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US Financial Crime Compliance Costs Surged In 2020: Survey

By Al Barbarino · Jun 9, 2021, 12:02 AM EDT

Projected spending by U.S. financial institutions on financial crime compliance shot up by one-third to $35.2 billion in 2020 compared to the previous year, in part due to "increased due diligence times and costs" brought on by the COVID-19 pandemic, according to a new report that surveyed more than 1,000 compliance professionals globally.

The $8.8 billion jump from 2019's $26.4 billion projected figure was the second-highest increase of any country, behind only Germany, which added $9.6 billion to its expected tally for the year, according to the report from LexisNexis Risk Solutions.

The report shows that virtually all regions of the world experienced sizable year-over-year percentage increases, with the global total across all financial institutions jumping to $213.9 billion in 2020 from $180.9 billion in 2019.

"In large part what we're seeing is the effects of COVID-19 and what that's done to shape the regulatory environment and the desire [of companies] to have the right amount of scrutiny in a timely manner," Leslie Bailey, vice president of financial crime compliance for LexisNexis Risk Solutions, told Law360.

Labor costs in the U.S. were a main driver of the upticks, accounting for 60% of the total spend in 2020 compared to 54% in 2019. The surge in labor costs could be attributed to additional contracting or entry-level hiring to address increased alert volumes and risks during COVID-19, the report notes.

The pandemic contributed to "increased alert volumes and suspicious transactions, inefficiencies with alert resolution and due diligence, more manual work" as well as risk profiling, sanctions screening and customer identification issues, the report states.

"You saw a higher level of alerts on the front end that people had to manage through, and I think for a lot of people it was a higher volume than anticipated," Bailey said.

The Financial Crimes Enforcement Network and federal and state financial regulators also prioritized anti-money laundering during the year, and federal programs like the Paycheck Protection Program forgivable business loan program carried additional compliance costs for firms, the report said.

Most of the global year-over-year increases were due to Western Europe and the U.S., which represented 82.7% of the global total projected costs. Germany led the pack, with a projected 2020 spend of $57.1 billion, followed by the U.K. at $39.8 billion and the U.S. in third at the $35.2 billion mark.

The average spend of individual mid-to-large Western European financial institutions also far surpassed their American counterparts, with companies in the United Kingdom, Germany, France, Italy and the Netherlands averaging $52.3 million versus just $20.5 million for U.S. firms.

"In Europe there's more scrutiny around just everything that is financial crime, money laundering being the foremost," Bailey said. "But I think the dramatic shift in the regulatory environment last year is what contributed to that."

Europe's fifth Anti-Money Laundering Directive brought a number of regulatory changes and expanded due diligence for the most complex transactions, cryptocurrencies and so-called know-your-customer requirements, the report notes. 

The report suggests that firms harnessing technology will reduce costs in the long-term and were "more prepared and less impacted overall by increasing regulatory pressures and COVID-19."

"Those who were prepared with the technology, with layered solutions, and who enabled a digital environment … were far better off than those who had to endure that onboarding to handle the additional alert volume," Bailey said.

The report surveyed 1,015 financial crime compliance decision makers at financial institutions including banks, investment, asset management and insurance firms globally.

--Editing by Jill Coffey.

LexisNexis Risk Solutions is owned by RELX, parent company of Law360.

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