Survey: AML, OFAC Compliance Costs Rising for FIs Worldwide (July 2013)

By Kate Fitzgerald, Emerging Payments Editor 

The cost of complying with anti-money laundering (AML) rules and requirements is rising, just as the expansion of related anti-bribery and corruption laws around the world is placing unique new demands on global financial organizations, according to a new survey.

International banks are devoting more personnel, departmental resources and board members’ time to complying with these laws, Veris Consulting found in “The Global Cost of Anti-Money Laundering Compliance,” its first global survey of the bottom-line effects of increased global AML and anti-corruption laws. For its survey, Reston, Va.-based consulting firm Veris polled 284 senior management and compliance executives at global financial institutions in 46 countries. The majority of respondents were multinational financial institutions; 72 percent were banks; 12 percent were broker-dealers; 6 percent were money service businesses, 1 percent were investment funds and the remainder were “other.”

Sixty-six percent of survey respondents said they’ve seen an increase in compliance costs related to AML and Office of Foreign Assets Control (OFAC) laws over the last three years, according to Veris. Twenty-three percent saw no change in those compliance costs, and 11 percent saw a decrease, the results suggest. Differences emerged in global regions. Seventy-one percent of respondents in the Latin America and Caribbean region said their AML and OFAC compliance costs rose over the last three years, compared with 63 percent of respondents in the U.S.; 59 percent of respondents in the Europe, Middle East and Africa regions and 55 percent of respondents in the Asia-Pacific region, Veris found.

Benchmarking Costs

Financial institutions’ compliance costs vary widely, but the effect of rising compliance costs cuts across financial organizations, according to Sven Stumbauer, Veris Managing Director and practice lead for Miami and Latin America, who conducted the study. “AML costs are a growing concern and could use more attention at certain banks, depending on the institution’s particular situation,” he tells Paybefore, adding that the survey is intended as a benchmark for global banks assessing compliance costs.

Sixty-one percent of respondents saw an increase in their organizations’ headcount due to AML and OFAC compliance over the last three years, and an equal percentage saw an increase in corporate board involvement in AML and OFAC compliance. Seventy percent of respondents said their organizations are asking other internal departments for help with compliance and 24 percent are using outside consultants to help with compliance.

Nearly a third, or 32 percent, of respondents told Veris they consider their organizations’ AML and OFAC compliance budgets to be inadequate, while 8 percent said they consider their budgets to be adequate.

The top cost driver of AML and OFAC compliance is automated transaction monitoring systems, accounting for 75 percent of costs, according to survey respondents. Forty-two percent of respondents said AML and OFAC policies and procedures also were top drivers of compliance costs, while 39 percent of respondents said updating and maintaining accurate customer information is a top driver of AML and OFAC compliance costs. Another 39 percent cited compliance personnel training as another top driver of AML costs.

Pendulum Swings

It’s not surprising to see the rise of AML and OFAC compliance costs as priorities shift with the changing global economy, James H. Freis Jr., counsel at Cleary Gottlieb Steen & Hamilton LLP, previously director of the U.S. Treasury Dept.’s Financial Crimes Enforcement Network (FinCEN), tells Paybefore. While AML and OFAC rules have not changed significantly in recent years with respect to banks, the pendulum is swinging back toward a greater emphasis on compliance as institutions get past the financial crisis that began about five years ago, Freis suggests. “There has been a general shift in sentiment with respect to the financial industry and in the general public about regulations—before the financial crisis there was a feeling we had too many regulations, but afterward we are now in an environment of increasing regulation and enforcement of those rules.”

Global financial organizations increasingly are rising to meet the challenge of compliance with AML, OFAC and similar laws around the world by creating enterprise-wide strategies, according to Freis. “Previously many institutions took a siloed, or pocketed, approach to complying with these regulations and now they are looking at it more broadly and creating a framework for compliance around the concept of a global risk management policy that works for multiple jurisdictions.”

Finding cost-effective approaches to coping with the burdens of compliance with AML and other requirements will be the next challenge for affected organizations, says John F. Walsh, CEO and president of SightSpan Inc., which advises organizations on risk-management and AML programs.

“Clearly compliance costs are increasing as the global focus on international AML increases and combating terrorist financing plays an increasingly important role in the financial services and payments marketplace,” Walsh tells Paybefore.

A ‘Business Mindset’

Affected organizations should strive to design a strategic approach to meeting AML compliance requirements to reduce costs, he suggests. “The private sector needs to not only reduce compliance risks but do so with a business mindset, maximizing their investment in technology tools.” Examples include designing technical approaches to compliance that reduce steps and avoid duplication of tasks, according to Walsh.

Another way to offset AML compliance costs involves harnessing data from the transaction-monitoring process, says Walsh. “Understanding and sharing transaction-monitoring information at a detailed level, such as what clients are doing with their capital and where they spending their money—down to times, dates and locations—is extremely valuable to the business units within an organization.”

Firms that invest in longer-term solutions that are well thought-out and use a practical business approach to manage compliance risk may see a variety of bottom-line benefits, including a higher likelihood of risk-management success, Walsh suggests.