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Financial institutions in the dark over cost effectiveness of anti-money laundering controls.

IT is perhaps the ultimate irony in the anti-money laundering crusade. The industry, devoted as it is to the movement of cash and software algorithms that help track it, has no shortage of statistics detailing the numbers of suspicious transactions reported, illegal monies seized and criminals prosecuted. However, ask people in the industry for a detailed cost-benefit analysis of the financial returns from the millions of pounds ploughed into the efforts over recent years and what emerge instead are explanations of why their success or failure cannot be expressed in such simplistic terms.

Even the global accountancy firms, most of whom have large teams helping the financial industry comply with anti-money laundering requirements, are surprisingly silent when asked what mathematical models exist to test whether anti-money laundering procedures are good value for money.

So what figures do exist and how useful are they in monitoring this expenditure, which is likely to come under increasing scrutiny by financial institutions as economic times worsen? One area where there is consensus is that the cost of fighting money laundering and terrorism financing continues to mushroom.

The most recent of the three-year global anti-money laundering surveys published by accountants KPMG International, issued in 2007, estimated that more than US$1 trillion a year is laundered by drug dealers, arms traffickers and other criminals. Just as that figure is said to be rising, so are the sums committed to fighting these illicit transactions. Surveying 224 respondents from more than 25% of the world's top 250 banks in 65 countries, KPMG's study found that global costs of fighting money laundering increased by 58% between 2004 and 2007--greater than the 43% increase rate that had been predicted by the banks in 2004. In north America, spending on anti-money laundering systems jumped by an even greater percentage, climbing by 70%, it said.

Globally, the banks surveyed said that they expected the rate of growth in their anti-money laundering costs to slow by an average of 24 percentage points between 2007-2010. Yet, this would still see the global total spend rise by another 34%, with the biggest areas of increase expected to be enhanced transaction monitoring, training provision and sanctions compliance.

Past results suggest that the costs tend to overshoot expectations and indeed 10% of survey respondents felt unable to predict their future anti-money laundering costs. The difficulty of estimating anti-money laundering costs, explained the report, is that cost may be spread across many different functions, such as operations, compliance and risk management, and regions.

They may also include both direct and include costs and overlap with processes that are embedded in normal business practice, such as credit risk or customer relationship management systems.

All these factors are also cited by practitioners as reasons for why so few figures exist for the global cost of anti-money laundering efforts. Even in the KPMG report, pounds or dollar signs are conspicuously absent from the section dealing with the costs of anti-money laundering compliance. So how much money is being spent globally on anti-money laundering? Either few people in the industry have added it all up or they don't want to say. Brian Capon, spokesman for the British Bankers Association, said: "We do not have a figure because at the majority of banks anti-money laundering measures are included in other fraud prevention measures and so it is very difficult if not impossible to say what expenditure relates to this one area."

Partial answers are available, however. Boston-based analysis firm Celent Communications estimated in the same year that global spending on anti-money laundering technology alone would increase from US$335 million in 2006 to US$375 million in 2009. In contrast, there may be too many statistics on the other side of the cost-benefits equation. In the UK, for example, the Serious Organised Crime Agency's most recent figures show 210,524 suspicious activity reports received in the year to September 2008, of which 956 were disseminated to the National Terrorist Finance Investigation Unit. Over the year, cash of GBPounds 5.8 million was seized on suspicion of criminal activity or intent.

Many national anti-money laundering authorities have similar reporting systems but without numbers on the cost side of the equation, comparison and meaningful analysis of whether compliance systems are producing decent returns on investment are nigh on impossible. Even if such figures were available, moreover, accountants say comparing like with like would be extremely difficult for several reasons. One is that many anti-money laundering costs fall within other operational budgets so most figures for costs of anti-money laundering efforts are likely to be underestimates.

Another is the deterrent value of anti-money laundering campaigns, which cannot be calculated with any accuracy.

Michael Zeldin, global leader of the anti money laundering and economic and trade sanctions practice of accountancy group Deloitte, likens it to spending on security or health insurance and the difficulty of knowing what might have happened without such expenditure. "Can anti-money laundering efforts be evaluated to see whether they are good value for money?" he asks. "It's a very fair question and there is no real econometrical mathematical answer," says "Banks have looked at this and one cannot say that if plot it on a graph and put more or less into the expenditure on the x axis that you will be more or less successful on the y axis.

"Nor can anyone say that if we spend a certain amount of dollars or a certain proportion of the total budget that we can ensure success."

Nonetheless, governments would like more measurement and analysis. The United States General Accounting Office's report to congressional requesters on combatting money laundering in September 2003 complained that while US anti-money laundering strategies in 2001 and 2002 contained initiatives to measure programme performance, none had been used to ensure the accountability of results.

It cited "the difficulty in establishing such measures for combatting money laundering" and added that, despite the requirements of the Strategy Act, the US Treasury had not provided annual reports to Congress on the effectiveness of policies to combat money laundering and related financial crimes.

Karen Briggs, global head of anti-money laundering at KPMG said there are complications in evaluating the cost-effectiveness of different anti-money laundering strategies. One is that a great deal of the expenditure is related to compulsory compliance with legal requirements, where failure is met with stiff financial penalties. Even if such anti money-laundering expenditure were shown to be ineffective against such crimes occurring, therefore, banks would still have no choice other than to spend the money. Banks also have to contend with increased product complexity, greater involvement with emerging markets and integration of mergers that have taken place, all creating greater challenges in relation to anti-money laundering compliance going forward. Finally, she said, the amount of pressure on banks to pay up and increase protection remains unabated, especially in the US.

"There will be more streamlining and there will be more pressure for transparency and accountability on anti-money laundering spending," she added: "But this is not going to go away. There is still a big clampdown on money laundering and a huge expenditure by governments and law enforcement agencies on anti-terrorism."

Another complication is the risk-based approach that banks are increasingly using to determine the level of due diligence to perform on clients at the account-opening stage. In theory, this approach involves institutions taking on more risk but may yield operational benefits and better results.

However, a survey of 148 money laundering reporting officers and other compliance professionals in the UK by accountants PricewaterhouseCoopers in 2007 found that while 91% of respondents were either satisfied or very satisfied that their organisation had successfully implemented the risk-based approach, 82% said they had not noticed any cost benefits and 6% had seen costs rise as a result.

Furthermore, 64% of those 82% never expected to see any benefits from the initiative. "The backdrop to this rather negative outlook," explained Andrew Clark, PwC partner for anti-money laundering services, "was that 86% of respondents were unable to quantify total spend on anti money laundering compliance in the previous year. "More than four in ten were unclear about the proportion of their organisation's compliance budget spent on anti-money laundering regulation."

PwC's report concluded that organisations should ensure that the costs of operating their anti-money laundering controls are captured so that measurement of efficiency gains, or otherwise, is possible.

Elsewhere, Mr Clark suggested that general improvements can be made in institutions' automated transaction monitoring systems, many of which are experiencing significant inefficiencies from their automated transaction monitoring systems, as shown by extremely high false positive rates.

This is an important area for institutions to reconsider in order to work out whether any cost or operational efficiencies can be found, he suggested. Mr Zeldin added that other efficiencies could be found by combining some anti-money laundering processes with those of other financial intelligence agencies to increase the cost-effectiveness of total compliance resources "Banks are going to be facing shrinking budgets in the current economic conditions," he said: "The more that they make themselves as cost-effective as possible, without affecting their compliance mandate, the better they will able to cope."
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Author:Cave, Andrew
Publication:International News
Date:Mar 1, 2009
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