AML compliance is costing UK financial institutions a staggering £28.7bn annually, and is set to rise to £30bn by 2023 according to new research released today (21 June) by LexisNexis® Risk Solutions, the global data and analytics provider.

The report, which was done in conjunction with Oxford Economics, is the most comprehensive analysis of AML compliance spend of its kind since Brexit, the data provider said, and showed that regulation is the primary driver behind the rising compliance costs as opposed to criminal threats.

This massive figure is equivalent to more than half the 2020 UK defence budget (£53.3bn) and a significant proportion of the estimated £37bn the NCA estimates that organised crime costs the UK each year.

UK Firms are responding to mounting AML pressure by increasing spend on teams rather than technology, with 70% of budgets committed to people power

The research, produced in partnership with Oxford Economics, is a detailed AML cost analysis study helping to uncover widespread inefficiencies in AML compliance processes within the UK financial services sector.

The findings revealed that regulatory burden, rather than a rising criminal threat, is the primary cause of the growth in compliance costs, as firms struggle to keep up with ever-increasing and changing regulatory requirements.

The implementation of the Fifth Anti-Money Laundering Directive (5MLD) alone, is estimated to be costing the average UK financial institution around three quarters of a million pounds.

Changes in data privacy requirements, customer demand for faster payments and increasing geo-political risks were all cited as key external drivers of increased compliance costs.

Rising costs are compounded by significant AML inefficiencies, the report found, including data quality, system failures, gaps in IT infrastructure, ineffective internal tools and outdated technologies.

Adding unnecessarily to the burden, the report also found that firms are creating more work for themselves by erring on the side of caution, as a consequence of a fear of regulatory repercussions, if something is missed.

Steve Elliot, managing director, business services UK & Ireland at LexisNexis Risk Solutions, said: "The fact that increasing AML regulations, rather than an evolving criminal threat is the primary driver for increased compliance costs in the UK is a clear sign that the UK's current AML approach requires wholesale change. Building on past solutions is evidently becoming too costly and ineffective, and so they need to be redesigned for the modern age, using big data and technology instead of rules and manual processing."

He added: "This report appears to show that, under the strain of increasing regulatory burden, firms are spending time and cost on fulfilling their short-term compliance requirements and are tending to throw people at the problem, rather than investing in technology, data and analytics, which could bring about longer-term and more transformational benefits."

The research further revealed that over half (53%) of compliance budgets are spent on processes required to onboard new clients, such as Customer Due Diligence (CDD) checks, remote ID & verification checks and risk assessments, driven in part by the shift in demand for online services fuelled by successive lockdowns. An additional 14% of budget is consumed by investigations and evidence gathering relating to enhanced due diligence checks.

While alert investigations account for only around 6% of AML spend, the resource burden is high, as another LexisNexis Risk Solutions report in 2017 revealed, firms spend more than 20 hours and 3.7 members of staff remediating even standard risk customers, 90% of which turn out to be false positives.

If unaddressed, today's research reveals that the rapidly increasing cost of compliance to firms is expected to continue to rise in the next three years, with predictions putting the total cost at over £30bn by 2023.

Added to that, financial institutions expect the UK's exit from the European Union to result in more regulation, fuelling an even steeper AML compliance cost rise in the coming years.

Elliot concluded: "Tech-enabled big data and analytics tools can help businesses transform the detection of financial crime and shift their focus towards prevention rather than detection. Good quality data alone can significantly transform a firm's AML process effectiveness by reducing data silos and providing a far clearer picture of the risk a potential customer presents, reducing false positives and associated remediation tasks in the process, which as this report highlights, accounts for a further fifth of firms' AML costs."

"Over-reliance on people is expensive and clearly unsustainable in the long term, however the answer isn't to reduce human resource, it's to employ technology to do the repetitive tasks that can then free up people's valuable knowledge to be deployed where it's most effective, applying a robust and regulator-approved risk-based approach that will really make a difference to the effectiveness of AML activities."

It's reassuring that firms clearly support and see the benefits of introducing technology into their AML processes, with two in five firms planning data quality initiatives in the coming year and a similar number planning to implement new compliance software. But it's also apparent that what's holding the sector back from more widespread change is reassurance from regulators that the technology they're adopting is fully endorsed.

He continued: "Today's report should be a rallying call for UK regulators to combine efforts and work together with the industry to ensure that the right processes, tools and technology is in place to stand a chance of effectively detecting and deterring money laundering in all its forms. As part of this, there needs to be a deliberate move towards a far more considered risk-based approach to AML that draws the best elements of big data, technology-assisted processing and human knowledge and experience together to truly understand and prevent the constantly evolving criminal threat."

The research was carried out between October - December 2020, commissioned by LexisNexis Risk Solutions and executed by Oxford Economics, consisting of a survey of 301 UK based financial services organisations (FSOs), including Retail banks, Challenger banks, Wholesale/Commercial banks, Investment banks/securities firms and money services businesses.