NEW YORK–A new study of financial crime compliance costs found spending by American and Canadian financial institutions is up significantly in 2020, driven in part by the coronavirus pandemic.
The True Cost of Financial Crime Compliance Study, released and compiled by LexisNexis Risk Solutions, is projecting the cost of financial crime compliance at $42 billion across U.S. and Canadian financial firms this year. The costs break down to $35.2 billion for U.S. firms and $6.8 billion for Canadian firms.
Total costs are up 33% over 2019, according to the report.
The findings are based on a survey of 150 financial crime decision-makers (120 American, 30 Canadian) polled via telephone during August. The individuals worked in financial crime compliance at banks, insurance companies, investment firms, and asset management firms.
According to LexisNexis, the total annual cost of compliance across firms was calculated using survey data on financial crime costs as a percent of total assets and secondary data that provides the total assets for all financial institutions in the United States and Canada. The spend amount was generated by multiplying the average percent allocated to financial crime costs by the reported total asset amount, according to the survey’s methodology.
Increased Complexity
The coronavirus pandemic has increased the complexity of financial crime compliance in a number of ways, Daniel Wager, vice president of global financial crime compliance strategy at LexisNexis Risk Solutions, said in a statement.
According to Wager, since face-to-face interaction has largely given way to electronic exchanges, new customers have to provide their documentation electronically. That has put a strain on financial institutions the now have to make sure these electronically filed documents are legitimate and legible.
The volume of new accounts has been buffeting some financial institutions, according to Wager. New customers who may never have had a bank account before are applying, driven by a desire to facilitate government unemployment and stimulus payments, he said.
Among the related findings: 91% of survey respondents said the pandemic was having a moderately or significantly negative effect on customer risk profiling, and 78% said the same for know your customer (KYC) account onboarding.
“Instead of billion-dollar venture capital transfers, they’re dealing with one million new account holders who want to transfer $150 each,” Wager explained.
The Next Wave
The next wave of financial crime compliance costs, Wager is predicting, will be in investigating fraud, anti-money laundering, and sanctions violations, as these new account holders “try to do weird things.”
The report also found 87% of U.S. financial institutions surveyed, and 82% of Canadian firms, expect alert volumes to increase in 2020. It is taking American and Canadian financial crime analysts about five hours to clear KYC due diligence alerts, up from three hours in 2019.
According to LexisNexis, financial institutions are responding to the increased costs with increased pay, benefits, and bonuses to the compliance team members, including overtime for hourly employees and salary bumps for executives in financial crime compliance. But the survey found the increased spending did not translate into more hiring; instead, existing compliance teams have been largely tasked with handling the increased workload without extra help.
Tech Investments
The survey also found firms that invested more heavily in technology experienced lower cost increases and fewer negative impacts due to the pandemic than those that did not.
“Year-over-year compliance cost increases are lower among those allocating more spend to technology, and these financial institutions (FIs) also realize greater efficiencies,” LexisNexis said in a statement. “Larger FIs (over $10 billion in assets) in the U.S. and Canada who allocated at least 50% of their compliance costs to technology will spend $5 million less on average in annual costs in 2020 than FIs who allocated 35% or less of those costs to technology.”