- A global watchdog group is warning that the COVID-19 pandemic is creating hurdles for running financial crime compliance programs, reporting suspicious activities to law enforcement and working together to identify larger, interconnected criminal groups.
- The Paris-based Financial Action Task Force (FATF), the standard bearer of anti-money laundering (AML) compliance best practices, is also highlighting that the relentless march of the coronavirus is also hampering compliance regulatory oversight and law enforcement investigations – preventing agencies from communicating, cooperating and quickly closing large cases.
- Part of the issue is that many banks are struggling to balance quickly processing billions of dollars in stimulus payments to small businesses to prevent a foundering economy from falling further with ensuring the funds are not lost and stolen due to graft and fraud – a key concern noted by FATF.
- One tactic employed by illicit organized groups is creating shell companies to act as a small business and attempting to skimp on AML customer due diligence details, critical information that could have uncovered a risky or criminal entity – or forensically could have tracked down pilfered stimulus funds.
By Dev Odedra
Independent AML expert, director, Minerva Stratagem Consulting
May 6, 2020
With editing and minor content additions by ACFCS VP of Content, Brian Monroe
The COVID-19 pandemic has created compliance stumbling blocks while opening the door to more criminal scams and laundering opportunities – including illicit entities evading customer scrutiny as banks focus more on doling out emergency stimulus loans to keep the world economy afloat, according to a just-released report by a global counter-crime watchdog.
The coronavirus pandemic has “led to a rise in COVID-19-related crimes, including fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance,” the Paris-based Financial Action Task Force (FATF) said Monday.
With criminals trying to take advantage of pandemic fears with a surge in spam phishing fusillades on one end of the tainted spectrum and a charitable desire to help on the other, these coronavirus infection inflection points are “creating new sources of proceeds for illicit actors,” according to FATF, the international standard bearer of fincrime compliance best practices.
To read the full report, click here.
It is also negatively affecting anti-money laundering (AML) oversight at all levels, along with the ability for financial institutions to broadly analyze for aberrant patterns and large-scale organized criminal patterns and related suspicious activity report/ suspicious transaction report (SAR/STR) reporting and international cooperation for law enforcement agencies.
“As the world is focusing on responding to the COVID-19 pandemic, it is impacting on the ability of government and the private sector to implement anti-money laundering and counter terrorist financing (AML/CFT) obligations in areas including supervision, regulation and policy reform, suspicious transaction reporting and international cooperation,” FATF said.
The missive to the compliance and investigative communities is the first major communique the influential world body has made related to the coronavirus and its tendrils to international crime fighters.
FATF in two more diminutive statements touched on the pandemic in recent weeks to exhort institutions to be a willing, but wary, partner of non-profit groups purporting to support COVID-19 causes and that institutions should consider digital onboarding and verification and employ simplified due diligence in certain cases to balance calibrating AML risk assessment requirements and social distancing protocols.
While acknowledging the AML obstacles of the financial sector, FATF also noted it is not immune to coronavirus-related compliance difficulties, admitting it is dealing with logistical challenges of its own and would be suspending on-site country evaluations along with extending assessment and follow-up deadlines.
To read the FATF pandemic statement tied to non-profits, click here.
To read the FATF statement tied to updated evaluation timelines, click here.
In frenzy of stimulus loans, criminals will attempt to evade AML scrutiny
It’s not a surprise that even the disciplined and typically well-oiled FATF evaluation train has gone off the rails.
Few individuals, businesses and even countries have remained unscathed by the relentless march of the coronavirus.
Overall, more than 200 countries and territories around the world have reported a total of nearly 3.8 million confirmed cases of COVID-19 that originated from Wuhan, China, and a death toll of more than 260,000, according to Worldometer.
In the face of lockdowns and rising unemployment, many financial institutions have seen profits fall and risks soar, in some cases choosing to trim or reorganize now-scattered fincrime compliance teams.
For some institutions, this has resulted in a “perfect storm” scenario where banks have fewer resources to review an avalanche of alerts – both from normal people drastically shifting money to support themselves and others and from fraudsters, scammers and spammers trying to game the system.
What this means for AML professionals: Even as you adjust to support your bank extending emergency stimulus loans, if you can’t proactively risk assess before the money goes out, forensically analyze after the fact so that when law enforcement eventually follows fraud funds to your door, you are seen as a SAR-armored ally, and not a co-conspirator.
The pandemic, according to FATF, could help criminals to:
- Bypass customer due diligence measures;
- Increase misuse of online financial services and virtual assets to move and conceal illicit funds;
- Exploit economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit proceeds;
- Increase use of the unregulated financial sector, creating additional opportunities for criminals to launder illicit funds;
- Misuse and misappropriation of domestic and international financial aid and emergency funding;
- Exploit COVID-19 and the associated economic downturn to move into new cash-intensive and high-liquidity lines of business in developing countries.
To counter these criminal vulnerabilities, AML/CFT policy responses should include:
- Domestic coordination to assess the impact of COVID-19 on AML/CFT risks and systems;
- Strengthened communication with the private sector;
- Encouraging the full use of a risk-based approach to customer due diligence;
- Supporting electronic and digital payment options.
Putting all the pieces together
But this latest FATF report, titled “COVID-19-related Money Laundering and Terrorist Financing. Risks and Policy Responses,”must also be viewed with the broader context of what other non-government corruption and transparency groups have said and through the lens of the increasing aggressiveness and creativity of criminal groups.
