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Financial Institutions Face Challenges with Cryptocurrency and AI-Driven Fraud

Financial institutions across the United States and Canada are facing an unprecedented challenge as compliance costs surge to a staggering $61 billion, according to the latest True Cost of Financial Crime Compliance Study released by LexisNexis Risk Solutions.

The study, conducted by Forrester Consulting, paints a concerning picture of the mounting financial burden on institutions amidst escalating regulatory pressures and the emergence of sophisticated criminal methodologies.

The study reveals that 99% of financial institutions have witnessed a surge in compliance costs, with mid and large-sized institutions holding over $10 billion in assets particularly feeling the strain. A primary driver behind these escalating costs is the rapid escalation of financial crime regulations and regulatory expectations, cited by 44% of institutions. To navigate this challenging landscape, 70% of institutions are prioritizing cost reduction in the next 12 months.

One of the most pressing challenges faced by financial institutions is the escalating complexity of the sanctions environment, leading to a surge in screening workloads. A striking 83% of mid and large-sized institutions and 87% of smaller organizations have reported an increase in screening alerts, highlighting the growing pressure on compliance teams.

Technology costs are a significant contributor to the rising expenses, with 79% of organizations witnessing increases in expenses related to compliance and know-your-customer (KYC) software in the past year. Additionally, costs associated with networks, systems, and remote work have surged for 75% of businesses, underlining the substantial investment required to meet stringent compliance requirements.

Furthermore, the study sheds light on the emergence of cryptocurrencies, digital payments, and AI technologies as tools for illicit activities. Alarmingly, 22% of institutions reported significant increases in financial crime involving cryptocurrencies, while an equal percentage noted heightened use of AI in criminal activities.

In response to these challenges, Matt Michaud, Global Head of Financial Crime Compliance at LexisNexis Risk Solutions, emphasized the importance of a strategic approach to financial crime compliance.

Michaud stressed the necessity for organizations to actively seek ways to reduce labor costs while simultaneously enhancing compliance efficiency. This includes equipping institutions with comprehensive datasets, advanced AI/ML-based compliance models, and robust analytics to swiftly identify new crime patterns.

The study also offers recommendations for combating financial crime, including balancing compliance effectiveness with customer experience, embracing new technologies to counter emerging financial crimes, and employing compliance tools and analytics to manage costs and enhance efficiency.

Striking the right balance between compliance and customer experience is crucial in the digital era, as institutions vie to deliver seamless onboarding and transaction experiences while mitigating financial crime risks.

As financial institutions grapple with the dual challenges of escalating compliance costs and evolving criminal methodologies, proactive measures and strategic investments in technology and expertise will be essential to navigate the complex regulatory landscape and safeguard against financial crime threats.

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