The Real Cost of Anti-Money Laundering Compliance: Where Can Banks Cut Expenses Without Increasing Risk?

Anti-money laundering (AML) compliance costs continue to rise as global AML system spending is projected to reach $51.7 billion by 2028. However, the cost of compliance extends beyond monetary expenses. Inefficient processes, reliance on outdated systems, and high false positive rates create operational inefficiencies that reduce productivity.

It is time for banks to rethink their compliance strategies by leveraging technology, streamlining operations, and adopting a risk-based approach to remain competitive. This involves assessing the areas important to implement cost-reducing measures that enhance efficiency while maintaining compliance standards. 

In this blog, we’ll help you understand the key cost drivers in AML compliance which are essential for identifying areas where banks can reduce expenses without compromising effectiveness.

The Growing Cost of Compliance in The Banking Industry

Banks have been working to reduce their costs but the cost of compliance remains a major financial burden. In the U.S., efforts to reduce expenses have been growing after a liquidity crisis caused by deposit outflows, which lowered net interest margins. At the same time, the global increase in non-performing assets has increased financial distress.

Regulatory expectations around AI, operational resilience, and open banking continue to transform which makes it necessary for the banks to upgrade RegTech and improve compliance processes. While these investments help institutions meet regulatory obligations and maintain customer confidence, they also contribute to rising operational costs.

Banks are also investing in new technologies to remain competitive and balance the need for compliance along with the drive for innovation. However, as regulatory demands and financial pressures grow, banks must take a strategic approach to compliance spending, ensuring they meet requirements without unnecessary cost escalation.

Breaking Down the Cost of Compliance Components

Financial institutions, especially banks, are constantly developing strategies to reduce the regulatory cost of compliance. To understand where banks can optimize their spending, it’s essential to dissect the key components of AML compliance costs.

In the following part of this section, we will understand how technology, labor, regulatory fines, and operational inefficiencies are becoming the leading factors of increased compliance costs.

1. Technology Investments: Costs, Growth, and Gaps in Efficiency

Technology is essential in financial crime compliance, offering automation tools that improve detection and regulatory processes while requiring significant investment. In the UK, financial services firms spend over £21,000 per hour on FinCrime and fraud prevention through onboarding and compliance screening alone.

Technology-related compliance costs have also grown significantly. Global IT spending is expected to grow in 2025 as Gartner projects it to increase by 9.3% and reach $5.74 trillion.

The banking software industry is expected to grow as financial institutions prioritize digital transformation. Despite increasing reliance on technology, AI adoption in AML processes remains limited.

These rising costs highlight the need for financial institutions to use technology strategically, ensuring investments lead to real efficiency gains. Financial institutions have long seen modern technology as a way to enhance compliance and improve customer experiences.

2. Labor and Training: The Rising Cost of Compliance Staffing

A key challenge for financial institutions is managing the increasing volume of screening alerts, particularly as sanctions enforcement becomes difficult. The survey shows that labor accounts for 41% of the total costs and is the largest financial compliance expense in Asia.

Labor costs are a major driver of compliance expenses and show the investment needed in highly qualified personnel. In the past year, 72% of financial institutions saw higher labor costs for full-time and part-time staff while 70% faced rising compliance training expenses.

Moreover, board members and c-suite employees recently have been dedicating their working hours to FinCrime compliance. Senior executives must spend more time focusing on strategic business growth instead of overseeing compliance programs, risk assessments, and regulatory reporting.

3. Increasing Cost of Compliance Due to Long Working Hours

Between 2016 and 2023, the number of employee hours dedicated to complying with financial regulations and responding to examiner mandates surged by 61%, even though total employee hours across the industry grew by only 20% during the same period. 

This trend highlights the increasing complications of compliance obligations, which require personnel and greater investments in oversight. Instead of streamlining processes, regulatory expectations have expanded, demanding resources from financial institutions.

4. Regulatory Fines and Penalties

35% of financial institutions cite increasing FinCrime regulations as a major driver of compliance costs. Banks that come under the Bank Secrecy Act (BSA) must maintain transaction records and verify non-customer identities per the BSA Travel Rule to prevent illicit financial activities.

Failure to comply with AML regulations can result in severe penalties. BSA violations tied to AML program failures may lead to daily fines. Money Services Businesses (MSBs) that fail to register with FinCEN also face daily fines until properly registered.

