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COVID-19, organized crime and managing financial crime threats

Matthew Long

Criminal organizations are taking advantage of opportunities arising from the uncertainty of a global pandemic. Financial institutions must ensure robust AML processes are in place to protect themselves and their customers from increasing financial crime threats.

As many legitimate businesses worldwide continue to adjust to new ways of working during the COVID-19 pandemic, criminal organizations are ahead of the curve in adapting their operations to take advantage of arising opportunities. Criminals are finding new ways to “balance the books” while other parts of the business take a hit, so organizations must also adapt to combat evolving financial crime risk.

While New York Mafia struggles, Italian Mafia is set to thrive

It has been reported that the cash flow of the New York Mafia has been severely impacted by the coronavirus pandemic after many of its traditional money-making channels, such as gambling halls, sporting events, and construction projects, have been temporarily closed down. Similarly, income from extortion rackets has stopped as restaurants, bars, nightclubs, and other cash-heavy businesses have also been forced to close their doors while customers stay at home.

However, it is a different story in Italy where government agencies are warning that the local mafia appears to be well set to benefit from the after-effects of the pandemic as normality returns to the region and business starts up again. An Italian anti-mafia author Roberto Saviano stated in an interview:

Just look at the portfolio of the mafias, to see how much they can earn from this pandemic…Where have they invested the last few decades? Multi-service companies (canteens, cleaning, disinfection), waste recycling, transportation, funeral homes, oil, and food distribution. That’s how they’ll make money. The mafias know what you have, and will need, and they give it, and will give it, on their own terms.

Financial services companies and government agencies funding re-generation projects will have to be extra vigilant concerning business with any new companies who claim to be offering services linked to the pandemic and, in particular, involving regeneration initiatives. Similarly, smaller local businesses that had previously been failing but have suddenly had an injection of cash, trade and/or new management appointments during this period require closer examination to ensure they have not become a front to facilitate the laundering of illicit criminal proceeds.

Financial crime networks in New York

Financial institutions must focus on trade transactions

The Head of Interpol has also claimed the COVID-19 pandemic has “sparked new crime trends” and warned that organized crime groups have already adapted their activities to benefit from the global health crisis.

Interpol revealed that police forces around the world have already seized counterfeit medical items, including substandard protective masks and hand sanitizer, so-called “corona spray”, and corona medicine. Interpol also announced that 121 arrests had been made in an operation against the illicit online sales of medicines and medical products, seizing potentially dangerous pharmaceuticals worth more than $14 million (€12.7 million).

Criminals are turning to the trade market to transfer illicit or substandard goods linked to the health crisis, and are generally taking advantage of resource constraints within customs and border agencies. As such, financial institutions and governments must ensure their trade-focused financial crime systems are effective in detecting and acting upon suspicion – both within the trade itself, as well as the involved parties. Given the complexity and cross-border nature of global trade, including the related documentation which is largely paper-based across the supply and payment chains, this is a challenge at the best of times.

To that effect, the European Banking Authority (EBA) has instructed its financial institutions to pay closer attention to transactions linked to international trade, stating:

“As most economies are facing a downturn, financial flows are likely to diminish. However, experience from past crises suggests that in many cases, illicit finance will continue to flow… For example, there is already some evidence of increased levels of cybercrime, COVID-19-related frauds, and scams targeting vulnerable people and companies, of fake fundraising campaigns and of criminal networks selling rationed goods at a higher price.”

The EBA singles out international trade as a potential risk area, noting banks processing payments linked to trade transactions should take additional measures to establish whether unexpected flows, particularly linked to customers or regions badly affected by the virus, are of legitimate origin.

Similarly, AUSTRAC highlighted particular risk in areas where the financial system may be more vulnerable to criminal exploitation during the COVID-19 pandemic, including the “movement of large amounts of cash following the purchase or sale of illegal or stockpiled goods.” In similar communications, the HKMA noted: “criminals are taking advantage of COVID-19 to perpetrate a number of fraud and exploitation scams, some of which have impacted Hong Kong (e.g. face mask scams)”. The HKMA also urged its regulated entities for continued vigilance against emerging money laundering and terrorist financing risks.

The solution is a risk-based approach – but it’s not easy in the current environment

Applying a risk-based approach to financial crime and compliance management is frequently cited as ‘challenging at the best of times’, but during this time of crisis, it is proving even harder. Financial crime and compliance teams globally are having difficulty adapting their existing transaction monitoring systems and investigative resources to the new world, where it is more difficult to detect what is “normal” financial activity for customers compared with how they are interacting with their finances today.

