Monday, July 09, 2007

Anti-money Laundering Costs Balloon

The Globe and Mail, Tavia Grant, 9 July 2007

The cost of fighting money laundering and terrorism financing has mushroomed around the world, including Canada.

In North America, banks' spending on anti-money laundering systems jumped 70 per cent over the past three years, according to a global study by KPMG Monday – far more than the 43-per-cent increase banks had anticipated back in 2004.

Now, as governments ramp up measures against criminal activity and financial markets become more complex, compliance costs are set to spiral further, KPMG said.

“The need for more stringent anti-money laundering processes will only continue to grow for Canadian banks consistent with global expectations of the banking sector,” said James Hunter, head of the firm's forensic practice in Canada, in the report.

Tracking illicit money flows is increasingly difficult because financial markets are increasingly global, with more exposure to unfamiliar emerging markets, and as the popularity of alternative assets explodes.

Globally, spending to combat money laundering jumped 58 per cent, on average, over the past three years, KPMG said, based on its survey of 224 banks from 55 countries. Most of that spending is on transaction monitoring and staff training costs.

Banks continue to lowball cost estimates of compliance. “Just as three years ago banks under-estimated their level of spending in the future, so now they still seem in danger of being overly optimistic,” the study said. “On average, they are predicting an increase of only 34 per cent in their spending over the next three years.”

Canada is no different. Rules, such as the proceeds of crime and terrorist financing act, have been tightened recently, requiring Canadian banks to increase their scrutiny of banking relationships and politically exposed people.

“All of this costs money, so we can expect rising costs of compliance globally to be matched by the banking sector in Canada as well,” Mr. Hunter said.

He stressed that methods of money launderers tend to be different from those who are financing terrorism.

“While money launderers try to integrate the proceeds of crime into the legitimate economy, terrorist financiers may often take funds raised legitimately, perhaps by a community group who believe they are funding a charitable cause back home, which in turn are then funnelled back into the underground economy to fund terrorist activities.”

The number of suspicious activity reports has also increased at over 70 per cent of global banks. Almost half said those reports have increased “substantially.”

Following the money across borders is a challenge for many banks. Globally, 41 per cent said they weren't capable of tracking across countries, and 26 per cent were only partially capable.

In all, “the opportunities for money launderers are multiplied by changing investment patterns such as the shift from transparent public markets to private and opaque structures.

“One thing is certain: governments and regulators are only going to increase the pressure on banks and other financial intermediaries in Canada and elsewhere to devote resources, technology and people in the fight against the money launderers and those who would use the global financial system to finance terrorism,” Mr. Hunter said.

KPMG, which makes money by helping companies meet government standards, releases its money laundering study every three years.