AML Risks in the Covid-19 World

2020 0415 AML risk

2019 1024 JBA 05xThe Covid-19 pandemic has already affected more than 200 countries and a million people impacting the global economy and businesses in unprecedented ways.

Not unlike scores of industries worldwide, banks and financial institutions are grappling with this crisis on multiple fronts – they have to safeguard their workforce while keeping up with provision of banking services which have been deemed as essential. Lockdowns, working restrictions and connectivity problems have added to operational burdens. Toplines and bottomlines are significantly affected due to an economic slowdown. Credit risk is high with several businesses likely to default, yet due diligence is difficult due to lack of direct contact with customers. And amidst these challenges, heightened cyber security concerns are keeping everyone from IT to financial crime compliance staff on their toes.

 

Emerging Risks

 

Cyber-crime and fraud have seen a particularly large spurt and have become a significant area of concern currently, with advisories and awareness campaigns from regulators, third party watchdogs and banks alike becoming commonplace. The incidence of cyber attacks, hacking, email phishing, malware, fraudulent investment schemes and scams have seen a manifold increase as criminals are preying on uncertainty and fear.

 

A recent Europol Report suggests that cybercriminals will continue to innovate in the deployment of various malware and ransomware packages themed around the COVID-19 pandemic. They may expand their activities to include other types of online attacks [i].

 

Apart from cyber security, there are other AML risks that are likely to evolve in scope and/or nature as the pandemic continues to strengthen its grip. The list below is by no means comprehensive and continues to evolve rapidly:

Online gaming – As a typology for money laundering has come to the fore over the last few years, especially since the case involving the game Fortnite [ii]. Revenue from the online gaming industry was estimated at USD 16.9 billion in 2019 [iii]. With students and youngsters stuck at home due to lockdowns, these numbers are likely to see a major rise. Money laundering through online gaming is closely connected with the dark web and cryptocurrencies, two other fuzzy areas of risk due to the anonymity involved.

Cash – The uncertainty surrounding lockdowns and availability of essentials has reportedly led to a spurt in cash withdrawals across the world. The volume of such transactions may be large and very different from customers’ usual patterns of cash usage. If transactions monitoring systems trigger alerts based on this behaviour, it may result into an increased workload for AML teams who may find it difficult to differentiate suspicious activity from unusual patterns.

Trade volumes and cargo traffic worldwide have seen a huge dip due to the virus outbreak that has paralyzed supply chains. As opportunities for trade-based money laundering (TBML) decrease due to a fall in trade volumes, services-based money laundering may still see a rise and may become the new area of concern. Detection of services-based money laundering is even more complex than TBML and little understood.

Organised Crime – London-based Think Tank RUSI has cited cases of organized crime groups raising the prices for their ‘services’ and resorting to activities such as counterfeiting of chemicals and medical equipment used for Covid-19 patients [iv].

NPOs/ NGOs – In the midst of the humanitarian crisis that the pandemic has brought on, there are several volunteer organisations that are working on the ground to provide food and necessities for poorer sections or elderly people. This may offer a convenient front for money laundering transactions to be co-mingled with genuine ones, and for grey organisations to operate without being closely monitored.

Trafficking – with borders being closed, trafficking and smuggling is likely to take on more innovative ways. Record job losses and dips in income may increase the vulnerability of populations to human trafficking and modern day slavery.

Terrorism Financing – The terrorist’s objective is usually to cause maximum damage and while crowds and public gatherings are missing, we may see this threat going down in places under lockdown or subject to border controls. Terrorism financing, on the other hand, may continue, even grow, as cyber-crime is on the rise and may be used to build finances for use in future.

 

AML monitoring & reporting

 

Under the circumstances, maintaining the required rigour and accuracy with respect to core compliance functions may be extremely challenging for most banks and financial organisations that are already operating at sub-optimal capacities and under challenging infrastructure limitations. Many institutions may be dealing with backlogs in transaction monitoring, potential delays in regulatory reporting and an increase in cost.

In a webinar recently hosted by Fintelekt on ‘Managing AML Risk, Operations and Continuity During the COVID-19 Pandemic’, Guy Sheppard, Head of Asia-Pacific Financial Crime, Intelligence and Cyber, SWIFT shared that AML regulators are reportedly more flexible than before but are unlikely to allow banks to delay regulatory reporting [v].

 

Criminals and terrorists may seek to exploit gaps and weaknesses in national AML/CFT systems while they assume resources are focused elsewhere, making risk-based supervision and enforcement activity more critical than ever.

FATF Statement on April 01, 2020.

 

Regulators especially in the heightened risk environment, may not like to be seen taking a lenient approach towards reporting entities. The Financial Action Task Force highlights the role of supervisors, financial intelligence units and law enforcement agencies. In a statement published recently, the FATF [vi] emphasizes that “criminals and terrorists may seek to exploit gaps and weaknesses in national AML/CFT systems while they assume resources are focused elsewhere, making risk-based supervision and enforcement activity more critical than ever”.

The regulatory expectation from AML compliance professionals will be to continue to track new and emerging typologies and keep up the monitoring and reporting rigour. While doing this, AML compliance professionals can also play their part in maintaining business continuity and protecting the institution from the threats posed by the dynamic Covid-19 environment.

 

References:

https://www.europol.europa.eu/publications-documents/pandemic-profiteering-how-criminals-exploit-covid-19-crisis
https://www.independent.co.uk/news/fortnite-v-bucks-discount-price-money-dark-web-money-laundering-crime-a8717941.html
https://www.thehindubusinessline.com/info-tech/global-online-games-revenue-to-touch-178-bn-by-2024/article30494534.ece
https://www.rusi.org/commentary/how-covid-19-changing-organised-crime-threat
https://www.fatf-gafi.org/publications/fatfgeneral/documents/statement-covid-19.html

 

2020 0229 ArpitaArpita Bedekar
Director – Strategy & Planning | Committed to Uniting Stakeholders to Build a Stronger AML/CFT regime
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AML compliance professionals have an important role to play in tracking evolving AML risks, contributing to maintain business continuity and protecting their institution from the threats posed by the dynamic Covid-19 environment.    

The original article can be read HERE.

 

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