How to Reduce the Cost of AML Compliance

Anti-money laundering compliance seems to get more expensive every year, doesn’t it?

It’s not just your imagination: A report by Oxford Economics, surveying 300 UK businesses, found that the country’s AML compliance cost increases by an average of £186.5/$227.2 million each year. 

That growth isn’t fueled by actual money laundering but by financial crime compliance. Let’s explore how you could reduce these costs with a better AML strategy.

What Is the Cost of AML?

When companies mention the cost of AML, they are referring to how much it costs them to remain compliant with anti-money laundering rules and regulations. Calculating that cost is not as clear-cut as it seems. You must consider a number of factors, such as:

• the time and resources spent by your legal team to interpret ever-changing and complex regulations – this may be outsourced to consultants, such as the Joint Money Laundering Steering Group (JMLSG), which is expensive in itself
  
• the deployment of an effective AML strategy, including staff training, hiring compliance officers, and an increased budget to manage best practices
  
• time spent auditing internally, gathering information, and reporting
  
• resources needed to commit to ongoing transaction monitoring, including writing and submitting Suspicious Activity Reports (SARs)
  
• AML fines, which are designed to be punitive and exemplary, especially for financial institutions, including banking AML
  
• lost business due to false positives – an overly strict screening process may reduce the risk of irregularities, but at the cost of blocking genuine customers who want to move money through your business
  
• AML technology, which can be an affordable alternative to building an in-house team but still requires a significant budget to run smoothly
  
• human resources necessary to review cases after they’ve been flagged by your AML system, which includes sifting through false positives/negatives and tweaking the system to ensure it performs efficiently

It’s also worth noting that whether you are deploying internal AML checks or outsourcing them to a third-party automation solution, this translates into high integration costs, developer time, and maybe even lost revenue due to operational downtime. 

Why Is Managing Your AML Budget So Challenging?

We’ve already established how AML costs can add up way beyond simply purchasing AML tools & software. But what makes this particular compliance requirement so hard to budget for? The answer is, mostly, ever-changing circumstances and laws. Specifically:

Increasing and Changing AML Regulations

AML regulations are hard to manage in part because they keep changing. Every new update requires careful thought to avoid fines and sometimes a complete overhaul of your risk strategy.

The 6th Anti-Money Laundering Directive, for instance, will impact a huge digital market, including anyone involved with crypto-assets. 

Unpredictable Fines

In 2022, the highest AML fines were imposed on a UK estate agent, a Dutch financial institution, a family office broking company, and an online gambling business – demonstrating how a growing number of verticals have to stay on top of the latest regulations. 

This forces businesses to anticipate higher costs without necessarily having clarity on what they must monitor. Are AML fines now a cost of doing business? And how much should you keep in your legal pot to stay afloat if things go wrong?

Evolving Macro Environment

The global pandemic has created a list of challenges for AML compliance staff, which show no signs of slowing down. According to the aforementioned Oxford Economics report, 50% of institutions recorded spikes in alerts and possible suspicious activity during the lockdowns, and the global economic downturn does not help reduce these rates. 

In 2022, Russia’s invasion of Ukraine also triggered an unprecedented wave of sanctions against the Kremlin and its business proxies, demonstrating how geopolitics can have a direct impact on evolving AML rules.

5 Steps to Reducing AML Costs

We’ve certainly established that AML is expensive; here are five ideas to make it less so.

1. Deploy Modern RegTech Solutions to Augment Your Current Checks

The first AML directive was implemented in 1991 – which partly explains why so many financial institutions are stuck with legacy AML solutions. These may only support static and preconditioned rules that are difficult to retune and update. They may lack modern integrations and force companies to “rip and replace” whenever they want to adapt to the latest legal requirements. 

It doesn’t have to be that way. In the last few years, dozens of modern regulatory software solutions, often known as regtech, have appeared on the market. One of the many advantages of relying on such SaaS providers is that you don’t need to pay for software maintenance or updates – and some may even include support as part of their offer.

However, they don’t always aim to replace legacy systems fully. With advances in integration technology, it’s possible to put an extra layer of verification on top of your existing checks. For instance, you could go through your current solution to check PEP list databases and add a more modern transaction monitoring software solution. 

2. Avoid Data Silos from Legacy Systems

It’s often said that AML tools are a customer data black hole. You add all that information to a system, where it simply vanishes. At best, it’s creating silos, fragmenting information across hundreds of processes, which is simply unsustainable. There are duplicates. Errors abound. 

A key solution for modern businesses – whether they are financial institutions or not – is to try to bring their KYC and AML tools under one roof. Having a single source of truth for customer data for these two frameworks, both of which are legal requirements, is a great way to save on unnecessary expenses. 

What does it look like in practice? You could have an all-in-one identity verification, KYC, and AML solution or a streamlined integration between all these tools at the onboarding stage. Your customer submits information once, and you use it to meet all regulatory requirements in one fell swoop. 

3. Invest in Training and Employee Upskilling

Providing your employees with a better understanding of AML has two advantages.

Firstly, you improve the chances of catching potentially risky customers, which means fewer fines and better compliance.

It can also boost productivity. The more employees at your organization are aware of the AML challenges, the more chances you get to streamline the framework, improve processes, and save on redundant or resource-heavy operations.

4. Leverage Machine Learning to Assist AML

There’s a been a handful of predictions about AML and machine learning in recent years. As it stands, not all of them came true. It’s still hard to simply let a system automatically decide if your customer is a money launderer or not, but you can still leverage the power of AI to assist your compliance.

However, the more money laundering signals you can feed a ML system, the more likely it is to accurately predict whether you should flag an action as risky or not. A perfect example would be transaction monitoring. If you have accidentally onboarded suspicious individuals and managed to flag enough of them as high-risk, a ML system could suggest risk rules that apply to other risky individuals. 

The mechanics are similar to how fraud detection by machine learning can help, especially if your business processes large volumes of customer data on a daily basis. And the goal, of course, is to help reduce your AML costs by automatic risk detection as soon as possible.

5. Consider Pay-Per-Check Pricing

Most third-party AML solutions will lock you into expensive, multi-year contracts. It’s advantageous for the vendor but not so much for businesses with oscillating traffic volume.

For instance, you may want to increase your number of AML checks before a triple witching hour (when stock options and index futures expire at the same time). This usually involves an explosion in the volume of transactions, which can be exploited by money launderers. 

But what if you want to reduce your AML budget after that? Pay-per-API call payment models are the answer. Modern AML tools will give you much better ROI by letting you adapt your budget to the seasonal nature of the finance world. 

How SEON Helps Reduce the Cost of AML

SEON’s AML screening tool lets you check user identities against PEP, sanctions, crime lists, and other watchlists. It is the ideal solution to augment your AML compliance by combining it with KYC checks to benefit from:

• Real-time data enrichment: Data is passively enriched using digital footprinting, allowing you to build complete customer profiles with as little information as an email address or phone number. 
• Removing KYC and AML silos: All the information flows through the same system, making it easier to report, log and control your data.
• More affordable PEP and sanctions checks: Our pay-per-check pricing model is very competitive.
• Transaction monitoring: We let you monitor, flag, and even block high-risk transactions in real time.
• Customer behavior analysis through risk rules: Control AML by identifying and flagging risky behavior, such as a sudden increase in deposits or suspiciously regular withdrawals that could indicate smurfing.

Ready to learn more about SEON’s AML tool? Get in touch today.

Frequently Asked Questions on Reducing AML Costs

Sources

• Oxford Economics: Cutting the costs of AML compliance