The true cost of AML compliance for financial institutions in the APAC region
Financial compliance is becoming more and more challenging in the Asia-Pacific (APAC) region. Regulators are putting increasing pressure on financial institutions to determine beneficial ownership and improve overall screening requirements, particularly in the wake of the 1MDB scandal. The growth of non-bank payment providers / systems is making these efforts more difficult for financial institutions, based on various factors including complexity and lack of transparency in the transaction chain, uncertainty about whether these providers are compliant with regulations and blind spots regarding beneficial owners. All of this is leading to increased alert volumes, cost of resources and stress on compliance teams. What is the true cost of AML compliance for financial institutions across the Southeast Asia?
A research report published earlier this year, finds that AML compliance costs rose 9% to 10% during the past two years with growth expected to continue at a similar rate over the coming year.
Key findings from this study include the following:
True cost of AML: Midsize to large financial firms in Indonesia, Philippines and Singapore (assets totaling greater than $10 billion) have significantly larger annual average compliance outlays than smaller firms, ranging from $11.95 to $13.93 million for larger firms and $1.18 to $2.08 million for smaller firms.
High labor costs: Labor represents a sizeable portion of AML compliance spend, which drives higher costs at larger firms. As a result, these firms are implementing labor-related steps to address the impact of non-bank payment providers and systemic risks, including enhanced training and controlling operations screening hours.
Limited use of new technologies: Despite the labor-intensive nature of the AML function within financial firms, the report reveals limited use of newer technologies across smaller and larger firms in the region.
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The study further reveals that business de-risking is a top driver for AML functions among financial institutions in the APAC region, though significantly more Indonesian firms (78%) place it as a leading driver compared to those in other markets.
Implications from the study findings include the following:
Technology plays an important role in effectively managing the impact of AML compliance. Beyond managing direct costs, it plays a role in managing indirect and opportunity costs as well, that can be harder to measure.
Increasing difficulty for APAC financial firms to keep pace, manage false positives and remain in compliance. Complex regulations and higher alert volumes can make firms seek more human resources; but, at some point, firms will reach a point of diminishing returns. Human resource costs can rise sharply, making it harder to manage AML costs over time.
Technology is not a threat to human expertise and decision making in the compliance process. Technology does not need to replace human input with due diligence; it can augment it to future proof against significant cost increases over time.
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