The COVID-19 pandemic is slowing down compliance processes, hampering financial firms' ability to conduct many functions, according to a recent study.
According to the LexisNexis Risk Solutions 2020 True Cost of Financial Crime Compliance Study released Tuesday, financial institutions in the US and Canada had a harder time executing the compliance functions that help them root out financial crime in 2020 compared to 2019. The challenges were caused by new protocols brought about by the US Paycheck Protection Program and many people still working from home.
"Pandemics and chaos increase risk for financial crime, putting financial institutions at even greater risk; while some leniency may have been granted by regulators, compliance rules and red flags still remain," the report said. "A sizeable portion of increased year-over-year financial crime compliance costs are attributed to COVID-19, though it may be higher than is actually reported."
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The top three issues facing departments of financial institutions caused by the COVID-19 pandemic and remote working are:
Difficulty accessing information sources for Know Your Customer (KYC) due diligence research (42%)
Increased challenges onboarding of new accounts (41%)
Longer times to complete due diligence for onboarding new accounts (38%)
COVID-19 protocols and subsequent remote working requirements also are negatively impacting the effectiveness and efficiency of key compliance activities such as:
Customer risk profiling (91%)
Sanctions screening (83%)
KYC for account onboarding (78%)
Efficient resolution of alerts (74%)
These ongoing pandemic-related pressures will likely drive future compliance costs higher for financial institutions of all sizes, the survey found. The total spend on financial crime compliance in 2019 for US and Canadian firms was $31.5 billion. That number jumped to $42 billion in 2020. For larger institutions, technology is a major factor driving costs higher. Smaller firms, on the other hand, are seeing greater labor costs associated with pandemic compliance efforts.
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Most survey respondents (79%) expect COVID-19 to drive financial crime compliance costs higher during the next 12 to 24 months. Of those increased costs, 68% will go to technology resources and 32% will be spent on labor.
"The events of 2020 have been unprecedented and financial institutions must prepare for increased risk of financial crime for the foreseeable future," said Leslie Bailey, senior director of financial crime compliance strategy for LexisNexis Risk Solutions, in a statement. "Compliance teams can optimize resources to better navigate the new normal brought by the pandemic while maintaining the customer experience with a multi-faceted approach that includes efficient technology, intuitive analytics and extensive global risk intelligence."
The increased digitization of the industry also is expected to complicate compliance challenges going forward.
"As financial crime complexity grows in this digital age, complying with regulations requires more due diligence on beneficial ownership and risk assessment ..." the report said. "It is unclear what the landscape will look like over the next [one to two] years as shaped by COVID-19. Financial institutions could be faced with greater spikes in financial crime for at least for the foreseeable future--particularly as digital/cryptocurrency transactions provide criminal opportunities."
LexisNexis Risk Solutions surveyed 150 decision-makers in the US and Canada who oversee financial crime compliance. Surveyed organizations included banks, investment firms, asset management firms, and insurance companies.
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