Anti-money laundering compliance costs South African financial services companies over $2 billion a year, survey
The true cost of anti-money laundering compliance in South Africa has increased by 14 per cent to $2.05 billion over the past two years, according to a recent LexisNexis® Risk Solutions survey.
South African financial services firms anticipate the true cost of anti-money laundering (AML) to spiral higher in 2018, by an additional 12 per cent.
Larger firms with more than $50 billion in total assets tend to use separate teams for sanctions and AML compliance. These firms reported a higher average annual compliance spend over other firms, which reported spend of US$16.7 million per year.
However, smaller firms with fewer than $100 million in assets are hit harder in relative terms, with AML compliance costs representing between 0.67 per cent and 2 per cent of their total assets.
This higher spend as a percentage of assets is driven by the basic overhead investment required to support compliance operations, regardless of a firm's size.
Comparable to the costs of AML compliance in South Africa, Swiss and Dutch financial services firms reported a slightly lower compliance spend of $1.9 billion and $2.0 billion, respectively. This is according to the LexisNexis® Risk Solutions 2017 True Cost of AML Compliance European Study.
Labour is the most significant component of AML compliance costs across South African financial services firms of all sizes, accounting for 64 per cent of spend. Larger firms have higher average annual compliance costs, as they are likely to have dedicated teams for compliance, and employ more staff as a result.
Distribution of AML compliance costs by compliance activity varies, with Know Your Customer activities being the most costly. On average, nearly a third of financial services firms' compliance spend is on KYC activities, which involves information collection, list screening and risk assessment.
The remainder of spend is distributed fairly evenly between investigations, suspicious activity/transaction monitoring and AML compliance management.
Job dissatisfaction amongst compliance staff can also add to compliance costs through lost productivity. Just over two-thirds of financial services firms indicated concern about compliance staff job satisfaction, with an average of 2.5 weeks of lost productivity per full-time employee.
By allocating more spend to technology solutions, financial services firms can reduce overall AML compliance costs through improving productivity and job satisfaction amongst compliance staff. In particular, adoption of advanced analytics tools to streamline KYC activities, which account for 31 per cent of spend, would optimise the time of the compliance staff, focusing more of their time on investigations and AML compliance management.
Currently, adoption of tested new technology and services that support risk assessment of customers and streamline AML compliance by South African financial services firms is limited.
For instance, only 27 per cent of firms use machine learning and artificial intelligence, although a further 42 per cent expect it to be a standard part of AML processes in five years. Use of manual labour that the time is takes to clear alerts for KYC, sanctions, watchlists and transaction monitoring take around 10 hours – significantly slowing down the customer on-boarding process.
Eighty-six per cent of South African financial services firms indicate losing up to 4 per cent of prospective customers because of friction during on-boarding.
Study respondents view AML compliance as having a negative impact on job satisfaction and productivity amongst compliance staff, as well as customer acquisition, and leads to higher long-term costs.
Incorporating new technology into AML compliance procedures could reduce AML compliance spend and also improve financial services firms' understanding of customers' risk tolerance levels, translating into a greater ability to manage these relationships.
Seyfi Gunay, director of financial crime compliance in EMEA for LexisNexis Risk Solutions, commented: "The direct and indirect costs for AML compliance, in terms of higher labour costs, lower productivity and lost customers, have a major influence on South African financial services firms' top and bottom lines, thus business growth.
The results indicate now is an opportune time for South African financial services firms to rethink the data, technology and analytics solutions they are using to address financial crime compliance processes.
This is an era of heavy operational workload for financial services compliance departments. New technology platform choices are now available so that compliance departments become more efficient while improving compliance staff morale, streamlining customer on-boarding, and reducing the cost of compliance."