White-collar crime in the post-COVID-19 landscape

February 2022  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2022 Issue

Throughout the coronavirus (COVID-19) pandemic, the world has dealt with unprecedented business and financial disruption, including with respect to white-collar crime. Even prior to the crisis there were growing concerns about the persistence of fraud and corruption, with two-thirds of countries scoring below 50 on Transparency International’s 2019 Corruption Perceptions Index.

Certain types of white-collar crime have increased significantly since the outbreak of COVID-19, as cyber criminals and money launderers became bolder and more ambitious with their schemes. Companies, not least financial institutions, have had to adapt quickly to new threats.

Times of economic crisis are often a boon for malicious actors, but the unique circumstances created by COVID-19 have magnified the opportunities. Remote working, rapid disbursements of support funding and stimulus cash, and subdued enforcement efforts, among other factors, have encouraged illegal activities.

Malicious actors have sought to take advantage of the anxiety and uncertainty that the pandemic has created over the last two years. Unprecedented disruption has changed the way work is conducted and how people interact. Internet usage has exploded during the pandemic as individuals switched to working, communicating, socialising and shopping remotely.

This, in turn, has created opportunities for cyber criminals. Malware, phishing and ransomware have become more prevalent, increasing the threats companies face. And with employees operating away from the office, outside of more secure networks and physically removed from oversight processes, their susceptibility to a breach rises. Meanwhile, aspects of existing compliance programmes, such as in-person training or investigative interviews that might reduce risks, have also been disrupted.

Enforcement activities

The spike in white-collar crime caused by the pandemic is reflected in enforcement activities instigated by regulatory bodies. As of late March 2021, in the US, the Department of Justice (DOJ) had publicly charged 474 defendants with criminal offences based on COVID-19 fraud schemes, for instance. Many of these cases involved efforts to obtain over $569m from the US government and ‘unsuspecting individuals’ through fraud. Between March 2020 and April 2021, the US Small Business Administration (SBA) Office of Inspector General hotline reported receiving a record-breaking 150,000 complaints related to loan fraud – up dramatically from well under 1000 complaints in 2019.

But COVID-19 significantly impacted the government’s ability to investigate and prosecute white-collar crime. In-person investigations and interviews were curtailed. Agents struggled to develop cooperating witnesses, which typically requires face-to-face meetings to build trust. Though videoconferencing technology bridged some of the gaps in communication, it was less likely to be used in highly sensitive plea negotiations, which slowed authorities’ ability to move cases forward.

“Like every company has had to adapt and develop a new normal to function during the ongoing global pandemic, so too have the enforcement agencies,” says Zach Terwilliger, a partner at Vinson & Elkins. “At the start of the pandemic when it appeared that a 14 day stay-at-home period would flatten the curve and we would all return to the physical workplace in a matter of days, the enforcement agencies, like many others, pressed paused. There was also a prioritisation on risks to life versus simply economic harms, as these enforcement entities had to triage and do only what was absolutely essential.

“As the pandemic moved forward, it became apparent that it would be impossible to both continue to investigate and prosecute in a posture of simply waiting it out,” he continues. “Therefore, enforcement entities such as the DOJ pivoted to a hybrid workplace where whatever could be done remotely – such as the issuance of process, review of documents, virtual witness interviews and coordination with overseas enforcement partners through the Mutual Legal Assistance Treaty (MLAT) process – continued.”

Authorities have, for the most part, responded to the challenges imposed by the pandemic. “Despite the emergence of certain variants, critical enforcement agencies have returned to domestic and international travel, in-person interviews and the jury trial process,” observes Mr Terwilliger. “There is no question that the pandemic has delayed larger investigations because of the concomitant logistical hurdles, but it also forced massive, bureaucratic enforcement entities to become nimbler, adapt and ultimately push forward in a way that will make them more efficient and flexible in the years to come.”

In recent months, after years of decline in fines and prosecutions during the Trump administration, the Biden administration has renewed the emphasis on tackling corporate crime. In October 2021, Lisa Monaco, deputy attorney general, reiterated that white-collar crime was an enforcement priority for the DOJ. Though Ms Monaco acknowledged that it can be costly for companies to implement effective measures to deter misconduct, she said that failure to do so may well cost companies down the line.

The DOJ now has broader powers and greater resources to investigate and prosecute. In October 2021, the deputy attorney general published a memorandum – ‘Corporate Crime Advisory Group and Initial Revisions to Corporate Criminal Enforcement Policies’ –  which announced three policy changes: (i) DOJ prosecutors must consider a company’s entire domestic and foreign criminal, civil and regulatory history when making resolution decisions; (ii) a company must provide all information concerning all individuals involved in corporate misconduct to qualify for cooperation credit; and (iii) DOJ prosecutors should consider the use of monitorships in corporate criminal resolutions, whenever appropriate.

