The EU’s Fourth Directive has Opened Pandora’s Box

Overall AML compliance costs have increased by 21% over the last two years alone, and financial institutions expect as much of an increase within the next year. Now, financial service providers have costs running up to $83.5 billion!

The fourth directive

More commonly known as due diligence, this addition to KYC protocols has put a lot of stress on banks and other organizations. Experienced labour is the primary AML compliance cost, while on the other hand, a more probing onboarding process has led to an average loss of 4% of prospective clients – institutions hold the belief that procedural inefficiencies in their AML structure could be the main cause.

Risk management technology

With major regulatory authorities such as the FATF and FinCEN outlining a risk-based approach for AML compliance, technological solutions have adapted automation and machine learning for more efficiency and accuracy.

Costs are, on an average, split three-fourths and one-fourths between labour and technology. However, most AML executives cite plans to expand their AML operations, and increase investment in RegTech.

Return on investment

Another issue that plagues most banks is the poor rewards of their compliance programs. Pareto’s principle is pretty spot on when it comes to AML programs – 80% of the results come from 20% of effort. A study also found that European banks spend close to 30 hours a week conducting due diligence on foreign corporate clients, while only a few accounts were opened.

Process improvements in AML programs

A majority of institutions believe that a more comprehensive compliance system can lead to better customer relationship management. This demonstrates that financial institutions in Europe, have a strong understanding of AML compliance and associated costs not only as a simple legal requirement but also as a strategic tool to grow and protect their businesses.

The final word

As compliance requirements get increasingly specific and more data is collected by financial institutions, tech AML solutions will grow more comprehensive and competitive. A good solution is one that includes the right combination of people, processes and technology. However, a semblance of balance between what is needed and value add-ons should be clearly defined for banks and FIs to make the most of their budgets.