Article
The hidden costs of noncompliance: Why investing in AML/CFT is critical
Jan 22, 2025 · Authored by David Twomey
Reach out to our financial crimes specialists to discuss AML compliance considerations for your organization.
When it comes to anti-money laundering and countering the financing of terrorism (AML/CFT), companies in the financial sector tend to focus on the cost of compliance.
As we discussed in an earlier article in our AML/CFT series, these costs can certainly be burdensome. However, the reality is that many financial institutions focus so much on the cost of compliance that they fail to consider the far greater cost of noncompliance.
What do we mean by this? Well, it is easy for financial specialists to understand the material cost of hiring employees and implementing technology solutions to run their AML/CFT compliance program. Thus, the total cost of an AML/CFT compliance program is relatively easy to quantify and can be a major expense for institutions.
Of course, some institutions circumvent AML/CFT compliance (and the associated costs) altogether or inadvertently run an outdated program. When they do that, however, they run the risk of facing profound consequences.
That brings us to the cost of noncompliance.
Follow our series for a full picture of the BSA, the different regulations that are a part of the BSA and how it will affect the financial services sector.
Read Navigating the new FinCEN final rule for investment advisers for an overview of the FinCEN final rule and how it affects RIAs and ERAs.
Read Navigating the new AML landscape: It’s much more than KYC for in-depth explanations of the BSA, AML, CFT and KYC.
Read The cost of AML compliance: Why outsourcing may be the smart solution to understand the people, processes and technology investments to be considered to comply with AML regulations.
Read RIAs: Thinking the FinCEN AML final rule is no big deal? Think again if you are a registered investment advisor seeking guidance and next steps ahead of the upcoming FinCEN final rule deadline.
AML/CFT compliance: Invest now, save later
While the costs of AML/CFT compliance might appear burdensome on the front end, the back-end repercussions – financial and otherwise – can be much more severe and much more long-lasting.
Responsible AML/CFT compliance essentially requires an up-front investment to avoid a potential avalanche of consequences down the road. In fact, let us examine those potential consequences:
Fines can be imposed by regulatory bodies such as the Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Consumer Financial Protection Bureau (CFPB), the Office of Foreign Assets Control (OFAC), and other federal and state regulators. Large financial institutions, including banks, credit unions, fintechs and virtual asset service providers, have been fined billions of dollars in the past, while investment advisers have received fines in the millions of dollars. These penalties can be substantial enough to affect profitability or even the ability to stay in business.
Regulatory bodies may take formal enforcement actions against a noncompliant organization, which can range from fines (as noted above) to more severe sanctions such as suspension of operations, restrictions on business activities, significant remediation efforts or even the closure of the institution in extreme cases.
The loss of client trust and brand value can be severe when an institution is caught in noncompliance with AML/CFT regulations. Reputational damage can impact client confidence, client relationships and public perception. Clients may choose to take their business elsewhere, or prospective clients might be hesitant to work with firms linked to illicit financial activities.
Noncompliance with AML/CFT regulations can jeopardize the assets of both clients and financial institutions. Failure to comply may expose client funds to potential loss due to money laundering or fraud. Similarly, for financial institutions, inadequate controls can lead to frozen or seized assets, legal claims, or losses from regulatory penalties.
Senior executives, compliance officers and sometimes even employees of financial institutions may be held personally liable for their roles in failing to comply with AML/CFT regulations. This can include criminal prosecution, civil penalties, or both. In some cases, individuals are prosecuted for failing to detect or report suspicious activities with consequences that may include personal financial penalties or jail time.
Noncompliance can lead to an increased level of regulatory scrutiny, which can extend beyond the specific institution involved. This may involve closer inspection of the firm’s business practices, and heightened reporting requirements or increased examinations from regulatory bodies. Moreover, increased scrutiny is rarely a short-term consequence; in fact, regulators have long memories and tend to continuously scrutinize noncompliant organizations.
Many financial professionals do not realize that the costs of noncompliance far outweigh a reasonable, up-front investment in AML/CFT. Of course, there is another option on the table.
Outsourcing: An attractive option
Given all the potential consequences, it is imperative that financial institutions hire AML/CFT experts who possess both the highest level of experience and the time to dedicate most or all of their attention to AML/CFT compliance. These professionals also need to understand the seriousness of their position, the importance of their role and the severity of the potential consequences.
In short, before they even begin their AML/CFT journey, companies need to fully comprehend the cost of compliance and the cost of noncompliance.
There simply is too much risk in cutting corners with your AML/CFT hires and technology decisions. Of course, the immense challenge of sourcing qualified people, training them, paying their salaries, and purchasing the required software is precisely why so many companies outsource their AML/CFT responsibilities to a firm that specializes in this type of work.
As the regulatory environment changes, Baker Tilly continues to offer financial institutions a steady hand with their AML/CFT compliance program. Our onshore Certified Anti-Money Laundering Specialist (CAMS) professionals understand the roadblocks to AML/CFT compliance and the risks of noncompliance and are ready to serve organizations in any industry and at any maturity level.
With this in mind, many financial institutions opt for assistance with individual components of their AML/CFT program, such as third-line independent testing and regulatory exam preparedness or one-time projects such as implementing a new transaction monitoring system, responding to a regulatory enforcement action, or validating remediation activities while other companies outsource their entire AML/CFT responsibilities to Baker Tilly. Along the way, we absorb the costs of hiring full-time AML/CFT specialists and offset the expense of purchasing technology to detect and prevent financial crimes, all while allowing you to focus on what you do best.