Regulators have increased scrutiny on banks as they recently issued a $42 million civil monetary penalty in an enforcement action for compliance failures. The bank was responsible for multiple BSA violations which include facilitating cross-border transactions without proper registration or SAR filings. 

Furthermore, BSA violations tied to AML program failures can result in daily fines, following the same penalty caps. Additionally, Money Services Businesses (MSBs) that fail to register with FinCEN face daily fines until properly registered. Regulatory agencies and banking authorities impose further penalties of $1,000,000 per day or 1% of the institution’s assets.

5. Operational Inefficiencies Leading to Increase in Cost of Compliance

Outdated systems and fragmented compliance processes continue to drive up costs for financial institutions. Many banks still rely on legacy infrastructure that does not integrate well with modern compliance tools. 

Similar trends are emerging in other industries, where integrating systems has added complications rather than reducing risk. In some cases, for every $1 lost to fraud, institutions are expected to spend an additional $4.04 to address the issue in 2024, up from $3.85 in 2023 because of the integration systems used for data sharing.

While data-sharing across financial institutions has improved visibility, it has not eliminated fraud risks or inefficiencies. Banks need strategies that can be implemented effectively and efficiently to reduce their cost of compliance and prevent FinCrime in 2025.

Strategies for Cost Reduction Without Increasing Risk

With AML compliance costs rising, banks need targeted strategies to manage spending without weakening financial crime prevention. Below are practical approaches grounded in recent data and industry trends.

1. Leveraging Advanced Analytics and AI

Artificial intelligence and machine learning (ML) offer a path to reducing labor and operational costs. By integrating with traditional rules-based systems, AI-driven solutions can analyze vast datasets in real-time, identifying patterns of suspicious behavior with greater accuracy. An example of such a platform is Lucinity, which integrates rules with AI transaction monitoring powered by Resistant AI.

A 2023 Forrester Consulting study found that organizations using AI-based compliance models reduced false positives by up to 70%, freeing analysts to focus on high-risk cases. AML solutions integrate ML with transaction monitoring and customer risk scoring to reduce manual reviews. 

AI-driven transaction monitoring systems accurately detect suspicious patterns, minimizing false positives and improving investigative efficiency. These technologies help compliance teams focus on high-risk transactions rather than wasting time on irrelevant alerts.

Regulatory technology (RegTech) solutions further enhance cost efficiency by automating compliance processes such as customer due diligence (CDD), suspicious activity report (SAR) generation, and case management.

2. Consolidating Technology Platforms

The proliferation of standalone systems often drives up the cost of compliance for banks and financial institutions. Consolidating these into a unified platform can streamline workflows and reduce maintenance expenses. AI-powered case management systems integrate fraud, AML, and sanctions screening into a cohesive framework. 

Data suggests that this approach could slow the growth of compliance costs by optimizing existing investments. Financial institutions are already projecting a moderation in spending increases. 

A single, interoperable platform also improves data sharing across departments, reducing duplication and enabling near-real-time insights. This change requires upfront investment but leads to long-term efficiency gains.

3. Adopting a Risk-Based Approach

Implementing a risk-based approach allows banks to allocate compliance resources efficiently. Customer risk profiling ensures that financial institutions focus on high-risk individuals and entities while applying less stringent measures to low-risk customers. 

A risk-based approach (RBA) tailors compliance efforts to the level of threat posed by customers, transactions, or jurisdictions, avoiding overinvestment in low-risk areas. The Basel AML Index, which scored global AML risk at 5.12 out of 10 in 2024, emphasizes the importance of focusing resources where they matter most. 

Enhanced due diligence (EDD) should be reserved for higher-risk clients, while standard due diligence processes can be streamlined for lower-risk individuals.  For example, real estate and cryptocurrency are often linked to money laundering cases in Canada which require stricter controls while routine retail transactions pose less risk.

Risk-based compliance also involves continuous monitoring and reassessment of customer activities. Implementing dynamic risk scoring models that adjust to real-time transaction behavior allows banks to improve compliance processes and focus resources where they are needed most.

4. Enhancing Workforce Efficiency and Productivity

Workforce optimization plays an important role in cost reduction. Compliance teams often operate in fragmented environments where different departments handle separate aspects of financial crime compliance. 

Integrating compliance functions into a centralized system enhances collaboration and eliminates redundancies. Cross-training employees on multiple compliance tasks increases workforce flexibility, allowing staff to handle diverse responsibilities without the need for additional hires. 

