July 09, 2007 09:00 ET

KPMG: Banks Battle Against Money Laundering as Market Complexity Increases: Spending Up By Nearly 60 Per Cent Over Previous Three Years

TORONTO, ONTARIO--(Marketwire - July 9, 2007) -

Attention: Business/Financial Editors

The cost of fighting money laundering has risen dramatically for banks across the world as they have become increasingly engaged in the struggle against criminality. However, the task is becoming more difficult due to the increasing complexity of the financial markets in which they operate, including greater exposure to sometimes unfamiliar emerging markets and the dramatic growth of alternative assets, according to a global study by KPMG International.

KPMG's study among 224 banks from 55 countries found that banks' spending on anti-money laundering (AML) systems and processes has risen by an average of 58 per cent over the last three years. In North America, spending has increased by 70 per cent or more. These increases are far in excess of banks' own predictions when KPMG Forensic carried out its last study in 2004, when respondents on average predicted an increase of 43 per cent. The biggest spending continues to be on transaction monitoring and staff training costs.

However, just as three years ago banks under-estimated their level of spending in the future, so now they still seem in danger of being overly optimistic. On average, they are predicting an increase of only 34 per cent in their spending over the next three years.

James Hunter, a Toronto-based KPMG Advisory partner and head of the firm's Forensic practice in Canada said: "The challenges in combating money laundering and terrorist financing are no different for Canadian banks. In this country, banks are pretty competitive, but when it comes to anti-money laundering and counter terrorist financing activities, there is a good level of cooperation and sharing of leading practices."

"The need for more stringent anti-money laundering processes will only continue to grow for Canadian banks consistent with global expectations of the banking sector. For example, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) has recently been beefed up to require Canadian banks to enhance their due diligence enquiries surrounding correspondent banking relationships and politically exposed persons. All of this costs money, so we can expect rising costs of compliance globally to be matched by the banking sector in Canada as well."

The study also noted that there is significant concern amongst banks that governmental and international regulation needs to be more effectively targeted. Half of respondents said they believe that while the overall regulatory burden is acceptable, the requirements need to be better focused, while nearly one in ten (8 per cent) believe that regulation should actually be increased in order to combat both money laundering and terrorist financing more effectively.

In Canada, there is one statute which addresses both money laundering and terrorist financing. "In some ways these criminal activities are mirror-images of each other," explained James Hunter: "While money launderers try to integrate the proceeds of crime into the legitimate economy, terrorist financiers may often take funds raised legitimately, perhaps by a community group who believe they are funding a charitable cause back home, which in turn are then funnelled back into the underground economy to fund terrorist activities.

Reporting, identifying

With greater spending and training, the number of suspicious activity reports (SARs) being generated has also increased at over 70 per cent of banks. Forty-two per cent of banks say that the number of SARs has increased "substantially".

Banks are also making greater efforts to identify politically exposed persons (PEPs) who could be the conduits for laundered money. Over seven out of ten banks say they perform enhanced due diligence on PEPs, markedly up from the worrying low of 45 per cent three years ago. There are significant variations here, however, with only 42 per cent of banks in the Asia Pacific region and only 65 per cent of banks in Europe monitoring for PEPs. Within Europe, this ranged dramatically, from 86 per cent in the UK to only 29 per cent in Spain and 13 per cent in Italy. The task facing banks here is made more difficult by the lack of a common definition of a PEP and the fact that in some markets business and politics are closely intertwined.

Cross-border challenge

Despite all of these efforts, it is clear that significant challenges remain. Less than a quarter of respondent banks with an international presence are capable of monitoring a single customer's transactions and account status across multiple countries. There was no evidence that larger banks are any more capable in this respect than smaller banks, and this may reflect that banking secrecy and data protection laws in some countries prevent the sharing of information around a banking group.

North American banks are ahead of their peer group in this respect, however, with 42 per cent of banks capable of monitoring across borders. Globally, 41 per cent of banks said they were not capable of tracking across countries, and 26 per cent were only partially capable.

The View from North America

In many cases, US jurisdiction has been extended beyond its national boundary by the US Patriot Act of 2001, and the sanctions arising from the Office of Foreign Asset Control (OFAC). In Canada, government has shown its support for the Egmont Group (the global association of national Financial Intelligence Units) which is currently in the process of moving its Secretariat to Toronto.

"The opportunities for money launderers are multiplied by changing investment patterns such as the shift from transparent public markets to private and opaque structures. One thing is certain: governments and regulators are only going to increase the pressure on banks and other financial intermediaries in Canada and elsewhere to devote resources, technology and people in the fight against the money launderers and those who would use the global financial system to finance terrorism," says Hunter.

Notes to editors:

KPMG International's report, Global Anti-Money Laundering Survey 2007: how banks are facing up to the challenge, is available at ( and

KPMG International commissioned RS Consulting, an independent research agency based in the United Kingdom, to conduct a telephone survey of banks across the major sectors (retail banking, corporate/business banking, private banking, investment banking and wholesale banking). The survey featured 224 of the world's largest 1,000 banks by tier 1 capital.

About KPMG

KPMG LLP is the Canadian member firm of KPMG, a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 144 countries and have more than 104,000 professionals working in member firms around the world.

KPMG's Canadian Advisory practice offers an integrated suite of services focused on operations, transactions, governance, and controls. In the Forensic area, KPMG assists in resolving issues when corporate behaviour contravenes ethical standards, and to help create clarity when information, organizations or individuals disagree.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services.

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