With U.S. banking regulators ramping up their efforts to enforce anti-money laundering (AML) rules, banks are facing the prospect of higher compliance costs and heftier fines, Fitch Ratings says in a new report.
The rating agency notes that the US Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) have “recently increased the visibility of regulatory actions against banks” to enforce anti-money laundering laws.
“These actions have not been confined to the largest banks, but a series of actions related to multinational institutions have received considerable public attention, and banks have been more forthcoming in identifying AML compliance costs as an issue in their filings,” it says.
Fitch says that the real costs of AML compliance for both U.S. and foreign banks “are becoming clearer in the wake of fines levied against HSBC ($1.9 billion) and Standard Chartered ($667 million) in recent months… In addition to these fines, ongoing compliance costs will stem from investments in procedures, staff, and infrastructure; reporting requirements; facilitation of regulatory on-site monitoring; and compliance with remediation programs.”
For example, Fitch says that Citigroup has said that its “extensive activities in emerging markets expose it to greater AML scrutiny by U.S. agencies, driving a need for big investments in compliance infrastructure.” It notes that HSBC has also indicated that its U.S. compliance costs rose significantly last year, and that both Citi and JP Morgan have pointed to “required AML compliance investments as a likely driver of higher costs in 2013.”
In addition to the banking regulators, Congress has taken a leading role in identifying potential AML compliance lapses, Fitch says, and it expects congressional involvement to continue.
“For customers of affected banks, tougher AML scrutiny will likely lead to longer transaction times, increased documentation requirements, and potentially higher fees,” it notes. “It is conceivable that the increased costs of doing business with international customers could push some banks out of certain global businesses.”
For the biggest banks, these increasing costs are significant, but have so far been manageable, Fitch says. However, it cautions that for some smaller banks, they may prove large enough to affect their credit quality.
“We expect that these and the growing burden of regulatory costs, such as the Dodd-Frank Act and Basel III, will continue to weigh on overall bank profitability over the near-to-medium term,” it concludes.