Saturday, October 31, 2020

Coronavirus and AML Transaction Monitoring

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As countries around the world struggle with the coronavirus pandemic, financial institutions are experiencing compliance challenges linked to the outbreak. The coronavirus has caused widespread disruption to global financial markets along with new opportunities for criminals to generate and launder illegal funds. Accordingly, financial authorities around the world are adjusting their AML/CFT approach to account for new patterns of criminal behavior and better address emerging money laundering risks.

Firms should be familiar with the ways in which money launderers and other criminals are exploiting the pandemic and how their AML/CFT compliance processes might need to change to manage the elevated threat.

Changes in Behavior

The coronavirus pandemic has prompted numerous countries to enact strict control measures, restricting movement and often confining people to their homes. The subsequent impact on global economies has caused drastic changes in the behavior of banking customers and in the behavior of criminals seeking to exploit the situation:

“People are withdrawing hard currency in a state of panic,” a FinCEN compliance expert said of the pandemic’s impact. “We have people turning to mobile apps because they think that it’s safer, and an influx of people using virtual currency.”

The sharp increase in cash withdrawals and cryptocurrency transactions has been accompanied by increased engagement with digital banking services, particularly by demographics, such as the elderly, that would not normally use them. The surges represent a challenge for AML/CFT compliance because the increased volume of transaction data is making it more difficult for compliance teams to discern between legal and potentially illegal activities.

That compliance challenge is complicated by changes in criminal behavior as fraudsters use coronavirus fears to sell fake cures, fund fake charities or elicit money by posing as government officials. In fact, FinCEN has characterized the typologies of coronavirus financial crime as reflecting those seen in the wake of natural disasters.

Adverse Media Monitoring

The increased money laundering risk that the coronavirus pandemic has brought to global financial systems is reflected by an increased volume and diversity of adverse media stories. During the pandemic, banks and financial institutions should adjust their adverse media screening to capture categories of news stories that indicate potential money laundering activities or other crimes. These include:

  • Regulation: Regulatory media stories might cover disciplinary actions taken by authorities against certain firms or the imposition of fines for activities like price-fixing or collusion.
  • Financial difficulty: Stories involving significant debt or bankruptcy, store closures, redundancies or the departure of high-level staff.
  • Violence or human rights abuse: Stories involving violent actions, such as assault or sex offenses, or connection to state-level offenses, including human rights abuses.
  • Criminality: Stories about other kinds of financial criminality, including accounting malpractice, dishonest billing practices and predatory lending.

In the context of the widespread economic disruption caused by coronavirus, compliance programs should be particularly vigilant for stories concerning financial difficulty. Firms which enter financial difficulty may become vulnerable to money launderers who are seeking gaps in compliance or opportunities for leverage.

Increase in Money Mule Crime

The coronavirus outbreak has prompted an increase in a typology of money laundering that utilizes “money mules” to transform illegal funds. Money mules are people who have been recruited, sometimes on the pretext of legitimate employment, to receive deposits of illegal money into personal accounts. The mule is asked to withdraw that money as cash, with a commission for themselves, before depositing it back into an account owned by the money launderers.

In the context of the coronavirus pandemic, money launderers are exploiting legitimate health concerns and the impact on the employment market to recruit mules. The mules are discouraged from sharing information about the “donations” that they are handling and advised to invoke an urgent need to pay for coronavirus medicines should they be questioned by the bank. AML/CFT compliance teams should be particularly vigilant for characteristics of the following process:

  • A money launderer poses as a legitimate medical charity in order to recruit employees to handle charity “donations”: in reality, the donations are illegal funds that require transformation.
  • The donations are deposited in employees’ personal bank accounts (or sometimes in personal Bitcoin wallets).
  • Employees are asked to withdraw the funds as cash and deposit them in a Bitcoin ATM.
  • Once deposited, the now-transformed funds are sent, via an irreversible transaction, to a Bitcoin wallet controlled by the money launderers.

Adjusting Compliance

As the pandemic continues to affect societies and economies across the world, banks and financial institutions must adjust to the new compliance climate to accommodate legitimate behavior from customers while identifying criminal behavior from money launderers and fraudsters. From a practical perspective, that means not only incorporating sufficient screening and transaction monitoring capabilities into AML/CFT compliance programs but changing rule-sets to ensure that those programs are able capture emerging typologies, such as the use of money mules or an increased amount of adverse media about financial difficulties.

Since AML/CFT compliance already represents a significant compliance challenge, firms should seek out technological solutions to their screening and transaction monitoring needs. Smart technology automation enables firms to collect and analyze the vast amounts of data relevant to their compliance obligations, identifying suspicious transactions quickly and expediting suspicious activity reports to financial authorities. In combination with human expertise, digital technology frameworks not only offer accuracy and efficiency as compliance burdens grow but deliver ongoing compliance during periods of regulatory upheaval.

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