Studying a New FATF Guide: The Global ML/TF Situation in a Time of COVID-19
Be it a financial crisis or a far-reaching pandemic, the crime level always grows in times of turmoil; the current COVID-19 situation is no exception. Recently, we’ve seen a rise in COVID-related offenses such as fraud, cybercrime, corruption, and, subsequently, terrorist financing and money laundering.
The Financial Action Task Force (FATF), a global AML/CTF regulator, has released an overview of the current ML/TF situation and provided insights into how we can prevent financial crimes at both the government and business levels. We’ll discuss the findings here.
How COVID-19 impacted AML/CTF compliance
Rapid changes in people’s financial behavior caused by COVID-19 have resulted in loopholes in financial systems that are easy for criminals to infiltrate. Let’s take a look at the nature and the extent of these changes on AML/CTF supervision and compliance.
- Rise in remote services
Due to social distancing, many people have to use online platforms for everything, ranging from engagement with banking services to buying groceries. However, not all companies employ secure systems for remote transactions and customer verification. In fact, even some banks struggle to apply reliable due diligence checks remotely. Such lack of security leads to offenders bypassing verification processes and being able to hide illicit money.
Furthermore, criminals can take advantage of people who are unfamiliar with remote services. For instance, the elderly often fall victim to online fraud when scammers create “government” websites that claim to issue tax refunds, raise money for charity, or provide COVID-19 medicine.
- Use of illegal financial services
Since the global economy is contracting significantly, and people have less financial stability, banks are not willing to offer loans. This makes people seek unregulated lenders, which may be criminal groups, and, thus, they can end up involuntarily helping criminals to launder money.
- Deprioritization of AML/CTF
COVID-19 makes authorities solely focus on health and economic issues. Companies, too , are forced to direct all their efforts on keeping their business afloat. In this situation, AML/CTF compliance goes by the wayside. This results in offenders taking advantage of the situation and hiding illicit funds.
On top of that, some AML regulators risk closing down, and others are unable to constantly monitor suspicious activity. Further, jurisdictions that have not implemented online systems for submitting reports might not receive information about suspicious activity at all.
All these factors—loopholes in financial systems, the deprioritization of AML/CTF, and the lack of regulator involvement—lead to the rise in ML/TF activity.
How criminals use the COVID-19 crisis to conduct financial crimes
Several types of crimes have skyrocketed during the pandemic:
- Fake charities, fraudulent medicine, and other COVID-19-related fraud
Criminals have been using the COVID-19 crisis to scam individuals by pretending to be a member of charity that raises funds to combat the virus. Alternatively, they have posed as a hospital employee who states that a person’s relative is sick and needs money for treatment. Other common criminal activity involves individuals pretending to be bank employees and asking for banking information. Another frequent case of fraud is tricking people into buying masks or medicine and never delivering the goods.
- Cybercrime: Trojans in the information on COVID-19
COVID-19 has made people focus more on health and economic problems, and as a result, they have lowered their guards in other areas, including cybersecurity. Offenders search for flaws in internal systems of companies and steal clients’ databases. They also create fraudulent websites or send emails that share information about the pandemic and phish people’s personal information.
- Rise in corruption, child exploitation, and other associated crimes
Recently, we’ve seen the rise in corruption (officials stealing funds meant for social health), online children and workers’ exploitation (the decreasing number of workplaces operating and also subsequent unemployment, which, in turn, leads to people willing to take any jobs, even illegal ones).
How criminals launder money
The increase in fraud, corruption, and other financial crimes leads to money laundering when offenders want to conceal the origin of their funds and change them into legitimate money. Let’s take a look at how criminals “wash” money by taking advantage of the COVID-19 crisis.
- Bypassing due diligence checks
A lot of companies do not have a reliable electronic verification system that can detect fake documents and access databases, sanction lists, and adverse media sources. Criminals look for flaws in internal safeguards that are caused by the rapid change to remote working to hide illicit money.
- Using online financial services and virtual assets
Many criminals sell fraudulent COVID-19 medicine over the Darknet and then launder money using various online financial services and cryptocurrency exchanges. The FATF has highlighted the increase of ML/TF linked with virtual assets.
- Pretending to be financial institutions
Financial instability causes people to remove money from the official banking system. When a regulated bank rejects a loan application from an individual, chances are the person will reach out to unregulated institutions, which may belong to criminals. At present, offenders indulge in schemes where they lend illicit money to people and get back “clean” money.
How to combat COVID-19-related ML/TF crimes
In its guide, FATF provides recommendations for combating money laundering and other financial crimes in a time of COVID-19. These recommendations are mostly directed to countries’ authorities and financial intelligence units, but some of the information is applicable to businesses themselves. Let’s see what measures companies can adopt to ensure AML/CTF compliance.
- Respond to the impact of COVID-19 on AML/CTF
Many businesses have now started working remotely, which has significantly changed their overall workflow. To cope with the new environment, companies need to reassess ML/TF risks that they face today and develop responses.
- Pay special attention to money transactions and digital onboarding
Since criminals look for any flaw to bypass due diligence and perform numerous transactions to conceal the origin of their funds, businesses have to be on guard when it comes to customer verification. We recommend that companies do not hesitate to apply enhanced due diligence checks and establish the source of funds for transactions in a cryptocurrency if something seems suspicious. To manage digital onboarding successfully, companies should develop a secure remote verification system or reach out to a KYC/AML service provider.
Even in the times of the pandemic and the subsequent economic crisis, businesses should make an effort to stay AML/CTF-compliant: they should renew internal safeguards, develop a reliable remote customer verification system, and employ ongoing monitoring. The number of money laundering and terrorist financing crimes is continually rising, and thorough compliance is as vital now as it ever was.
