Managing the Impact of AML Compliance: Technology vs. Human Capital

Anti-money laundering (AML) compliance costs have continued to increase at a dramatic pace. Our recent study projected that the cost of compliance for U.S. and Canadian financial services firms will total $31.5 billion this year. For large and small banks alike, the compliance landscape is complicated by rigorous and evolving regulatory demands, stringent sanctions requirements and a rapidly growing footprint of non-bank payment providers.

The report, devised from a survey of nearly 150 financial crime compliance executives at banks, as well as investment, asset management and insurance firms, found that AML compliance costs increased by 16 percent on average over the last 24 months for U.S. financial services firms, with Canadian firms seeing a 6 percent rise over the same period. Those numbers are expected to keep rising.

Keeping pace with the current environment of escalating, continually evolving global regulatory requirements places a great deal of cost and operational burdens on financial services firms. Balancing optimal compliance with core business objectives and competitive pressures further complicates the cost outlook.

Optimizing Your Compliance Workforce

Labor and technology represent the biggest compliance cost outlays for most financial services firms. Despite the significant amount spent on labor, productivity challenges and concerns about compliance workforce job satisfaction show no sign of letting up. This indicates that adding more human resources is not a sustainable answer to the growing complexities of the AML compliance environment. These costs can rise sharply where financial firms feel the need for more skilled resources to address more complex compliance decisions.

More skilled labor demand increases salary demands, especially if there is a limited universe of skilled resources that firms are fighting for. For instance, as the EU has implemented stricter regulations concerning financial crime, banks in the United Kingdom have faced increased workloads and labor costs. Further, without the support of expanded data sources, bad data can lead to bad decisions, regardless of the number of human resources applied to a case.

Financial institutions may not even suffer from bad data, but instead disjointed data or data that isn’t unified. As a result, it takes the human compliance workforce longer to parse through all the data to look for patterns. Technology and subject matter expertise are not necessarily sufficient, which leads to the need for expanded data. Expanding your data to combine internal and external sources is great, but it may not achieve the efficiencies nor the insights needed unless you find a unified delivery mechanism like customer life cycle management.

The Risks of Siloed Compliance

In order to future-proof a financial institution, executives must find the synergies that already exist in their businesses. As expected, our study revealed that human capital is a significant cost, driven in large part by the silos that exist between groups with overlapping, but unoptimized, responsibilities. It’s clear that those silos won’t go away overnight, but present a significant opportunity to streamline existing processes in preparation for future changes.

This isn’t a question of simply adding more technology, which does come with a human and financial investment. Instead, executives must think about aligning technological solutions with the risks they face across their business and expanding their toolkit to combat these issues cohesively. In other words, executives should look not only to combine technology with subject matter expertise, but also at ways to empower technology and subject matter experts across their business.

When you create a synergy across resources that work independently but are trying to accomplish the same goal, you are one step closer to a unified view of the customer, more meaningful analysis, more efficient operations and higher employee engagement. And you’ll actually have better insight into customer identification. That then helps with any enhanced due diligence and/or investigation because you leverage the same tool to get the same outcome.

Measuring Compliance Program Effectiveness

It’s a given that maintaining an effective, cost-efficient compliance program is essential in order for a business to survive the complex and changing global compliance climate and flourish in the competitive and fast-moving marketplace. Technology plays an important role in effectively managing the impact of AML compliance on the business. Optimizing a compliance program is about managing more than just the direct costs, however; it requires also managing indirect and opportunity costs, which can be harder to measure.

These opportunity costs go beyond lost prospects and future revenues associated with customer friction and delays at onboarding. Missing a holistic view with KYC and customer identification also adds the risk of letting “bad actors” in the door, increasing the potential for a business to incur hefty fines and reputational damage. Having accurate data and highly capable solutions generates a degree of utility for not just compliance, but other functional areas as well. This includes business development and marketing; knowing more about customers can help inform the right products and services to position with customers.

Our study showed that half or more of financial institutions are somewhat or very concerned about job satisfaction among their compliance staff. The data makes sense: If you worked in a job that was high-stress, had zero tolerance for error because of regulatory requirements and required you to spend your day screening names for red flags, you might not come to work every day brimming with enthusiasm. But if your job gave you the tools to draw valuable insights and identify key risks because you were able to unify internal and external data in order to identify not only a fraud risk, but also an individual with a loose affiliation to a known money launderer tied to human trafficking, then you would likely feel more accomplished!

In other words, as compliance regulations continue to grow in complexity, North American financial firms will be challenged to protect their reputation and avoid costly enforcement actions. The common reaction to add more labor resources will not result in a profitable long-term solution, but instead often leads to diminishing returns, especially if investments in technology don’t keep pace. The cost of human resources almost always trends upward, while mechanically adding headcount in order to meet stricter regulations also can lead to increased dissatisfaction and turnover.

But implementing a dynamic approach to AML compliance technology is one that allows businesses to not only optimize their compliance spending, but also empower their workforce to make more impactful decisions. Just as adding additional compliance employees is a decision that should be approached thoughtfully, so should the addition and implementation of new technology.

Technology solutions that help compliance teams analyze existing data, provide access to other external information and enable them to make decisions from a more holistic view of the customer can reduce onboarding times, decrease remediation costs, lower processing times, increase throughput (without hiring more people) and create a more effective means of preventing financial crime over the long term. It’s important to be thoughtful about how you evaluate and operationalize your technology so that the people on your staff aren’t wasting their time on false positives. That’s when your compliance program is performing at its peak.