Record-breaking Costs of Financial Crime Compliance in India: A New Challenge Amidst Digital Transformation
Amidst a dynamic geopolitical landscape and frequent legislative changes, financial institutions in India are facing mounting compliance costs. According to the latest study by Forrester Consulting, 98% of Indian financial institutions reported an increase in financial crime compliance expenses. This reflects the strict regulatory pressures that institutions are subjected to.
Staggering Compliance Costs in India
The study, which polled 1,181 senior decision-makers at financial institutions worldwide, including 271 respondents from India, China, Japan, Singapore, and Australia, revealed the following:
- Total Annual Cost of Financial Crime Compliance in India: ₹3,923 billion
Key Drivers of Financial Crime Compliance Costs in India
Financial crime compliance costs in India are substantial, primarily driven by the following factors:
1. Labour/Resource Costs 💼
Labour costs represented the biggest chunk of the total financial crime compliance costs in India, accounting for ₹1,373.6 billion, or 35% of the total.
- Key labour-related challenges in India:
- Skills shortage
- Training and development
- Turnover and retention
- External consultants
2. Technological Challenges 💻
Digital transformation and the adoption of innovative technologies such as artificial intelligence (AI), cryptocurrencies, and digital payments have ushered in new risk typologies. Financial crime involving cryptocurrency saw a 33% surge over the past year, while financial crime involving digital payments rose by 40%. Corruption within supply chains (65%) and trade-based money laundering schemes (67%) also pose significant challenges.
3. External Costs 💰
Costs related to outsourcing compliance obligations to third-party vendors added up to ₹57 billion, further contributing to India’s total compliance expenses.
Key Challenges in Financial Crime Compliance Operations in India
Institutions in India face several challenges in their financial crime compliance operations:
1. Positive identification of sanctioned entities or PEPs 🛡️
Ensuring the accurate identification and screening of sanctioned entities (PEPs) and politically exposed persons (PEPs) continues to be a major concern for financial crime compliance teams in India.
2. Customer risk profiling 📊
Effectively assessing and profiling customers to mitigate risks associated with financial crime has posed a significant challenge.
3. Regulatory reporting 📃
Complying with diverse and complex regulatory reporting requirements remains a challenge.
4. Processing non-Latin scripts 📜
Handling data in non-Latin scripts and adhering to specific data formats add to the operational complexities.
Conclusion
The high costs and challenges associated with financial crime compliance have become a significant concern in the Indian financial sector. Institutions must adopt a strategic approach to balancing the need for effective financial crime compliance with providing a seamless customer experience.
Download the APAC True Cost of Financial Crime Compliance Study, 2023 for guidance on this front.