Financial crime compliance costs have skyrocketed this past year, with the United States increasing total spending by $8.8 billion in 2020 alone, as reported in a recent LexisNexis Global Report entitled Trust Cost of Financial Crime Compliance Study (Report). While Canada has also experienced an increase in financial crime compliance spending from 2019 to 2020, likely due in part to the COVID-19 pandemic, it is still spending less than its Western counterparts.
The LexisNexis study found that the average annual cost of financial crime compliance per organization has increased significantly, particularly among mid/large firms in North America and Western Europe, and that financial institutions are facing a broader range of compliance operational challenges across regions. Between 2019 and 2020, the average spend per organization increased from $14 million to $19.5 million in Canada, and from $14.3 million to $20.5 million in the United States. The percentage of increase over the year was greater in North America than Western Europe, but organizations in Western Europe are still spending significantly more, with the United Kingdom spending $57.6 million per organization in 2020 (all figures USD). The key compliance challenges identified were customer risk profiling, sanctions screening, regulatory reporting, identification of politically exposed persons (PEPs), KYC for account onboarding and efficient alerts resolution.
The Report also confirms that the COVID-19 pandemic has had a significant impact on existing challenges associated with financial crime, which has led to longer due diligence times and associated costs. The possibility of financial crime has increased amidst the uncertainty of the pandemic, which puts financial institutions at a greater risk. Furthermore, working remotely has added challenges that include access to due diligence information as well as the need for increased surveillance of remote workers.
A top take-away from the Report is that preparation is key to counteract increased financial crime burdens and risks. A trend identified in the Report is that financial institutions that have invested in technology solutions to support financial crime compliance efforts have been more prepared for and less impacted by increasing regulatory pressures and the COVID-19 pandemic. Financial crime has become more sophisticated and complex with the emergence of cryptocurrency and cyber fraud, which has resulted in a broader set of due diligence challenges for financial institutions. Combining these issues with the new challenges arising from the COVID-19 pandemic makes preparation for, and investment in, financial crime compliance crucial as we enter a post-pandemic world.
As challenges are presented from more sophisticated and technologically driven sources of crime, the need for a coherent strategy to counter harmful activities on a national and international scale is even more apparent. As we have previously written, Canada has been criticized for lax enforcement of financial crime prohibitions (see here, here, and here). Notwithstanding this, increased spending in compliance is reflective of the heightened attention being paid to white-collar and financial crime enforcement, both in Canada and overseas. Companies should display a commitment to compliance, and maintain strong policies and procedures, in light of novel risks and to keep up with ever-increasing expectations.
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