The effects of Covid-19 have been felt in every industry, in every country. As the world continues the fight to quell the virus, everything about the way we live and work has changed. However, among all the chaos, heartache and fear, there are people who see the opportunities that Covid-19 has brought. Namely money launderers, terrorists, and fraudsters. For AML teams, there is no room for complacency now. As criminals exploit the new circumstances, novel ways of laundering money are rapidly springing up.
What impact has Covid-19 already had on financial crime and money laundering?
As with all of us, criminals have had to change the way they behave too. They have had to find new ways to launder and move goods as borders are shut, ferries are cancelled, and flights are grounded. The military has been deployed in some counties to ensure that lockdown rules are adhered to, which has made it increasingly difficult for fraudsters to use traditional scamming methods.
Recently, Europe’s top banking regulator instructed financial institutions to pay closer attention to transactions linked to international trade, as criminals look for new ways to move illicit funds and goods across borders. This also brings up the interesting situation of what traditional cash launderers will do now. With all non-essential businesses shut or slowly re-opening, we can only presume that money laundering fronts are now sitting on piles of cash without a way to get it into the system. Once this is all over, banks may see an increase in the volumes of cash deposits.
Secondly, another impact we are seeing is increased levels of coronavirus-related crime, which will ultimately affect levels of money laundering as criminals try to wash their funds. Organizations need to be on high alert to new and emerging threats, or what is known as the ‘unknown unknowns’. Many retailers are refusing to handle cash, opting for card payments, which means that bank transactions are on the increase. The larger volumes will make it easier for scammers to disguise their money laundering activities.
Even before the Covid-19 crisis, many money laundering patterns were not being successfully detected.
The situation we are in now exacerbates the risk of anomalous transactions being missed. FinCEN reported several emerging trends connected to Covid-19. These include imposter scams, investment scams, product scams and insider trading, similar to those that occur following a natural disaster.
The FCA has warned we are likely to see an increasing number of scams in the coming months. In the UK, coronavirus-related fraud reports increased by 400% in March, and we expect this to continue to rise. Where, when, and how the money generated from these scams will be used is anyone’s guess, so it is essential to be vigilant. Covid-19 is also widening the money mule pool. This makes the need for ongoing and real-time client activity reviews more important than ever.
What AML challenges has Covid-19 created?
Without the right transaction monitoring technology and algorithms in place, efficiently detecting instances of money laundering and terrorist financing can be very difficult. But what is happening right now, is that everyone’s transactions are anomalous. The shopping landscape has changed with increasing numbers opting to purchase their items online, avoiding cash transactions altogether. What this means is many of the existing rules in place for monitoring transactions are not applicable.
Those financial institutions with legacy screening systems, which lack the flexibility and agility to quickly respond to a crisis such as this, are likely to be overwhelmed with false positive alerts right now. This will create larger workloads for compliance teams, until these rules are tweaked sufficiently to reflect customers’ changing behaviors.
There are also the further complications that lockdowns have caused, such as working from home. A key issue will be maintaining effective internal controls across operations if offsite team arrangements are implemented. Furthermore, as financial institutions see larger fluctuations in profits, there is a risk too that they could introduce cuts or reorganize compliance teams. As you can imagine, the scenario that could potentially unfold is one where banks have fewer resources to review increasing volumes of alerts.
What should compliance teams be looking at to deal with these challenges?
The natural inclination might be ease off the risk parameters on monitoring to reduce these alerts, but this is problematic. It will expose more risk by creating more false negatives. Rather than increasing risk appetite, rules should be adjusted to reflect the changes in customer’s behaviors. With the help of machine learning, for instance, it is possible to detect the ‘unknown unknowns’, which are vitally important right now. For those with modern technology, making these changes will be the case of users making quick and simple rule adjustments. There is no need to wait for and rely on specialist data scientists to intervene.
Will monitoring and deadlines for regulatory compliance fall by the wayside, in light of the challenges of Covid-19?
The FCA has postponed activity that is not critical to protecting consumers and market integrity in the short-term, but it has emphasized that firms should not unnecessarily delay submissions of regulatory data. Firms are also expected to continue to take all steps to prevent market abuse risks, including enhanced monitoring. It would be wrong to assume a specific deadline will take a back seat, and even if it did, this would only be temporary. As soon as things return to ‘normal’, expectations would be as high as ever.
How can banks improve their AML systems and approaches?
Banks need to invest in the latest technology. This is the only way they can improve their current situation and increase the detection rates of genuinely suspicious transactions, outside of hiring many more people. There is no doubt that human skill is hugely important. The best situation is to implement new technology so that staff can be relieved of menial tasks to focus on the important jobs of investigating suspicious transactions.
Is now a good time to invest in new AML technology?
There has never been a more important time to invest in new AML technology. Covid-19 has made many firms re-evaluate their operations and processes. It is absolutely vital that they adapt to the new way of working as quickly as possible.
Contact us to learn how ComplyRadar helps you address AML transaction monitoring requirements by automatically identifying suspicious behavior in real-time or on a scheduled basis, while minimizing false positives. It monitors transactions related to individuals, accounts, and entities to detect suspicious activity quickly and effectively, through a fully audited process to inspect and act on flagged transactions.