- Spending up by nearly 60 percent over previous three years
- Senior management more involved
- But regulation needs to be better focused, six out of ten say
- Transaction monitoring needs enhancing as staff remain first line of defense
The cost of fighting money laundering has risen dramatically for banks across the world as they have become increasingly engaged in the struggle against criminality. However, the task is becoming more difficult due to the increasing complexity of the financial markets in which they operate, including greater exposure to sometimes unfamiliar emerging markets and the dramatic growth of alternative assets, according to a global study by KPMG Forensic.The cost of fighting money laundering has risen dramatically for banks across the world as they have become increasingly engaged in the struggle against criminality. However, the task is becoming more difficult due to the increasing complexity of the financial markets in which they operate, including greater exposure to sometimes unfamiliar emerging markets and the dramatic growth of alternative assets, according to a global study by KPMG Forensic.KPMG’s study among 224 banks from 55 countries found that banks’ spending on anti-money laundering (AML) systems and processes has risen by an average of 58 percent over the last three years. In North America and in the Middle East and Africa, spending has increased by 70 percent or more. These increases are far in excess of banks’ own predictions when KPMG Forensic carried out its last study in 2004, when respondents on average predicted an increase of 43 percent. The biggest spending continues to be on transaction monitoring and staff training costs.However, just as three years ago banks under-estimated their likely level of spend in the future, so now they still seem in danger of being over-optimistic: on average, they are predicting an increase of only 34 percent in their spending over the next three years to 2010.Senior management are getting more involved in AML, with 71 percent of banks saying directors at the highest level are actively involved in it, up from 61 percent in 2004. Most respondent banks (85 percent) have a global AML policy, ranging from a high of 100 percent in North America to a low of 58 percent in the Middle East and Africa.However, there is significant concern amongst banks that governmental and international regulation needs to be more effectively targeted. Half of respondents said they believe that while the overall regulatory burden is acceptable, the requirements need to be better focused, while nearly one in ten (8 percent) believe that regulation should actually be increased in order to combat money laundering more effectively.In addition, there is evidence that transaction monitoring systems need to be enhanced. Despite sophisticated monitoring technology being available, 97 percent of banks say that they are dependent on the vigilance of staff to monitor and identify suspicious activity, and a third of banks (34 percent) say that they are not satisfied with the effectiveness of their transaction monitoring systems. Fewer than one in five (18 percent) describe themselves as ‘very satisfied’.Karen Briggs, Global Head of Anti-Money Laundering at KPMG Forensic and partner in the U.K. firm, said: “Banks are clearly continuing to make increased efforts to tackle the money laundering threat effectively. These efforts are considerable, but nevertheless many banks are struggling to design and implement an effective anti-money laundering strategy. Significant numbers say that the regulatory environment is not helping them as well as it should do – this is clearly a matter of concern, as effective coordination between parties is one of the keys to defeating money launderers.”“With international banks bolstering their presence in emerging market economies, and with a low interest rate environment driving growth in alternative assets including hedge funds, private equity and commodity investments, the need for more stringent anti-money laundering processes has only grown. Banks will need to work extremely hard from here if they are to maintain any advantage in the war against money laundering and terrorist financing.”Reporting, identifyingWith greater spending and training, the number of suspicious activity reports (SARs) being generated has also increased at over 70 percent of banks. Forty-two percent of banks say that the number of SARs has increased “substantially”.Banks are also making greater efforts to identify politically exposed persons (PEPs) who could be the conduits for laundered money. Over seven out of ten banks say they perform enhanced due diligence on PEPs, markedly up from the worrying low of 45 percent three years ago. There are significant variations here, however, with only 42 percent of banks in the Asia Pacific region and only 65 percent of banks in Europe monitoring for PEPs. Within Europe, this ranged dramatically, from 86 percent in the U.K. to only 29 percent in Spain and 13 percent in Italy. The task facing banks here is made more difficult by the lack of a common definition of a PEP and the fact that in some markets business and politics are closely intertwined.Cross-border challengeDespite all of these efforts, it is clear that significant challenges remain. Less than a quarter of respondent banks with an international presence are capable of monitoring a single customer’s transactions and account status across multiple countries. There was no evidence that larger banks are any more capable in this respect than smaller banks, and this may reflect that banking secrecy and data protection laws in some countries prevent the sharing of information around a banking group.North American banks are ahead of their peer group in this respect, however, with 42 percent of banks capable of monitoring across borders. Globally, 41 percent of banks said they were not capable of tracking across countries, and 26 percent were only partially capable.EU enlargementIn its report, KPMG Forensic also highlights the additional AML risks created by the enlargement of the EU. Many of the ten countries that have recently joined have not historically had stringent AML processes in place and it is likely to take these countries some time to bring their processes up to the standards required under the EU Third Money Laundering Directive. Some banks may be particularly vulnerable to risks if their internal procedures are based on the assumption that all EU banks are low risk and accordingly apply less scrutiny to these relationships.Brendan Nelson, Global Chairman of KPMG’s Financial Services practice and U.K. firm partner, concluded: “There is no doubt that a more even regulatory playing field globally would help banks coordinate their anti-money laundering processes more effectively. The desire and commitment is there, as banks recognize that money laundering is an issue with significant adverse reputational issues for them if things go wrong. However, a mixed regulatory landscape and banks’ own legacy issues in their KYC (know your customer) information, IT systems and culture is making the task difficult for many. As the expansion into emerging and alternative markets continues apace, these challenges are only likely to grow.”
uk: Internet leads to rise in fraud
Fraud levels in the UK are at record high, with the internet involved in almost all instances of fraud, according to the latest KPMG Fraud Barometer report. In the first half of 2007, the government and businesses lost £594m to fraud, almost three times the figure recorded for the previous six months. So-called carousel fraud has been the biggest contributor over the last six months, with four cases alone totalling £440m.