws, and larger AML and KYC budgets, each year. Streamlined customer onboarding is an ongoing challenge, and the problem of money laundering remains Herculean.
And yet, despite their flaws, AML and KYC processes are vital in reducing the funding of terrorism and other sinister activities. Therefore, banks and FIs need all the help they can get when it comes to AML and KYC. Solutions that provide greater data sharing are critical as they avoid information silos and may reduce bloated AML and KYC budgets.
The following statistics illustrate the problems that plague AML and KYC. They indicate the rising cost of compliance and the need for solutions that streamline AML and KYC at the organisational level.
- LexisNexis Risk Solutions: U.S. financial services firms pay $25.3 billion per year in AML compliance costs
The cost of implementing AML compliance infrastructure is almost always high, no matter the size of the financial institution. The smaller the financial services firm, the greater the proportional cost of AML compliance. Maintaining and updating the infrastructure as clients and regulations change is also costly for every firm.
- Deloitte: 62% of banks and FIs cite increasing regulatory expectations and enforcement as the greatest challenge with AML compliance.
With new AML related legislation comes new compliance benchmarks. The Illicit Cash Act is the latest bill expected to introduce new AML and KYC challenges.
- PwC: Large banks spend $88 million per year on AML-related data storage.
And yet, PwC also found that these banks receive no competitive advantage from this massive expenditure. As AML and KYC regulations expand, the cost of compliance will rise. PwC suggests stronger data-sharing solutions to “greatly reduce the cost” of KYC and AML.
- PYMNTS: 18 out of 20, or 90%, of the largest banks in Europe have received sanctions for money laundering-related violations in the past decade-plus.
A reminder of the need for effective KYC and AML processes, even though compliance remains a major challenge.
- Compliance Week (access code required): KYC and AML fines totaled $10.4 billion in 2020
Financial institutions incurred more fines for data privacy, AML, KYC, and Markets in Financial Instruments Directive (MiFID) violations in 2020 than ever before. As compliance spending continues to rise, violations do as well.
- RealWire: Banks could save at least $12 million each year by improving their KYC/AML systems.
These proposed savings would come through improved customer retention, avoidance of fines, and reputation maintenance.
- Forbes: Banks take an average of 24 days to onboard customers, due in large part to the complexity of KYC and AML.
This time frame is expected to lengthen as new regulations make KYC and AML even more difficult. Customer abandonment and diminished brand perception are two risks of long onboarding periods.
- Fenergo: The U.S. accounts for about 91% of the total value of non-compliance-related fines.
Though only 44% of global AML and KYC fines affect U.S. accounts, the total value of those fines accounts for 91% of sanctions. The precise value of U.S. fines over a ten-year period: $23.52 billion.
- Thomson Reuters: 60% of FIs expect their compliance budget to increase slightly or significantly in the next decade. Only 9% expect a decrease.
It is a reasonable expectation, as compliance costs have historically trended upward. Respondents to the same survey cited regulatory changes as the top compliance-related challenge of 2020. Changing regulations and rising compliance costs go hand-in-hand.
- Deloitte: 10 trends could affect the cost of KYC, AML, and broader compliance in 2021 and beyond.
Deloitte lists the ‘Bank Secrecy Act and anti-money laundering (BSA/AML) compliance’, a ‘renewed push for consumer protection’, and ‘financial resilience in an uncertain regulatory environment’ as regulatory trends to anticipate in 2021. Along with concerns such as climate risk, any or all of the 10 trends identified by Deloitte could increase the cost of compliance through more complex rules and regulations.
- One World Identity: The KYB subset of KYC/AML is expected to grow to be an $11.8 billion industry by 2022.
Increased scrutiny of legal businesses is driving the cost of Know Your Business (KYB) compliance. Greater transparency into who owns legal businesses, including shell companies, has proven costly. KYB has always been a challenging feature of AML processes, as a business does not always tell the full story of the client.
- Signicat (via Paypers): 90% of bank customers will abandon an onboarding application if the process takes more than an hour to complete.
Meanwhile, 12% will abandon an application after only five minutes. Another 40% won’t last more than 10 minutes, while 86% will give up after 30 minutes. It’s a mystery how financial institutions continue acquiring customers with onboarding processes trending towards the month-long mark.
- LexisNexis Risk Solutions: Crime compliance operations cost $20.5 million on average for large financial services firms in the United States.
This figure applies to financial services firms handling more than $10 billion in assets. These expenses reflect a 33% increase in compliance costs for U.S. and Canadian financial services firms in 2020, per LexisNexis.
- Thomson Reuters: only 30% of corporate respondents make their banks aware of KYC and Customer Due Diligence (CDD) changes proactively.
