The Real Costs of Compliance
Volume 11, Number 7
July 28, 2021
Advocacy News You Can Use
A recent Lexis/Nexis survey of over 1,000 financial crime compliance decision makers, which focused on finding the true cost of AML/CFT compliance, reported that the total price tag for all financial crime compliance across financial institutions worldwide is somewhere around $213.9 billion—up from $180.9 billion the previous year. The survey was finalized in 2020, so one could estimate with the complexities of COVID-19 factored in (in particular around customer/member due diligence), the real cost figure for 2021 is likely much higher.
Compliance costs increasing at this exponential rate falls disproportionately on smaller financial institutions, especially when compared to the larger banks that have the resources to comply with AML/CFT rules and regulations. More importantly, it often leads to financial exclusion, as it makes it more difficult to serve rural or underserved markets.
So, it is encouraging when I see international standard setters focused on the opportunities and challenges of new technologies and how they can help with compliance and financial inclusion. I urge you to read the article below regarding their recent report which embraces a risk-based approach to AML/CFT risks and proportionality.
AML/CFT risks are just one of the regulatory issues I am keeping an eye on as the summer winds down. Hear my thoughts on other emerging regulatory issues for credit unions, including the G20’s approach to proportionality, payments, COVID-19 related measures and sustainable finance, by listening to the latest episode of The Global Credit Union Podcast—a new monthly feature from World Council.
FATF Releases Report on Opportunities and Challenges of New Technologies for AML/CFT
The Financial Action Task Force (FATF) released a report entitled Opportunities and Challenges of New Technologies for AML/CFT, identifying emerging and available technology-based solutions. The purpose of the report, “highlights the necessary conditions, policies and practices that need to be in place to successfully use these technologies to improve the efficiency and effectiveness of AML/CFT” - as well as roadblocks to implementation of new technology, including “innovative skills, methods, and processes that are used to achieve goals relating to the effective implementation of AML/CFT requirements or innovative ways to use established technology-based processes to comply with AML/CFT obligation.” World Council applauds FATF’s incorporation of financial inclusion into the report and their acknowledgment that financial inclusion can mitigate AML/CFT risks.
“FATF has reiterated its commitment to the proportionate risk-based adoption of its Standards with a view to protecting the most vulnerable and supporting the reach of AML/CFT safeguards. Its publication of FATF Guidance on AML/CFT measures and financial inclusion includes a supplement on customer due diligence sought to raise awareness of the issue as well as “encourage countries to make use of the FATF Recommendations’ flexibility to provide sound financial services to the financially excluded. (Vyjayanti T Desai et al., 2018)”
World Council has previously commented on the unintended risks associated with FATF standards, such as the effects of overburdensome regulation and its impact on financial inclusion. World Council will continue to advocate for proportional regulation that will foster financial inclusion by providing right-sized regulations for credit unions, which are essential to the financial inclusion of underserved communities.
More information on the Opportunities and Challenges of New Technologies for AML/CFT is available here.
Why this matters to your credit union: The embrace of proportionality means that regulations can be properly tailored for credit unions and help reduce regulatory burden. This article also discusses opportunities that can help with compliance for the numerous AML/CFT compliance issues.
Financial Stability Board Emphasizes Urgency to Transition from LIBOR
The Financial Stability Board (FSB) published a progress report to the G20 on LIBOR transition and remaining issues, highlighting the FSB’s priority to transition away from LIBOR, and underscoring that a majority of LIBOR settings will cease in less than half a year. “The FSB encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR, regardless of where those trades are booked or in which currency they are denominated. Market participants are urged to cease new use of LIBOR in all currencies as soon as practicable, respecting national working group timelines and supervisory guidance where applicable, and in any case no later than the end of 2021.”
FSB further urged market participants to complete steps laid out in the Global Transition Roadmap, and for supervisory authorities to increase efforts to communicate the scope and urgency of LIBOR transitions to all clients. The FSB has committed themselves to helping with the transition of those emerging markets and developing economies that are lagging behind.
More information on the FSB’s report to the G20 and general efforts to transition away from LIBOR are available here.
Why this matters to your credit union: Many financial institutions utilized rates linked to the LIBOR index. Transitioning away from its use is an urgent compliance matter with regulatory and legal consequences if left unattended.
Climate-Related Financial Risk Letter from FSB Chair to G20
In anticipation of a July 9th meeting, a letter from Financial Stability Board (FSB) Chair Randal K. Quarles to G20 Finance Ministers and Central Bank Governors was published highlighting the remaining risks to financial stability associated with non-bank financial intermediation and money market funds, climate change and transition away from LIBOR as prominent issues. Notably, the FSB Chair underlined the need for coordinated efforts to address financial risks related to climate change and requested endorsement from the G20 of a roadmap tasked with undertaking climate-related financial risks. “The roadmap outlines the work underway and still to be done by standard-setting bodies and other international organizations over a multi-year period in four key policy areas: disclosures, data, vulnerabilities analysis, and regulatory and supervisory approaches.”
On July 7, 2021, the FSB published three climate-related reports:
- “The FSB roadmap for addressing climate-related financial risks.
- A report on availability of data with which to monitor climate-related financial stability risks and remaining data gaps.
- A report on promoting climate-related disclosures.”
More information is available on the FSB Chair’s letter to the G20 and Central Bank Governors here.
Why this matters to your credit union: Risks related to climate change will be reflected in many forms of regulations, including those related to investments, capital standards, operations and retail products. Understanding the development of the regulatory approaches will assist with compliance.
Bank for International Settlements Releases Annual Economic Report
The Bank for International Settlements (BIS) released its Annual Economic Report at the Annual General Meeting. The report includes several topics including:
- Pandexit: how “recovery will be uneven and the long-term consequences material.”
- Challenges as a result of the COVID-19 pandemic, including but not limited to: upside and downside risks; diverging economic conditions and tensions between fiscal and monetary policy; lack of policy support in emerging market economies (EMEs).
- The distributional footprint of monetary policy: how to combat economic inequity, which BIS argues is “outside the reach of monetary policy, and is best addressed by fiscal and structural policies.”
- Central bank digital currencies (CBDCs): an opportunity for the monetary system.
More information on the BIS’ Annual Economic Report is available here.
Why this matters to your credit union: This report provides insight into the knowledge base being used by international standard setting bodies for the purposes of their regulatory agendas. This helps anticipate upcoming regulatory changes for your credit union.
Andrew T. Price, Esq.