Although the paper is for information purposes only and does not constitute the official view of the FATF, nor imply or constitute any changes to the FATF Standards, it is of great value to anti-financial crime professionals as a knowledge piece.
Whilst much of the attention related to COVID-19 from a financial crime perspective has focused on fraud, cybercrime and regulatory responses to managing risks, the FATF paper may highlight some of lesser known financial crime related areas to be considered, especially when combined lesser known developments reported in the media.
Criminals finding ways to bypass customer due diligence measures
With many bank branches closed due to ‘lockdown’ measures instituted by countries, a significant shift in focus has turned to online banking for transactions and digital verification for AML know your customer (KYC) duties.
Whilst some regulators have issued guidance on alternatives to face-to-face KYC, such as requesting clients to provide ‘selfies’ or videos, this is not a relaxation of financial crime risk management requirements.
Institutions looking to incorporate new measures should be mindful that they need to be able to spot, for example; high resolution digital photos, “deepfakes” and 3D silicon/latex masks.
Increased misuse of online financial services and virtual assets to move and conceal illicit funds
Whilst much attention has been turned to fraud during the pandemic, there is likely little slow down of those involved in criminal activity involving virtual assets, regardless of new regulatory measures coming into force covering Virtual Asset Service Providers (VASP’s).
A case involving Bitcoins that received little attention but has a much larger significance for financial crime and compliance professionals was that of money laundering charges against William Anderson Burgamy IV.
Burgamy, arrested and charged in April, was alleged to have operated as a Darknet vendor selling medications, including prescription opioids.
He allegedly laundered the proceeds of his criminal activity by cashing out his Bitcoin drug payments into United States dollars and moving the funds through a variety of accounts, including his business bank accounts, in an effort to conceal and disguise the nature and source of his illicit proceeds.
Although the activity precedes the pandemic, it clearly continued and thrived throughout it, as Burgamy is said to have posted on his Darknet market vendor page: “Even with Corona Virus [sic] the shop is running at full speed.”
Misuse and misappropriation of domestic and international financial aid and emergency funding
Although there may already be many discussions in anti-financial crime circles on the exploitation of stimulus packages by criminals to falsely claim funds by posing as legitimate companies, much less focus has been on the risks of bribery and corruption involving the pandemic and funding.
The FATF report states that financial institutions claim that there is a risk that emergency financial aid to countries can be misappropriated by corrupt officials, especially in countries where the rule of law is weak combined with poor measures over transparency and accountability.
Government contracts involving the purchase of significant amounts of COVID-19-related medical supplies can open the door to risks for corruption and the misappropriation of state funds.
There also is a risk that individuals could use corruption or informal channels to obtain lucrative government contracts outside standard procurement procedures.
The bribery and corruption risks during a time where contracts and funds are quickly (and significantly) being disbursed should not be underestimated.
In a joint letter to the IMF’s Executive Board, NGOs; Transparency International, Human Rights Watch and Global Witness, urged for transparency and anti-corruption measures in coronavirus-related relief programs.
U.S. Congress must proactively prevent corruption from derailing coronavirus response: NGO coalition
These groups are also working at the country level to garner political support to weave in counter-corruption components tied to pandemic stimulus packages at their legislative foundations.
Transparency International, Global Witness, Global Financial Integrity and others have recommended more than two dozen anti-corruption measures to U.S. congressional leadership, including ensuring that government contracts go toward fighting the virus, and are not stolen or misappropriated by graft-gilt actors.
To read the full story click here.
Increased use of the unregulated financial sector, creating additional opportunities for criminals to launder illicit funds
Like past economic downturns, individuals (and even businesses) can find themselves quickly in need of funds either through job losses or loss of access to liquidity from banks.
With criminals finding regular channels of illicit activity being cut off due to the pandemic, those out of work and in need of funds can find themselves falling prey to loan sharks or even being recruited to work for the criminals.
It is not only vital to ensure existing client relationships are understood, including how they are weathering economic hardship, but also applying extra scrutiny on new clients during and post pandemic – particularly if they quickly return to pre-coronavirus transaction levels or even exceed them.
Both the US and the United Nations warned that threats connected to terrorism remain high despite the pandemic, with terrorist groups seeing increased opportunities for terrorist activity and terrorist financing whilst the attention of governments is focused on COVID-19.
Terrorist groups may see a window of opportunity to strike while the attention of most governments is focused on managing the pandemic.
Humanitarian organizations delivering assistance to conflict areas can face potentially higher risk of aid diversion in support of terrorist financing.
Terrorist financing can be difficult to spot, but anti-financial crime professionals should maintain vigilant.
A number of individuals were arrested in Germany plotting to carry out attacks on US bases in Germany and to finance their operations, they had planned to travel to Albania to raise finances by carrying out an assasisnation to raise $40,000.
Anti-financial crime professionals should maintain a heightened sense of vigilance despite lockdowns in many countries.
Criminals forced to adapt to the pandemic will continue to look for new avenues to exploit, as the FATF paper and under-reported developments show, illicit activity continues and may take on new forms.
About the author
Dev Odedra is an independent anti-money laundering and financial crime expert.
He has more than a decade of experience in managing financial crime risk in the retail, corporate and investment banking
His expertise covers investigations, advisory and controls implementation and improvement.
Dev is also a prolific author and gathers and analyzes many of the biggest financial crime compliance news stories on social media to help the community keep abreast of key criminal, regulatory and program trends.
Want to chat with Dev? Feel free to connect with him here.