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Article published on Oct 15, 2005

Anti-Money Laundering Costs Climb 63%
By Alison Sahoo

Fund advisors can count on sharply rising costs stemming from compliance with anti-money laundering rules.

In fact, in the past three years, the costs of complying with the rules climbed an average of 63%. That’s according to a new survey by KPMG. Of the 209 institutions that responded, none reported a decrease in AML spending. Most said they expect that spending increases will continue, with an average of 43% annual increases predicted.

While the results are based on responses from banks and other financial firms, it is unwelcome news to fund advisors. Many fund shops, especially smaller firms, have been struggling with a slew of new compliance costs brought on by new SEC regulations.

Carmina Hughes, a director in KPMG’s Forensic Services practice, says the increase is directly attributable to the new rules that have been passed both by the U.S. Treasury Department and by the other global regulators.

“There has been a groundswell of government activity,” she says. “It’s caused all of the institutions to ramp up the procedures and systems they had in place.”

What’s more, there are no shortcuts or easy solutions. Liam O’Brien & Associates senior counsel Harry Delagrammatikas says anything less than full compliance carries with it a hefty penalty that will keep most firms on the straight and narrow.

“The cost of noncompliance with the rules is huge,” he says. “You can go to jail. You face the real possibility of being charged with willful blindness if you do not do everything reasonably possible to ensure compliance.”

The anti-money laundering rules are required by the USA, Patriot Act, a law passed by Congress as a means to prevent and detect terrorist financing. The act requires that rules be issued for a range of financial services industries that address customer identification, AML policies, procedures and training programs and the filing of suspicious activity reports (SAR5) for customers that engage in suspicious transactional activity.

Fund firms and investment advisors are now subject to know-your-customer requirements and regs regarding policies, procedures and training programs. The SAR rules haven’t yet been finalized, but industry cognoscenti expect them shortly.

Enhanced transaction monitoring is the main area of increased spending, says Hughes, as firms beef up existing systems or implement them for the first time,

It was followed closely by training and know-your-customer requirements.

Hughes notes that so many of the regulations have been brand-new that just figuring out how to implement the requirements has been costly.

That’s particularly true for the fund industry, she says, since unlike the banking industry, there were virtually no AML rules before the Patriot Act,

There are also costs associated with keeping systems up to date, however, That’s because as technology improves, criminals get smarter and find more ways around the systems.

“Among the things I see is that fraud gets better and better,” says Delagrammatikas. “Crooks are out there and every couple of months they come up with something new. It’s amazing how quickly they adjust to internal controls, Once a firm has sealed up certain aspects of one type of fraud, the fraudster will adjust and change the variables to see if he can get through another way.”

Technology firm Celent Communications estimates that brokers and asset managers will spend about $35 million on AML software in 2003, up from about $20 million in 2002. This year, it expects firms to spend more than $80 million on the products.

But most of that spending will come from large financial complexes.

Steven Thornton, managing partner at compliance consultant InvestmentCare Consulting Group, says that smaller companies just don’t have the budgets to support buildouts of complex compliance systems.

The rules were written for the Merrill Lynches of the world,” he says, “They’re hard to fit to a 1O shop. We’re finding that smaller firms are outsourcing instead of doing things internally.”

For example, third services like McDonald Information Service will check new customer accounts against its database and report back any that are questionable.