LexisNexis Risk Solutions probes escalating cost of fraud

A new study by LexisNexis Risk Solutions offers a glimpse into what financial services companies are spending to comply with regulations, policies and standards regarding financial crimes. The 2022 True Cost of Financial Crime Compliance Study revealed the cost of compliance continues to rise above pre-pandemic levels, up 13.6 percent since 2021, to just shy of $57 billion for U.S. and Canadian firms combined.

This comes on the heels of news that the post-pandemic fraud landscape continues to expand. The latest LexisNexis Risk Solutions' True Cost of Fraud Study: Ecommerce and Retail – U.S. and Canada Edition, released earlier this year, showed the cost of fraud for U.S. financial services firms is between 6.7 percent and 9.9 percent higher than pre-pandemic levels. Not surprisingly, much of the increase in fraud activity occurs through online and mobile channels. The true cost of fraud includes the actual dollar amount of a transaction, as well as additional costs related to labor and investigations, interest and fees, and external recovery expenses. Frauds can include identity fraud, bogus requests for refunds, bounced checks, account takeovers, fraudulent applications and money laundering, researchers found.

In dollar terms, every $1 of fraud loss cost U.S. financial services firms $4 in 2021. That’s up from $3.25 in 2019 and $3.64 in 2020 just before the Covid-19 pandemic was declared, LexisNexis Risk Solutions reported. “The online and mobile fraud landscape continues to evolve,” the company stated. “Fraudsters are relentless, constantly seeking new vulnerabilities to exploit. Financial services firms and lending institutions can’t ever let down their guard.”

AML rules, sanctions drive up costs

Results of the latest LexisNexis Risk Solutions survey reveals a significant majority of U.S. (73 percent) and Canadian (68 percent) financial institutions (FIs) saw large increases in financial crime compliance costs beginning in the second quarter of 2021.

The average annual cost of financial crime compliance is highest among mid-sized and large FIs, at 14 percent. While that is down from a spike of 36 percent between 2020 and 2021, it’s still a big jump. According to the study, continued cost increases for the largest financial institutions are largely due to regulatory requirements, and increased exposure and labor costs associated with detecting and remediating exposures.

The Anti-Money Laundering Act of 2020 has been a major contributor to compliance costs as well, researchers have noted. That legislation broadened the scope of law enforcement and reporting requirements for due diligence around anti-money laundering (AML) requirements and processes.

Increased geo-political risks, such as sanctions against Russian individuals and entities, have further contributed to compliance costs, according to LexisNexis Risk Solutions.

“Costs are high for financial firms because they are facing challenges by an even broader set of financial crimes, including crimes related to money mules, cryptocurrency, ransomware, digital transactions and supply chain corruption,” said Leslie Bailey, vice president for financial crime compliance at LexisNexis Risk Solutions. “The combination of these challenges is impacting productivity, due diligence and new customer acquisition.”

The LexisNexis Risk Solutions' The 2022 True Cost of Financial Crime Compliance Study surveyed 150 decision makers at U.S. and Canadian financial firms that oversee know your customer (KYC) remediation, sanctions monitoring, financial crime transaction monitoring and/compliance operations. The survey was conducted in May.

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