2022 APAC True Cost of Financial Crime Compliance Study

The cost of financial crime compliance in China will reach $21.8 billion in 2022 as financial institutions deal with the consequences of geopolitical risk (in the form of more complex sanctions) and tighter anti-money laundering (AML) regulations, a new study by LexisNexis Risk Solutions has found. The average annual cost of financial crime compliance is now $18.7 million for each medium and large financial institution in China. 

The True Cost of Financial Crime Compliance, a study of 253 institutions across Asia Pacific including 50 in China, found that Chinese financial firms’ exposure to financial crimes has increased in the past 18 to 24 months. What is striking from the results is the wide range of crimes reported. The majority of respondents said they had seen an increase in the use of third parties to lend legitimacy to illegal activity, the abuse of offshore and shell corporate structures, and in trade-based money laundering schemes. Respondents also reported an increase in their exposure to crimes relating to digital payments, the use of money mule accounts to launder the proceeds of crime, and bribery and corruption

The range of crimes and increasing complexity of know-your-customer (KYC) and AML checks – including a requirement to check for cryptocurrency in a transaction chain following the decision by the People’s Bank of China to ban cryptocurrency transactions in September 2021 – is driving up the cost of compliance. New guideline rules, jointly published by the People's Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission, also would also take effect from 2022. The latest revised rules regulate how financial institutions conduct due diligence on clients, and store their identity and trading data, will also bring China more in line with global anti-money laundering (AML) standards and strengthen financial firms' ability to combat money laundering. 

There is little sign that the compliance workload will ease. The trend towards digital banking and remote transactions, which accelerated during the COVID-19 pandemic, and the use of third parties to disguise crimes make it difficult for institutions to develop customer risk profiles. The increased volume of alerts triggered during AML and KYC checks creates the potential for friction in customer service (particularly onboarding) for legitimate customers – 65% of Chinese firms say that financial crime compliance has had a negative impact on customer acquisition. Two thirds expect alert volumes to increase this year, by an average of 9%. 

Technology is seen as the solution to these challenges. The study shows that 82% of KYC checks on domestic accounts are done manually (usually through a search engine), although institutions are more likely to use AML software for checks on international accounts. Institutions say they need better KYC data and analytics, particularly when it comes to onboarding more complex business customers – customer due diligence takes significantly longer for new corporate accounts (an average of 54 hours compared with seven hours for domestic retail accounts) because organisational structures can make it difficult to identify risks associated with ultimate beneficial owners and politically exposed persons. 

The study shows that across APAC, half of all financial institutions have invested in data, tools and technology to improve risk assessments and processes. The study also reveals the benefits of spending on financial crime compliance technology in terms of cost and operational efficiency:

• Chinese financial institutions that allocate a larger share of their compliance budget to technology spend less on financial crime compliance overall. 
  
• The average annual cost of compliance for those that spend less than the sector average on technology is $19.8m, compared with $16.1m for those that spend more on technology. 
• Firms that spend more on compliance technology are also less likely to experience challenges with efficiency, risk assessment, and sanctions screening. 

The rise in financial crime worldwide in the digital age means that a multi-layered approach to due diligence and risk assessment is crucial. Timely and accurate data, digital and physical intelligence, and AI-driven data and behavioural analytics are powerful proactive tools that will allow financial institutions across APAC to meet compliance challenges, manage costs and protect the customer experience. 

Explore the LexisNexis® 2022 True Cost of Financial Crime Compliance study – China Edition now.

The total cost of financial crime compliance born by India’s financial firms is rising sharply and will reach $6.85 billion in 2022, according to a new study by LexisNexis Risk Solutions. This represents an increase of 24% since 2020. The True Cost of Financial Crime Compliance study shows that the average annual cost of financial crime compliance for each medium and large sized financial institution in India has now reached $17.77 million, 13.2% higher than in 2020.

Costs are being driven up by a rise in the frequency and range of financial crimes. Financial institutions in India say that their exposure to many types of financial crime have increased in the past 18 to 24 months, including trade-based money laundering and the use of money mule accounts: 

• 71% of respondents to the survey said that crimes involving digital payments have increased
  
• 65% reported an increase in crimes involving cryptocurrency, and 
  
• 65% have seen an increase in crimes involving third party advisers, such as lawyers and accountants, to lend legitimacy to a transaction.

• 90% of respondents say that financial crime compliance has had a negative impact on customer acquisition (up from 66% in 2020)
• 81% said that compliance has had a negative impact on productivity.

Technology is seen as the solution to these challenges. The study shows that half of all financial institutions worldwide have invested in data, tools and technology to improve risk assessments as anti-money laundering (AML) activity grows and investigations become more complex. The study also reveals that those financial institutions that have allocated a larger share of their compliance costs to technology spend less overall on compliance and realise greater efficiency in their compliance operations. For example: 

• Indian firms that allocate more of their compliance budget to technology spend less on financial crime compliance overall - $16.4m annually, compared with $19.9m for firms that allocate less of their budget to technology 
• 60% of firms that spend less than the industry average on technology say that alert resolution efficiency is a challenge; this falls to 42% among institutions that spend more than average on technology. 

