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Why are AML fines and penalties increasing? Deep dive into Encompass analysis

By Cheri Burns | Wed 26 June, 2019

2019 is set to be a record year of Anti-Money Laundering (AML) fines and penalties, according to new research.

Encompass, a fast-growing provider of intelligently automated Know Your Customer (KYC) solutions, carried out an analysis of AML-related penalties handed down between 2002 and April 2019, finding that there will likely be a peak this year, with total fines overtaking the previous 2014 record of $10.89bn.

Explore our analysis of AML fines and penalties

The research, which comes after a number of multi-million dollar fines in the past 12 months, showed that, while US regulators penalise the most followed by the UK, monetary sanctions imposed have ramped up, with $7.7bn of AML fines handed out in January to April 2019, compared to $1.16bn in the same period in 2018.

Reacting to the findings, Encompass co-founder and CEO Wayne Johnson told how the writing has been on the wall for some time, saying: “When it comes to the fines that have been imposed over the last 10 years or so, I’m continually surprised.”

When asked why, after more than a decade of progressive enhancements to AML regulations, banks still face these significant fines he added:

It takes quite a while for the fines to work through the system, so that is something that is bound to have an impact on the figures we see. There’s also the possibility that some of the banks have taken the view that fines are a cost of doing business.

Roger Carson, Encompass co-founder and Global Financial Sales Director, agreed, sharing that he believed “most of the big fines had been levied by now” and, as a result, this trend would start to alter.

Difference between AML fines and penalties in 2018 vs 2019

With high levels of awareness about financial crime and investment in prevention, how are criminals still managing to find the means to profit?

A survey carried out by Refinitiv revealed that what are thought of as business imperatives often outrank crime prevention.

While 98% of respondents claim they are under pressure to increase turnover, 45% claim this is extreme pressure. This is far higher than the extreme pressure they feel under to improve regulatory safeguards (35%) and prevent financial crime (32%).

Although Mr Johnson and Mr Carson expressed surprise at this year’s potentially record figures, what these statistics show is that banks have widely differing priorities, with compliance and preventing financial crime currently falling further down on the list.

With financial crime and the importance of meeting obligations having been top of the agenda for some time, many would have expected banks to be operating under robust and effective AML programmes. However, in an environment where profits are falling, banks are under pressure to bring in new business and grow their existing customer base. This means a key focus is to reduce time to revenue by ensuring customers are onboarding quickly and efficiently, and compliance processes that slow down this process can be the cause of significant frustration.

The role of technology in reducing AML fines and penalties

This is where technology comes to the fore. Implemented correctly, new technologies such as automation and artificial intelligence, can transform compliance from a stumbling block into an enabler of good business.

This is something that platforms like encompass allow, putting organizations back in control by automating repetitive and manual KYC and Customer Due Diligence (CDD) processes, while taking much of the burden from staff.

Many in financial services are already seeing the benefits of automation and technology, and what implementing these tools into their existing processes can do, with new technologies proving almost twice as successful at performing KYC checks on clients.

More is being done to realise the potential of effective technology powered by trusted data, with investment in improvements in detecting and preventing financial crime expected to increase by over 50% in the next 12 months. However, there clearly needs to be more of a focus on this across the board if there is to be a change in the number of firms receiving sizeable fines.

Looking ahead, Mr Johnson believes one major change we could see in AML and compliance is a shift in the type of punishments that come with falling short:

We are yet to see significant action on the criminal front. Prosecution, in most circumstances is held by government, and whether we will see more of this is something I do wonder about.

The thought that prosecution is not being used in the way it should is backed up by the Financial Action Task Force (FATF), whose research, looking at the US particularly, revealed that two thirds of assessments show that States are not effectively prosecuting, with FATF “working through its evaluation and follow up processes to strengthen prosecution efforts.”

What about the Australian market?

While the work carried out by Encompass shows AML fines to be highest in the US and UK, with Encompass’ origins being in Australia, the company’s co-founders also considered how things might reflect there in years to come.

The Australian market is traditionally behind Europe and the US, in terms of major trends, and Mr Carson believes this causes issues when it comes to regulation as many institutions are “playing catch up.”

He said:

Because banks and regulators are playing catch up, they have tried to throw bodies at solving the problem, which is what the UK and Europe did before they decided they had to embrace technology.

It’s easy to knock the regulator – they are a target – but they haven’t been funded well enough and that’s a function of the way governments have placed their emphasis.

Mr Johnson echoed these thoughts, saying:

The issues come from the lack of resources that regulators have. They control thousands of reporting entities but don’t have the capacity to do this effectively. The question is how well will regulators be funded by government going forward? We know now, since the introduction of Tranche 2, that the government is willing to enforce a higher regulation levy to provide a higher level of oversight, in order to line up with other countries.

This being the case, banks will have to ensure that processes are being carried out properly and consistently.

It will take a cultural shift and changing any cultural behaviour is difficult.

Whatever the outcome, going forward, technology will clearly play a major role in AML compliance and how organizations keep up with ever changing regulations.

Implemented properly, technology can also support business growth. Refinitiv’s survey found that 94% of respondents agree that the technology they use to detect financial crime is also enhancing customer engagement.

Showing its future importance, Mr Carson concluded:

There is going to be pressure to adopt technologies. A product like Encompass ensures firms can demonstrate to regulators that they are serious about meeting their obligations.


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