With regulatory efforts increasing, the DOJ also recently announced the creation of the Corporate Crime Advisory Group, which will propose new policies and procedures for corporate crime enforcement within the DOJ. The group will consider issues such as repeat corporate offenders, non-compliance with deferred prosecution agreements, selection of monitors and resource allocation for investigating corporate crimes. It will also develop benchmarks by which a corporation’s cooperation can be measured.

It is difficult to predict how effective these developments will be, however they do indicate the level of importance the DOJ places on corporate misconduct. Companies would be advised to prioritise their compliance processes and procedures to ensure they do not fall foul of the DOJ’s new enforcement priorities.

Moreover, in recent years there has been a concerted effort to increase cooperation between enforcement agencies across jurisdictions. As more countries collaborate, the number of parallel investigations and coordinated enforcement actions will continue to rise. Today, more than ever, companies implicated by alleged misconduct must consider the best approach to each jurisdiction in which they operate.

Enhancing compliance programmes

Companies are encouraged to actively review compliance programmes to ensure they adequately monitor and remediate misconduct. They will need to adhere to best practices, maintaining appropriate diligence and compliance measures to manage risks arising from opportunities for corrupt or illegal activity. They will need to build a compliance programme which accounts for issues such as business continuity, ownership changes and government interactions, among other factors. Programmes must be well designed, and applied in a manner which prevents and resolves compliance issues.

When checking for fraud risks, a formal assessment is usually recommended since no system of internal controls can fully eliminate this risk. Well designed and effective controls can, however, deter most would-be fraudsters by reducing the opportunities to commit or get away with fraudulent activities.

There is also a cultural angle. A strong, ethical culture influences employee conduct. Corporate leaders who send the message that anything goes and unethical behaviour is acceptable under certain circumstances open the door to white-collar crime. It is vital, therefore, to lead by example.

“For companies that truly want to both embody and empower an ethical culture, it is critical that there be both tone from the top and an actual, empowered compliance function,” says Mr Terwilliger. “If the C-suite simply offers lip service regarding the need for adherence to the rules, but then acts in a manner that shows the real goal is increased revenue or market share at all costs, the hollowness of a commitment to an ethical culture pervades the corporate landscape.

“Similarly, the compliance function must be appropriately resourced and independent so that it can perform its essential monitoring and reporting function. Where there is a sincere and active commitment to compliance, companies minimise fraud, guard against reputational damage and create an ethical culture that permeates throughout the company,” he adds.

Lessons learned

Virtually every aspect of conducting business has been affected by the pandemic. While scrambling to adapt in the early stages of the outbreak, risk officers, human resources professionals and chief operating officers, among others, were preoccupied with simply responding to rapidly changing circumstances, and thus were distracted from other risks. It is vital that companies learn lessons from the crisis.

“As companies now look back over the past 20 or so months of navigating the pandemic, it is essential that they look at their non-COVID-19 compliance risk matrix, such as where, prior to the pandemic, they were most at risk of potentially problematic conduct, and overlay the unique risks posed by the pandemic,” says Mr Terwilliger. “For example, if the onboarding of employees and integration into the firm is critical to gain an understanding of ethics over profits, how are those new employees who have never met any of their colleagues or supervisors in person navigating the sometimes-competing goals of maximum profitability and adherence to policy?

“It is critical that companies take the time to ‘audit’ the controls they have in place and ensure that they are still adept at minimising the risk of problematic or fraudulent conduct,” he continues. “Given corporate leniency and self-reporting programmes, as difficult as it might be under continued pandemic conditions, it is wise for companies to do that analysis now and be in a position to evaluate how best to mitigate and handle a potential violation versus continuing to simply put one foot in front of the other and try to weather the storm.”

Vigilance

In the wake of the global financial crisis, a number of scandals came to light. With that seedy underbelly exposed, consumer confidence suffered, and regulations were overhauled across multiple jurisdictions. It is possible that one legacy of COVID-19 will be something similar.

Companies have had to navigate rising fraud and other white-collar crime risks for the better part of the last two years. Virtually every sector needs procedures in place to mitigate those risks and to withstand scrutiny in the post-pandemic reckoning.

In the meantime, companies must remain cognisant of the internal and external threats they face. If organisations are to defeat white-collar criminals, or at the very least mitigate their impact, everyone from C-suite executives to employees at the coalface must remain vigilant.

© Financier Worldwide

BY

Richard Summerfield