For example, is the sudden withdrawal and movement of a large sum of cash from various ATMs linked to panicking consumers or is it a genuine indicator of suspicion? Is the fact that elderly customers are suddenly using entirely new channels, such as mobile banking to transfer funds, suspicious?

Or whether a trade transaction involving medical equipment from a high-risk country involves the transfer of illicit counterfeit goods linked to pandemic profiteering or is “business as usual” activity from a region struggling to keep the economy moving?

Conversely, questions can be asked if there is no “change in behavior” triggers from restaurants, pubs, and cafés, and normal levels of cash in and out are taking place at a time when paying customers are on lockdown.

These examples highlight the challenges of relying on traditional KYC and transaction monitoring systems and processes that are simply rules-based and cannot take into account environmental changes or include mitigating factors into the detection logic to help determine and prioritize increased financial crime risk and suspicious activity.

As noted in recent industry reports, adapting thresholds to simply reduce alert volumes is a dangerous approach to managing resource constraints within investigation or analyst teams and is one the regulators will not accept, particularly if risk is missed or not acted on in a timely manner.

Significant challenges also remain for institutions that rely on monitoring driven by machine learning. For example, the potential for false positive alerts increases and, in its most recent COVID-19 guidelines, the Luxembourg regulator acknowledged that there may be a need for compliance teams to manually identify and classify alerts.

In use cases with few previously known examples, such as anti-money laundering, banks should adopt a supervised approach to machine learning that augments human intelligence. Rather than reinvesting in manual processes, financial institutions should look to leverage technologies that provide an enriched contextual view of data that will enhance decision making.

The U.S. looks to suspend AML requirements

An interesting debate is developing in the U.S. as community banks call for Congress to halt beneficial owner requirements for small business customers that are seeking loans through the coronavirus rescue package that Congress recently passed.

In an open letter, Independent Community Bankers of America (ICBA) CEO, Rebeca Romero Rainey, said suspending the rules that require banks to report an account’s true owner to the Financial Crimes Enforcement Network until 31st December 2020 would make it easier for customers to seek Small Business Administration loans through the Paycheck Protection Program (PPP).

“This rule suspension will facilitate quick access for both PPP and non-PPP credit,” Rainey wrote to House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell. “Banks will exercise ongoing due diligence and monitoring to safeguard the PPP from fraud.”

Paul Merski, group executive vice president for congressional relations and strategy at the ICBA, stated that the beneficial ownership rules (part of broader anti-money-laundering requirements) are preventing banks from taking on new customers for the PPP because banks have to certify new customers’ true owners when they apply.

Currently, to onboard a new small business customer, FinCEN documentation is needed for every owner that owns 20% or more of the company to certify who these owners are. Merski stated: “There’s just no time to do that…particularly in an emergency situation, it’s putting [new customers] at a huge disadvantage”.

This is a difficult challenge as economies try to stimulate growth while ensuring the industry combats the inevitable rise in organized criminal activity that will seek to maximize any potential opportunity to leverage this time of crisis. However, there is an alternative to suspending requirements or (re)investing in a manual effort.

How to detect financial crime risk and meet regulatory obligations with existing data

Organizations need to obtain the necessary intelligence required to mitigate the risk of being used to launder criminal proceeds during this pandemic. Many financial institutions are actively seeking ways to better understand their customer base throughout the full client lifecycle, their behaviors, transactional patterns, and the collective financial crime risk that a customer presents.

The first step required is to adopt entity resolution and network generation, a process that consolidates and enriches your existing KYC and transactional data with external third-party corporate registry data and additional bank intelligence, such as existing AML alerts, fraud cases or SAR filings.

This provides a single contextual view of the customers and their hidden relationships, as well as a connected view of their collective financial behaviors. Layering analytics and network scoring on top of this contextual view adds mitigating factors into the detection logic and runs across historic data and ongoing transactional data sets. This allows organizations to see and prioritize higher and more genuine financial crime risk.

In addition to fighting financial crime and meeting regulatory obligations, adopting an intelligence-led approach to managing financial crime risk will help the financial services industry continue to support their already stretched, tired and concerned staff, as well as legitimate businesses who are all trying to stay afloat and keep things going during such uncertain and difficult times.

HOW TO TACKLE TRADE-BASED MONEY LAUNDERING

The scale and complexity of international trade make it difficult to detect financial crime, especially when illicit activity is almost indistinguishable from that of legitimate businesses. Find out how to use context to effectively tackle trade-based money laundering.

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