Heightened vigilance: COVID-19 creates fraud and money laundering vulnerabilities

COVID-19 RESOURCE HUB | Financier Worldwide

AML & FRAUD RISK MANAGEMENT

Through all the turmoil caused by the COVID-19 crisis, which is stretching companies to their limits, it is imperative to remain alert on money laundering and fraud risk. When companies are at their most vulnerable, malicious actors will often strike.

An April statement by the president of the Financial Action Task Force (FATF), ‘COVID-19 and measures to combat illicit financing’, warned that criminals are “taking advantage of the COVID-19 pandemic to carry out financial fraud and exploitation scams, including advertising and trafficking in counterfeit medicines, offering fraudulent investment opportunities, and engaging in phishing schemes that prey on virus-related fears”. It also cited malicious or fraudulent cyber crimes, fundraising for fake charities and various medical scams targeting innocent victims.

The FATF statement added: “National authorities and international bodies are alerting citizens and businesses of these scams, which include impostor, investment and product scams, as well as insider trading in relation to COVID-19. Like criminals, terrorists may also exploit these opportunities to raise funds.”

In the US, the Financial Crimes Enforcement Network (FinCEN), the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have all advised financial institutions to be on high alert for a potential increase in “illicit financial activity”. They have also issued guidance that institutions can utilise to reduce instances of financial crime and misconduct.

The DOJ, in late March, announced its first enforcement action against COVID-19-related fraud, after US Attorney General William Barr directed the DOJ to “prioritise the detection, investigation and prosecution of illegal conduct related to the COVID-19 pandemic”.

In light of increasing threats, companies need to take steps to identify unusual or suspicious behaviour, investigate it thoroughly and, where appropriate, report it to the relevant authorities. A thorough review of internal systems and procedures is prudent, especially as typical working practices have changed dramatically. Social distancing, remote working, staff reductions and sudden reorganisations have been common corporate responses to lockdown measures. In terms of money laundering and fraud risk, companies should ensure that no corners are being cut as a result of new working habits.

Decision making and oversight processes need to be robust. If operating standards have been forced to change, compliance teams need to confirm that decisions are being properly documented and sound governance mechanisms are in place.

Client onboarding should be carried out within normal parameters. But as the Institute of Chartered Accountants in England and Wales (ICAEW) pointed out in March, restrictions on face-to-face interaction hinders effective client due diligence (CDD). “Given that the three stages of CDD are client identification (information gathering), risk assessment and verification (evidence gathering), any inability to meet the client face to face may impact a member’s ability to conduct an effective client risk assessment. This should lead to increased levels of caution, perhaps by gathering more evidence in the third stage of CDD to verify the client’s identity”, noted the ICAEW.

Technology, including FinTech, RegTech and SupTech, can provide solutions to assist with these problems.

In these challenging times, governments are taking steps to safeguard the integrity of the financial system. Economies are facing a dramatic downturn, and in such times criminals often prove to be highly adaptive, utilising new techniques. Companies will need to consider adjustments to their anti-money laundering (AML) and counter terrorist financing (CTF) programmes as innovative attack vectors are identified.

Meanwhile, regulators also understand the need to be flexible in these unusual circumstances. The European Banking Authority (EBA) has called on regulators in the European Union to: “make full use of the flexibility embedded in the EU’s AML/CFT framework and to plan supervisory activities in an effective as well as pragmatic and risk-sensitive way. This may entail, for example, a temporary postponement of non-essential onsite inspections on a case-by case basis even after current restrictions on movement have been lifted, a move towards virtual meetings and inspections where appropriate, or an extension of submission dates for AML/CFT questionnaires where these are being used.”

As financial institutions and other companies operate with weakened finances, reduced resources and limited capacity, malicious actors will look to capitalise. It is vital that compliance teams remain on high alert for potential instances of fraud or money laundering.

Richard Summerfield