The annual cost of anti-money laundering (AML) compliance for financial institutions in the UK is estimated to be a huge £28.7 billion, with costs expected to grow more steeply in the next two years, reaching over £30bn by 2023.
The National Crime Agency estimates the total annual cost of serious organised crime to the UK economy to be around £37 billion2.
The entire UK annual defence budget for the year ending March 2021 was £53.3 billion3.
On the other hand, the cost may be more justified when you consider the size of the money laundering problem facing UK plc, which a financial crime intelligence leader of one of the top tier UK banks describes as ‘absolutely massive’: “If you look at some of the key threats that we’re seeing as a bank, and then if you multiply that by the number of banks that are out there and all the other players that play as part of the process of executing transactions that can be susceptible to money laundering, I think we’ve got a considerable problem on our hands.”
Firms in the survey reported an average AML compliance cost of £186.5m per annum. For larger institutions average costs are closer to £300m, or more. In the past three years, firms reported that financial crime compliance costs have increased broadly in line with business inflation (up by 5.4%), however future cost inflation for AML and CFT compliance is expected to be more severe over the next three years, at nearly 10%.
Reported costs correlate strongly with firm size: despite lower absolute costs, evidence shows that AML compliance costs are more burdensome for smaller organisations, due to a lack of economies of scale4.
It might be assumed that evolving criminal threats and risk profiles would be the biggest external factor in driving up financial crime compliance costs, as criminals constantly seek to outpace the systems and controls that are put in place to stop them.
However, a significantly bigger driver of costs appears to be the regulatory expectations themselves, and the fear of being fined for non-compliance. – see Fig 1.
Firms report that the increasing volume and complexity of AML regulations have been the most significant external driver of cost: In 2020, UK money laundering regulations integrated the requirements of the 5th Money Laundering Directive (5MLD) and UK firms estimate that it will cost them, on average, around three quarters of a million pounds5 to implement.
One MLRO of a mid-sized building society admitted his organisation is spending £200-£250k per annum on screening alone (systems and staff), to comply with money laundering regulations, despite the nature of their business and perceived risk of money laundering being very low.
“The regulators don’t necessarily understand the granular impact of some of the changes they’re making”, says Group Head of Financial Crime for a UK specialist lending bank.
They cite the example of the UK sanctions regime that came into force at the start of 2021. The new regime didn’t constitute a massive change in terms of what was actually on the sanctions list, as most were already on the UN or the EU list. However, there were a number of administrative changes made that didn’t constitute any change to the level of risk or restriction, but that nevertheless had a big impact on referral rates, resulting in a huge spike in alerts at New Year for UK compliance teams to deal with.
The money laundering directives themselves are really complex, so most firms look to the Joint Money Laundering Steering Group (JMLSG) for guidance. That said, the JMLSG interpretation tends not to be issued until some weeks after the legislation is introduced. As a result, directives that involve major changes for a lot of organisations, as was the case with the 4th EU Anti-Money Laundering Directive (4MLD), can be a real challenge for organisations to implement and the cost of covering that is quite significant.
Group Head of Financial Crime for a UK specialist lending bank explains: “Some of these changes are like turning a super-tanker, particularly for the larger organisations. Processes are embedded, so the sooner you can get the guidance out, the better.”
“Regulation is becoming more complex, it is becoming more onerous, and I think one of the dangers is that it’s going to become so onerous or complex that businesses will stop buying in. There is more onus being placed on businesses to almost be all-seeing and all-knowing. And I think it’s in danger of reaching a saturation point if we continue down the line of more and more regulation.”
– Steve Payne, Group Head of Financial Crime and MLRO, Vitality Group
Financial institutions don’t expect the UK’s exit from the European Union to alleviate AML compliance cost pressures. On the contrary, they anticipate it will actually result in more regulation rather than less. So, if anything, the UK’s regulated sectors expect AML compliance costs to rise more steeply in the coming years, as a result of leaving the EU.
As one MLRO from a mid-sized bank puts it: “Costs are rising because the asks are increasing. Brexit will bring increased complexity and lack of clarity because we have EU sanctions, US sanctions and now we have UK sanctions too, so it is getting too complicated and, therefore, more difficult to implement.”
