AML compliance across M'sian financial services firms estimated at US$890m

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SINGAPORE (July 2): The true cost of Anti-Money Laundering (AML) compliance across all Malaysian financial services firms is estimated to be US$890 million (RM3.68 billion), according to a LexisNexis Risk Solutions’ “True Cost of AML Compliance” study.

Though this spend is largely attributed to larger asset-sized firms, it is smaller firms that spend somewhat more as a percentage of assets, said the study by the US-based company.

The cost of AML compliance is higher among smaller firms at an average of 0.14% than larger firms at 0.07%.

For this study, firms are referred to in terms of their asset size, whereby small asset size is having less than US$10 billion of total assets, and mid/large asset size is having more than US$10 billion total assets.

Data was collected by phone during March — April 2019 with 50 completions from Malaysia.

Respondents included decision makers within the financial crime function who oversee “Know Your Customer (KYC)” remediation, sanctions monitoring and/or AML transaction monitoring.

Organisations represented banks, investment firms, asset management firms, and insurance firms.

The study said the distribution of compliance costs is similar by size of organisation, though costs are distributed somewhat more toward labour than technology.

“And given that larger firms employ nearly twice as many full time equivalent (FTE) as smaller firms on average, this contributes to exponentially higher compliance costs,” it said.

Labour includes not only salaries, but also benefits, taxes, and overheads.

The study said average compliance costs are spread similarly across labour-consuming activities, with over a quarter involving KYC, which consumes labour hours through information collection, list screening, and risk assessment.

Remaining costs involve transaction monitoring, investigations, and overall compliance management.

According to the study, use of newer technologies/services is similarly limited across smaller and larger firms, outside of cloud-based KYC utilities.

Larger firms are more likely than smaller ones to use shared inter-bank compliance databases, artificial intelligence, and unstructured audio analysis.

A majority are able to monitor online transactions in real-time for criminal behavior (78%) and sanctions breaches (68%).

While fewer (63%) currently monitor digital identities, most firms don’t expect to within the next 1-3 years.

The study said Malaysia’s exposure to domestic and transnational criminal activity, including fraud, corruption, drug trafficking, wildlife trafficking, smuggling, tax crimes, and terrorism finance increases its vulnerability to money laundering.

This adds additional risk to financial firms and makes de-risking even more important, it said.

According to the study, there is a group that perceives AML compliance to negatively impact productivity (21%) and customer acquisition (35%).

These impacts are not insignificant, with average annual hours of lost productivity estimated to be 22 per FTE and annual opportunity costs of refused accounts/customer walkouts and delayed account opening amounting to between 2.0–3.0% of new account applications.

These things individually, but especially combined, can lead to higher long-term costs.

The above will likely be compounded by an expected increase in alert volumes and cost increases over the course of the year, said the study.

A majority, especially banks (90%), expect alert volumes to increase, by an average of 12%.

The study said AML compliance and sanctions costs are expected to grow by an average 9.0% and 8.0% respectively, in the coming year.

Additionally, the study said non-bank payment providers are creating challenges for compliance organisations.

Non-bank transactions have grown exponentially, 31.3 million mobile payment transactions in 2018, compared with just a million transactions in 2017.

In the past year, over one in three suspicious activity reports have involved non-bank payment providers, resulting in increased stress on compliance teams and an increase in alert volumes and resource costs.

In response to the impact from these providers, a number of financial firms have migrated to dynamic monitoring, creating a team to evaluate emerging payment technologies, or implemented more rigorous training.