By Hasan Zebdeh - Financial Crime and Compliance Risk Advisor, EastNets
2020 will go down in history as a year of unprecedented events due to COVID-19. Organizations the world over, across every sector have been materially impacted. Financial institutions have felt this impact keenly, with areas such as AML (Anti-Money Laundering) and CDD (Customer Due Diligence) coming under heightened pressure and risk. Many countries, regulators, law enforcement bodies, and financial institutions have reported a significant increase in financial crimes cases during the pandemic. The EU, for example, has stepped up anti-money laundering measures to attempt to alleviate this.
The dual pressures of regulations and COVID-19 in Anti-Money Laundering is only part of the story. Regulations around AML and CDD, along with digital transformation of transaction processing is creating a perfect storm. The result, a series of vulnerabilities and threats.
How the Covid-19 pandemic creates financial crime vulnerabilities
Covid-19 is a challenge on a personal and a cybercrime level. The associated measures to manage the pandemic, such as lock-down, has created vulnerabilities in several areas including but not limited to the following:
- Financial assistance programs: Reduced scrutiny due to the pandemic has meant that the systems that offer financial aid, are now open to increased exploitation by government officials. This occurs at the individual and legal entity level as well as at the country level.
- Technological vulnerabilities: Digital transactions are being increasingly used as social distancing becomes mandatory. Systems include non “face-to-face”/ Card-Not-Present (CNP) transactions, which are often associated with digital CDD processes and online authentication. Customers, such as the elderly, who are not technology savvy, may be at increased risk, making them vulnerable to fraud attempts. During the economic crisis that Covid-19 has heralded, lending institutions are likely to use stricter requirements for digital banking. This results in a move to ‘informal banking’ by many people, leaving them open to exploitation.
Pandemic- related financial crime threats
Some examples of financial crime threats that have been enabled by the pandemic and associated lockdown scenarios include:
- Fraudulent Fundraising schemes: Schemes that are focused on the theft of money by convincing the victim to either directly move funds to the fraudster’s account or by obtaining the victim’s account/card information.
- Fraudulent Covid-19 medical equipment trade: The illicit trade in faulty or fraudulent medical equipment, e.g. PPE) during Covid-19 has seen a boom in business for fraudsters. The European Anti-Fraud Office seized millions of substandard medical products. Typical criminal activity around fraudulent products include non-delivery, lower quality of, and/or overpriced, Covid-19 related medical items. A statement from Singapore police said:
“Police were alerted to a case of an overseas pharmaceutical company being defrauded of 6.636 million euros (approximately S$10.2 million) for the purchase of surgical masks and hand sanitizers. After the company transferred the monies to a local bank, the items were not delivered and the supplier became uncontactable.”:
- Impersonation of government officials: Criminals have been impersonating government officials in an attempt to steal money or obtain banking information, tax relief being an example.
A pandemic creates optimal conditions for human exploitation. This unfortunately includes children. A dramatic increase in cybercrimes during this pandemic has been noted by cybercrime researchers, including ransomware and phishing attacks. According to Barracuda:
“Barracuda researchers have seen a steady increase in the number of coronavirus COVID-19-related spear-phishing attacks since January, but they have observed a recent spike in this type of attack, up 667-percent since the end of February.”
Whilst it is true that these threats existed before the pandemic, the impact of Covid-19 measures such as lockdown, social distancing, etc., all contribute to a heightened level of risk.
Pandemic- related financial crime risks
In terms of Covid-19 pandemic management, it is still early days. Governments, citizens and financial institutions are continuing to learn about how to handle the pandemic and understand its true impact. Banking is still at an early stage in formulating a mature approach that can identify the wide-reaching effects of pandemic-related financial crime risks.
Many cases are still under investigation, whilst other incidents are still yet to unfold and surface.
According to FATF Covid-19-related “Money Laundering and Terrorist Financing, Risks and Policy Responses” report, the potential ML/TF risks, (2020) are:
- Criminals finding ways to bypass CDD measures by exploiting temporary challenges in internal controls caused by remote working situations, in order to conceal and launder funds;
- Increased misuse of online financial services and virtual assets to move and conceal illicit funds;
- Exploiting economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit proceeds;
- As individuals move money out of the banking system due to financial instability, this may lead to an increased 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 by avoiding standard procurement procedures, resulting in increased corruption and consequent ML risks;
- Criminals and terrorists exploiting COVID-19 and the associated economic downturn to move into new cash-intensive and high-liquidity lines of business n developing countries, both for the laundering of proceeds as well as to fund their operations, as well as fraudulently claiming to be charities to raise funds online.
Pandemic related Money Laundering/Terrorist Financing (ML/TF) and Fraud Red flags categories
Listed below, are the categories of red flags and related virtual assets as applicable to Covid-19:
- Legal Persons stimulus checks scams.
- Government officials & PEPs: pandemic related corruption red flags.
- Non-profit organizations (NPO): NPO abuse related red flags.
- Traditional transaction: frequency is not decreasing due to an increasing use of online banking.
- Vulnerable people: such as elderly customers and unusual transactions.
- Card transactions: pandemic related red flags
- Cash intensive transactions: pandemic-related suspicious cash-based transactions.
- Fund transfer: pandemic-related suspicious fund transfer transactions.
- Affected Businesses and professions: suspicious transactions by affected business and professions during the pandemic.
- Trade-related transactions: there are some pandemic related trade red flags. One good way to monitor it is to detect some keywords in the transactions, such as the word: ventilator.
Understanding these red flags is key to knowing what measures can be applied effectively.
Additional measures to be undertaken by financial institutions
In response to the vulnerabilities that the Covid-19 pandemic has introduced into financial institutions, several additional measures are expected:
- False positive reduction techniques. For example, the application of machine learning (ML) techniques to AML checks.
- CDD postponement related risk mitigates.
- Applying a rigorous Risk-Based approach RBA, re-designed to cope with the pandemic period.
Pandemic-centric financial crimes monitoring program
Mitigation of pandemic-enabled vulnerabilities is a challenge. However, several factors are coming together to help tackle this unprecedented era of financial crime. Using a mix of intelligence from the financial sector community, known vulnerabilities and risks, monitoring of known red flags, and using recommended additional measures, financial institutions can get through this difficult period.
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