October 13, 2023
SINGAPORE – Financial institutions here spent US$5.7 billion (S$7.8 billion) in the past year to fight crime and meet regulatory obligations, a new study noted on Wednesday.
It also found that the total bill for the financial sector across the globe hit US$206 billion in the 12 months to June 30.
The numbers represent a sharp increase over previous years. Financial firms here were estimated to have spent US$3.8 billion on compliance costs in 2020, up 22 per cent from US$3.1 billion in 2019, according to data and analytics provider LexisNexis Risk Solutions.
Compliance screening aims to detect and deter crime, protect an institution’s reputation and satisfy regulatory demands. It typically involves validating a customer’s identity and sources of funds and assessing potential risks.
The latest study surveyed more than 1,000 global decision-makers involved with financial crime compliance strategy at banks and other institutions.
All said they spent more on financial crime compliance in the past year. Those in Europe, the Middle East and Africa incurred the highest cost at US$85 billion while Latin America was the lowest at US$15 billion.
Financial institutions in North America and Latin America ranked taking on new customers as their No. 1 challenge. Those in Europe, the Middle East and Africa struggled the most with customer risk profiling, while those in the Asia-Pacific found regulatory reporting toughest.
Many found it challenging to identify direct and indirect relationships between business entities and undertake risk profiling of both companies and customers.
They also struggled with the sharp increase in crime alerts amid the numerous false positives.
The study showed that the growing complex web of global regulations and sanctions, coupled with stringent security checks, have dampened the customer experience.
“This puts many financial institutions in the precarious position of balancing customer satisfaction and regulatory adherence. It creates hindrances even for performing routine transactions,” Mr Ramanathan Sivabalan, director of financial crime compliance and payments for Asia-Pacific at LexisNexis Risk Solutions, told The Straits Times.
He expects scrutiny to increase for higher-income customers, following a money laundering blitz in Singapore where more than $2.8 billion worth of assets have been seized or issued with prohibition of disposal orders.
“Consequently, one can say that his or her experience with the banker is not going to be as smooth as it was in the past,” added Mr Sivabalan.
More than half of the study’s respondents globally reported a surge in crimes facilitated by digital payments, cryptocurrencies and artificial intelligence technologies. These attacks use sophisticated techniques to impersonate users, conduct phishing scams or manipulate transactions.
“This trend highlights the importance of adopting a multilayered approach that combines technology, expertise, collaboration and compliance to successfully combat new types of crime,” Mr Sivabalan said.
Apart from digital fraud, there has been an increase in exposure to both trade-based money laundering schemes and corruption within supply chain operations.
Bribery and corruption are among the top issues globally, with criminals manipulating invoices, customs declarations and shipping documents to facilitate undetected money flows.
“The complexity and vastness of global trade systems make them fertile ground for such schemes, requiring a meticulous and sophisticated approach to risk management,” the study said.
Crimes involving cryptocurrency topped the list of financial fraud in North America and Latin America while Asia-Pacific respondents were particularly vulnerable to scams involving digital payments and artificial intelligence technologies.
Respondents also noted that they are identifying key areas that need immediate attention to counter rising financial crime.
Around 80 per cent have prioritised using enriched payment data for faster processing time, fewer payment rejections and better risk management without compromising the customer experience while reducing the risk of non-compliance and exposure to financial crime.
About 75 per cent of Singapore firms are already using advanced analytics to help fight financial crime, and 65 per cent employ analytics and artificial intelligence to enhance compliance procedures.
Rising salaries were the primary cost driver in Singapore and the Asia-Pacific, with larger firms dealing with larger screening volumes, increased staff and compliance challenges.
In North America, technology costs related to compliance were bigger cost drivers. They have risen as banks pivot towards digital operations and remote working. Outsourcing to external parties is another major cost, along with staff training in financial compliance-related roles.
“To beat the cyber criminals and thwart their more sophisticated financial crimes, banks must leverage advanced technologies and data analytics to identify new crime patterns rapidly,” Mr Sivabalan said.