By Al Barbarino

Law360 (April 2, 2021, 7:53 PM EDT) -- Bank compliance teams fighting financial crime have had the deck stacked against them since the outbreak of the COVID-19 pandemic as fraud attacks have skyrocketed and compliance costs have increased, all amid the difficulties of working remotely and a regulatory enforcement regime that hasn't let up, according to a new report.

The research report published by software provider FICO on Thursday notes that the pandemic has led to increases in fraudulent attacks and higher so-called false positives of such attacks. Meanwhile, compliance teams have struggled to keep up as costs have increased and they struggle to secure top talent to handle higher workloads, according to the report.

"The pandemic has exasperated the challenges banks have in tackling both [anti-money laundering] compliance and fraud," according to the report. "Dealing with higher workload volumes has concurrently been impeded by the switch to remote working, with platforms across many banks not effective in supporting changing demands."

Interviews with senior executives at 110 global banks in the fourth quarter of 2020 found that more than 70% said they had experienced increases in fraud attacks, while more than 60% have seen increased levels of false positives since the beginning of the pandemic.

The false positives came as banks cautiously filed an abundance of suspicious activity reports, or SARs, a costly endeavor meant to keep up with increased regulatory scrutiny over AML compliance and consumer protection demands, the report suggests. The Financial Crimes Enforcement Network is among the regulators who have encouraged firms to keep SARs coming. 

"Given the economic fallout from COVID-19 pandemic, some outside the compliance world may have assumed regulators would have cut banks some slack in 2020," the report states. "In contrast, regulatory enforcement of AML compliance continued unabated."

More than 70% of executives said that their operational expenditures related to anti-financial crime activities increased between 2019 and 2020, with over half of those respondents seeing "significant" growth in spending, according to the report, which attributed much of the costs of ensuring high detection with high SAR output.

"With regulators across the globe continuing their focus on anti-money laundering, banks across all regions covered in the study are often taking a defensive posture to AML compliance, providing suspicious [SARs] even for relatively low-level suspicious activity," the report states. "This has resulted in high workload volumes in terms of investigations and reporting caseloads."

More than $10 billion in fines were doled out by regulators across the regions covered by the report in 2020 — including the U.S., Canada, Brazil and select European countries — accounting for a more than 25% increase from 2019.

While the figure was skewed by the 1Malaysia Development Berhad scandal, which drew $6.8 billion in collective fines, "regulatory bodies across the globe have continued to remain heavily focused on AML and sanction breaches," the report notes.

A flurry of regulatory actions tied to both AML compliance and the pandemic has also hit the market over the last year, culminating in new sweeping AML rules under the National Defense Authorization Act for fiscal year 2021, which FinCEN is currently hashing out.

"Compounding all of this, governments and regulators have generally enhanced consumer protection demands since the pandemic, creating increased pressure on institutions to rapidly redress financial fraud," according to the report.

The Consumer Financial Protection Bureau has led the charge in protecting consumers amid the pandemic. In one case last summer, TD Bank agreed to pay $122 million to settle allegations that it charged customers illegal fees. And in March, the bureau reaffirmed its authority and discretion to impose such fines.

While the pandemic has created an abundance of challenges for institutions tackling financial crime, firms' overall concerns have remained largely the same, according to the report, which lists the respondents' top priorities as protecting customers from financial crime, potential reputational damage stemming from violations, operational costs and impacts on "customer experience."

Ultimately, revenues and profitability have taken a hit, creating a "stronger imperative on institutions to tackle their operating costs," the report states.

It suggests that "an integrated approach" to AML compliance and fraud, which are often segmented within distinct banking units, can be used to streamline operations and lower expenses. The report shows that 69% of institutions now have strategic plans in place to either integrate these functions or at least share resources between them.

--Editing by Steven Edelstone.

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