Region sees surge in compliance costs for new bank accounts

Reuters

• Middle East recorded 63% increase in size of compliance teams
• Fraudsters find ways to cyber attack e-commerce businesses to gain data
• UAE, Saudi, Bahrain and Qatar all investing in fighting financial crime 

The rapid expansion of the financial technology and online banking sector in the Middle East has meant the region has seen a large increase in the size of compliance teams over the last three years, according to a new study.

Increased geopolitical risk, regulation and evolving criminal threats are also driving increased anti-money laundering (AML) compliance costs, requiring investment in more tools, technologies and staff.

The study by data analytics company LexisNexis Risk Solutions, which assessed 14 markets in Europe, the Middle East and Africa region, surveyed 428 decision-makers from organisations including asset managers, banks, investment and insurance firms.

While it includes data from previous years, it primarily focuses on providing an analysis on data collected during December 2021 to February 2022.

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The Middle East recorded a 63 percent increase in the size of compliance teams across the region. One of the factors driving this growth is that financial institutions are handling significantly higher volumes of new online account openings compared to most other regions. 

The Middle East, excluding the UAE, recorded 770 new online accounts being opened per month, while the UAE recorded 700, ranking them as the second and third highest respectively, after France with 825.

“There’s an increasing number of fintechs and neo banks emerging in the Middle East,” Tara Ahmad, head of governance at Wio Bank, a new challenger bank which launched in the UAE in September 2022, told AGBI.

“Whether in the payments space or banking, these activities are subject to various anti-money laundering (AML) laws and regulations. This is further bolstered by advancement in financial crime detective and preventative technology and the growing need for automation.” 

This is likely to continue, with the UAE Venture Investment Report, by research firm Magnitt, reporting that the amount of funding invested in the fintech sector rose 249 percent year-on-year to $243m in the first six months of this year.

Fraud detection goes digital

Dubai-based Ibtissem Lassoued, partner and head of advisory for regional financial crime practice at law firm Al Tamimi & Company, said extensive legislative reform across the region has imposed higher requirements on regulated industries and a doubling down on awareness initiatives by the authorities.

She said technology will play an increasingly important role in filtering and processing more meaningful data, which will result in better detection and management of financial crime risks. 

“Integrating technology to financial crime defences – and typologies – is inevitable. 

“New systems that can handle exponentially more volume and sophistication in financial analysis will ease the burden on human resources in compliance teams. And new solutions are already in development to address the emerging threats of technology such as cryptocurrency. 

“Technology will ultimately transform the entire financial system, so ensuring that AML defences stay in step with this evolution, rather than falling behind,” she said.

Targeting e-commerce

The digital transformation during the coronavirus pandemic has changed the region’s risk landscape. Over the past year e-commerce across the Middle East (excluding the UAE) has recorded a 65 percent increase in the risk of money laundering.

“Fraudsters and cyber attackers are constantly finding new vulnerabilities and sophisticated ways to attack e-commerce businesses to gain data,” said Wio Bank’s Ahmad.

“With the additional increase in data breach penalties, this has resulted in heavy investment by e-commerce and online retailers on security technologies in an attempt to avoid being the target of fraud and cyber-attacks.” 

The study shows that the Middle East (excluding the UAE) recorded a 26.6 percent increase in its average annual cost of financial crime compliance since the onset of the pandemic in 2020, growing from $9.4 billion to $11.9bn in 2021.

The UAE, meanwhile, recorded a 12.2 percent growth from $12.2bn to $13.9bn.  

“Industries that are not required to implement defences have a natural vulnerability to criminal abuse, and the e-commerce industry in particular emerged during the pandemic as a fertile environment for fraud schemes,” said Lassoued. 

“Criminals can take advantage of the remote nature of online transactions to evade detection, and where there is pressure on the supply chain, standard third-party checks are sacrificed in favour of urgency.

“The consumer interaction involves effectively zero oversight of business operations, and this level of anonymity is attractive to fraudsters.” 

Cost of combating crime

The study reveals that the Middle East’s total projected cost of financial crime compliance is $4.2bn, with the UAE representing a sizeable chunk of this at $1.7bn.

However, significant steps are being made in countries across the Middle East to bring the AML defence system in line with international standards and best practice, particularly as markets mature and diversify.

“The general favourable business environment and tax regimes in the Middle East are vulnerable to exploitation by fraudulent individuals and companies,” said Ahmad. 

“At the same time Middle Eastern countries have undertaken several initiatives to bridge some of the regulatory and legal gaps.”  

The UAE has faced challenges controlling money laundering activity. In March the Paris-based global financial watchdog, Financial Action Task Force, added it to a ‘grey list’ of jurisdictions that need to do more to combat such activities.

As a result, Emirati authorities have undertaken several initiatives in strengthening its court systems and fostering greater collaboration between the authorities. 

Over the past year, it has enhanced its effectiveness at combating financial crimes through signing international judicial cooperation agreements, enhancing ultimate beneficial ownership measures, and creating a Public-Private Partnership Committee.

Saudi regulators are also working on various initiatives to fight financial crime, having published a new law earlier this year to address the concerns around fraud. 

Bahrain similarly has made several amendments to its AML laws. Earlier this week, it announced the launch of the Certified Global Sanctions Specialist programme as part of an effort to equip compliance professionals with the necessary tools to understand and interpret changing sanctions regimes and regulations.

In July this year, as part of its efforts to combat money laundering and terrorism financing, Qatar imposed a ban on selected cash transactions exceeding the value of $13,732 (QAR 50,000). These must now be made via credit card, debit card, cheque or bank transfer.

“One challenge facing MENA countries is striking the right balance between building a credible and disciplined supervisory climate, and yet encouraging confidence in the security and prospects of their financial systems,” said Lassoued. 

“This is a strategic priority for countries across the region pursuing aggressive development agendas, which hinge on inflows of foreign direct investment.”