The rise in financial crime worldwide in the digital age means that a multi-layered approach to due diligence and risk assessment is crucial. Timely and accurate data, digital and physical intelligence, and behavioural analytics are powerful proactive tools that will allow financial institutions across APAC to meet compliance challenges, manage costs and protect the customer experience. 

Explore the LexisNexis® 2022 True Cost of Financial Crime Compliance study for India now.

Financial crime compliance will cost Japan’s financial institutions $17.9 billion in 2022, according to a new study by LexisNexis Risk Solutions. The True Cost of Financial Crime Compliance shows that the average annual cost of compliance for mid and large sized financial institutions in Japan, at $24.5 million, is higher in Japan than it is in any other Asia Pacific nation. 

Financial institutions in Japan have seen a sharp rise in a wide range of financial crimes in the past 18 to 24 months. Of 253 financial institutions across APAC questioned for the study, including 50 in Japan, the vast majority had seen an increase in a variety of crimes: 

• 82% said their exposure to trade-based money laundering schemes has increase since 2020
  
• 79% said crime involving cryptocurrency has increased
  
• 76% said crime involving digital payments has increased, and 
  
• 74% said abuse of corporate of offshore structures to launder money has increased.

The boom in digital payments and online banking, which accelerated during the Covid-19 pandemic, has exacerbated a growing problem. Financial institutions in Japan say that sectors involving payments, particularly e-commerce and retail, as well as transactions involving third party professionals such as legal, accounting and real estate services (which can lend legitimacy to illicit transactions), are now ranked as high risk for money laundering. 

At the same time, more complex sanctions, the rise of cryptocurrency, and criminals’ sophisticated use of technology are driving up the cost of compliance. Identifying falsified account information, Illicit transactions and the ultimate ownership of funds or assets is becoming increasingly difficult and institutions are carrying out more complex and time consuming Know-Your-Customer (KYC) checks and due diligence.

The boom in online financial services has also resulted in a significant increase in customer onboarding activity, which is governed by robust regulatory requirements. Managing the volume of alerts triggered by KYC and anti-money laundering checks has become a challenge for many institutions and is unlikely to ease. 65% expect alert volumes to increase again next year, by an average of 9%.

70% of Japanese financial institutions say they have responded to these extra demands by expanding their financial crime compliance functions. Demand is high for compliance professionals at all levels; 71% of firms have added entry level staff, but 41% have hired those with significant experience and a quarter have added highly skilled compliance professionals. Labour, in the form of salaries, is the single largest cost consideration for firms, accounting for 29% of the total cost of compliance. 

The study shows that the compliance workload, increased regulatory requirements and greater complexity of checks and investigations is affecting both productivity and firms’ ability to attract and keep customers. Many firms struggled during the pandemic – 63% say that the pandemic resulted in delays on onboarding of new accounts and 60% say it took longer to carry out customer due diligence – but the strain on compliance operations has not abated. Overall, three-quarters of firms say that financial crime compliance has had a negative impact on customer acquisition.

The study calls for better KYC and analytics to support KYC for onboarding, alert resolution and regulatory reporting. Many firms say that they do not have access to the data they need to develop effective risk profiles and maintain an audit trial for regulators. 

Financial crime compliance will cost financial firms in Malaysia $1.04 billion in 2022, according to a new study by LexisNexis Risk Solutions. The True Cost of Financial Crime Compliance shows that mid and large sized firms in Malaysia (those with assets of $10 billion or more) will each spend an average of $11.04 million on compliance every year – 40% more than they spent in 2019. 

While the Covid-19 pandemic has had a significant impact on the efficiency of financial crime compliance – two thirds of larger institutions in Malaysia say their compliance operations were less productive during the pandemic, and that customer onboarding suffered delays as a result – the study shows that banks and investment firms have seen a steady rise in a wide range of financial crimes in the past 18 to 24 months:

• 82% say their exposure to corruption and bribery in the supply chain has increased – this is a particular problem for asset management and investment firms
  
• 81% say they have seen an increase in the use of money mule accounts
  
• 77% of respondents, predominantly banks, have seen an increase in their exposure to trade-based money laundering schemes
• 75% say financial crime involving digital payments has increased, and 66% say crime involving cryptocurrency has increased.

E-commerce and retail merchants are seen as posing the highest risk of money laundering, but firms are also concerned about third party advisers, such as lawyers and accountants, who can lend legitimacy to illicit activity. 

• The average annual cost of compliance for Malaysian firms that spend less than the sector average on financial crime compliance technology is $11.4m, compared with $9.7m for those that spend more than average. 
  
• Firms that spend more on compliance technology are less likely to experience challenges with regulatory reporting, identifying UBOs, and efficient KYC profiling. 
• Of those that spend less on technology, 94% said that customer due diligence took longer to complete during the pandemic, compared with 58% of those that spend more on technology.  

The rise in financial crime worldwide in the digital age means that a multi-layered approach to due diligence and risk assessment is crucial. Timely and accurate data, digital and physical intelligence and behavioural analytics are powerful proactive tools that will allow financial institutions across APAC to meet compliance challenges, manage costs and protect the customer experience. 

Explore the LexisNexis® 2022 True Cost of Financial Crime Compliance study for Malaysia now.