There is a reason why corporate clients are reluctant to update their KYC and AML information proactively: the process is a headache. Without better solutions, those affected by KYC and AML will likely continue to make changes only when compelled to.
- S&P Global: 67% of corporate treasurers said they limit or restrict the number of banks they work with because of KYC related challenges.
KYC costs and processes are so draconian that corporations will make business decisions based on avoiding them. Whether the cost is financial or comes in the form of time-cost, treasurers are wary of the toll of KYC.
- Deloitte: 48% of banks and FIs said that insufficient or outdated AML compliance technology was one of their biggest compliance challenges.
Without the technological infrastructure for compliance, banks and FIs are virtually guaranteed fines for non-compliance. However, with the breakneck speed of regulatory change, keeping tech up-to-date means paying a steep cost.
- JD Supra: Financial institutions filed more than 2.3 million suspicious activity reports (SARs) in 2019, an average of 6,305 per day. That number increased to 6,452 per day in 2020.
Financial institutions aren’t just going through the motions. They’re reporting suspicious activity when they see it, and they’re seeing more of it than ever.
- Bank Director: An estimated $180 million in AML analyst salaries go towards Bank Secrecy Act (BSC) and SAR reports alone.
AML analysts are spending an outsize segment of their time filing suspicious activity reports. Better preventative AML resources may free AML analysts to focus on other tasks, dedicating less of their time to drafting and filing SAR reports.
- Deloitte: 2-5% of the global GDP, or as much as $2 trillion, is laundered each year.
Yet another figure that reminds us how important KYC and AML are. Even with the apparent room for improvement in KYC and AML solutions, money laundering operations can’t go on unabated.
- GLEIF: Nearly 6 in 10 (57%) of senior salespeople in the banking sector spend at least 1.5 days per week on onboarding processes for client organizations
Onboarding clients is undoubtedly a worthwhile undertaking. The question is whether the process could be more efficient, and whether fewer resources could be dedicated to KYC, AML, and other onboarding processes. The answer is yes.
- Arachnys: Global fines for financial crime-related violations in 2020 were the highest they’ve ever been.
Those fines included $2.9 billion paid by Goldman Sachs for its role in the Malaysian 1MDB bribery scheme. It was the largest corporate penalty for a criminal bribery case. Such a large fine against such a prominent bank brings into question the efficacy of AML processes throughout the financial sector.
- Deloitte: 34% of banks and financial institutions in Asia cited budget constraints as the biggest challenge to AML compliance.
The cost of compliance is rising, highlighting the need for more effective and affordable AML/KYC solutions.
- LexisNexis Risk Solutions: The total projected cost of financial crime compliance for all U.S. and Canadian financial firms in 2020 was $42 billion.
This was a significant leap from the $31.5 billion cost of compliance in 2019. The jump illustrates why financial institutions plan to spend more on AML and KYC in coming years.
- ShuftiPro: 2021 is set to see more regulations affecting KYC and AML.
Among the coming regulations is the Sixth Anti-Money Laundering Directive (6ALMD). Affecting the EU, this will increase the number of offenses linked to AML and KYC non-compliance, reduce the transaction threshold for fines, and increase the cost of economic sanctions for violations.
- International Consortium of Investigative Journalists (ICIJ): The suspicious transaction threshold may be reduced from $3,000 to $250 in 2021.
The Financial Crimes Enforcement Network (FinCEN) has proposed reducing the suspicious transaction threshold from $3,000 to $250. Should this proposal be adopted in the name of stymying more low-level criminal activity, it will mean significantly more AML costs for financial institutions.
Closing
KYC and AML present a conundrum for financial institutions and their clients. While each process is vital, increasing compliance costs have not bred adequate results.
High-profile scandals and fines tell us that money laundering remains a major problem. The largest financial institutions (Goldman Sachs among them) have not been effective in their AML processes. Despite lagging results, the cost of compliance keeps climbing.
But what choice do financial institutions and their clients have?
The cost of non-compliance is also high. Failing to invest in KYC and AML is not only illegal, but also foolhardy. Fines, and potentially more dire consequences, will follow non-compliance.
It is clear: the financial industry needs better KYC and AML solutions.
Data sharing is one of the clearest ways to improve KYC and AML. With better, more abundant data comes better threat detection. This translates to fewer violations and fines and more efficient KYC and AML spending—an area that is currently an albatross for most financial institutions.
Spending on AML and KYC has to produce better return on investment. With solutions like the Kyckr Registry Portal, regulated firms can access company intelligence on more than 170 million legal entities across 120 countries at a reasonable cost.