Encouraging efficiency and continuous learning helps banks boost productivity and lower long-term labor costs. Furthermore, empowering employees with intuitive compliance tools reduces workload burdens, ensuring that staff can focus on complicated investigations rather than repetitive administrative tasks.

5. Collaboration and Information Sharing for Cost Efficiency

Collaboration and information sharing among financial institutions enhance compliance effectiveness while reducing costs. Industry partnerships enable banks to share intelligence on emerging financial crime threats, reducing duplication of efforts.

AI-based approaches such as shared KYC utilities streamline customer verification processes across multiple banks and decrease redundant compliance checks. Working across industries helps financial institutions fight financial crime efficiently while managing compliance costs.

Participation in regulatory sandboxes also allows banks to test new compliance technologies and approaches in a controlled environment before full-scale implementation. Working together allows financial institutions to create cost-effective compliance strategies without compromising risk management.

How Lucinity Helps Banks Reduce Compliance Costs Without Increasing Risk

Financial institutions face growing pressure to manage compliance costs while maintaining effective financial crime prevention programs. Lucinity provides AI-powered tools to simplify compliance operations, eliminate inefficiencies, and improve decision-making.

Transaction Monitoring: Lucinity integrates its rule-driven scenario-based monitoring with AI-powered monitoring offered by its partners, particularly Resistant AI. This helps detect suspicious trends while reducing false positives and wasted costs.

Case Manager: Lucinity’s Case Manager centralizes compliance data, integrating alerts from multiple systems into a single platform. This eliminates manual data gathering, improves decision-making, and reduces investigation time, allowing compliance teams to focus on high-risk cases efficiently.

Luci Copilot: The Luci Copilot accelerates financial crime investigations by summarizing cases, highlighting risks, and visualizing transactions. Compliance teams can reduce manual reviews and false positives while improving accuracy. 

The Luci Copilot Plugin integrates seamlessly with existing enterprise systems, boosting productivity by up to 90% without IT overhauls.

Customer 360: Lucinity’s Customer 360 continuously updates risk profiles using data from KYC, transaction monitoring, and external sources. This ensures real-time risk assessments, reducing unnecessary scrutiny of low-risk customers and improving compliance efficiency.

Regulatory Reporting: Lucinity also automates Suspicious Activity Report (SAR) generation, ensuring compliance teams can prepare and submit reports faster, with fewer errors. Reducing manual workloads helps banks lower compliance costs and avoid penalties.

Wrapping Up

Financial institutions face rising compliance costs, with growing labor expenses and regulatory requirements adding pressure to resources. Adopting AI automation and risk-based strategies is now helping banks improve compliance, reduce costs, and strengthen financial crime detection. 

The following key takeaways provide an overview of our discussion in this blog:

• Financial firms spend over £21,000 per hour on fraud prevention during onboarding and compliance screening.
• Compliance labor hours have increased as outdated systems and manual processes force banks to spend $4.04 for every $1 lost to fraud, up from $3.85 in 2023.
• With AML risks surging, financial institutions must prioritize high-risk transactions while streamlining compliance for low-risk customers.
• AI-driven compliance can reduce false positives by up to 70%, cut investigation times, and streamline case management, boosting productivity by up to 90%.

To reduce compliance costs and strengthen risk management with AI-driven solutions, check out Lucinity.com.

FAQs

1. Why are AML compliance costs rising for financial institutions?

AML compliance costs are increasing due to stricter regulations, rising labor expenses, investment in compliance technology, and growing workloads for compliance teams. Banks are also dealing with higher screening alert volumes and complicated FinCrime threats.

2. How can financial institutions reduce AML compliance costs without increasing risk?

Banks can adopt AI-driven transaction monitoring, automate SAR reporting, consolidate compliance platforms, and implement a risk-based approach to optimize resources while maintaining strong FinCrime controls.

3. What role does AI play in reducing AML compliance costs?

AI improves compliance efficiency by reducing false positives, automating case investigations, and enhancing risk profiling. Solutions like Lucinity’s Luci Copilot help compliance teams analyze data faster and prioritize high-risk cases effectively.

4. How does Lucinity help financial institutions lower compliance costs?

Lucinity’s AI-powered tools streamline investigations, unify case management, automate SAR reporting, and improve risk profiling, helping banks reduce manual workloads, reduce operational costs, and enhance compliance accuracy.