It is time to stop wasting money on a failed and broken approach to defeating financial crime

The costs of financial crime are staggeringly high. The financial crime compliance officers that responded to a LexisNexis Risk Solutions survey of financial institutions in 26 markets around the world said they spent US$213.9 billion on compliance with financial crime regulations in 2020. If the main finding of a Refinitiv survey of 19 markets in 2018 still holds, and firms are spending 3.1 per cent of annual turnover on Know Your Client (KYC), Anti Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening measures, the expenditure is much higher than that figure suggests: US$1.28 trillion, in fact. Despite such vast expenditures, compliance breaches do occur, and regulatory fines ensue. According to the Kroll Enforcement Survey, between 2016 and the first half of 2021, financial institutions paid 338 regulatory fines for money laundering, sanctions breaches and bribery that totalled almost US$26 billion. These fines can be surprisingly chunky. HSBC paid US$1.92 billion in 2013 and ING US$900 million in 2018. Then there is the cost of the financial crime itself. This is much harder to estimate, but the Refinitiv survey put it at 3.5 per cent of the turnover of its respondents, or US$1.45 trillion. And this is the true absurdity: the cost of financial crime compliance (US$1.28 trillion) is now almost as expensive as financial crime itself (US$1.45 trillion). That is the reductio ad absurdum of half a century of regulatory pressure on money launderers, terrorists and other financial criminals. Since the United States passed the Bank Secrecy Act in 1970 to discourage money laundering through secret bank accounts, the financial services industry has assumed a steadily mounting burden of compliance obligations. The PATRIOT Act of 2021 added CFT to the AML requirements of the 1970 Act – and, fatefully, for the first time obliged financial institutions to implement a Customer Identification Program (CIP) to verify the identity of individuals that wish to conduct financial transactions with them. These originally American measures have over the last decade become universal. They are now embodied in the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, first published by the Financial Action Task Force (FATF) in 2012 and updated regularly ever since. More than 200 jurisdictions endorse them now. The European Union (EU) is on the sixth iteration of its Anti Money Laundering Directive (AMLD VI). Yet the chief characteristic of all these legislative and regulatory measures is that they do not work. Financial crime continues to increase. Mounting quantities of people and technology may have slowed its rate of increase but they have manifestly failed to solve the problem. Indeed, the growing volume of e-commerce, crypto-currency and digital assets business, spurred on by the Pandemic, is once more increasing the rate of increase of financial crime. Meanwhile, compliance is not only despised by the revenue generators. It has lost sight completely of its original objective of reducing crime and become an end in itself: a meaningless set of routines designed to avoid fines and reputational damage for non-compliance, by gold-plating processes, over-reporting data and tolerating embarrassingly high proportions of false positives. In short, all that 50 years of increasingly onerous legislative and regulatory measures have achieved is increased costs for financial institutions.

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