“In every crisis, an opportunity:” the criminal’s motto, probably. Financial crime compliance consultant Shubham Jain discusses what banks can do to foil the efforts of financial criminals during these unprecedented times.
COVID has shaken the entire world in almost every aspect. People are still adapting to “the new normal” – from being forced to remain indoors and hence, work from home, to relying more heavily on OTT platforms, online shopping and internet banking. These have become part and parcel of everyday life.
Though it has adversely impacted the entire economy, a few industries/sectors were impacted rather severely, including tourism, aviation, hotels, restaurants, etc. Production and sales in other sectors have hit an all-time low due to stringent lockdowns enforced by governments across the globe. It is imperative to note that many try to take advantage of times such as these, purposefully exploiting the vulnerabilities arising out of the situation.
Money-Laundering Vulnerabilities Due to COVID-19
Since this is a pandemic, almost every country is bearing the brunt of it. Therefore, criminals and money launderers are also trying to use this situation for their own benefit, as regulators, banks and other financial institutions focus increasingly on saving their institutions and employees, providing services to clients and helping the needy so that they can survive in this difficult time. As a result, financial institutions are focusing on providing their services through non face-to-face modes, like online or through telephone, etc.
Money launderers have become more active, as they feel this opportunity can be exploited and it is easier for them to launder money with very little chance of being caught. Though this situation is unprecedented, however, financial institutions – especially banks – need to be extra cautious, as the opportunity for money laundering and cyber fraud may increase significantly.
The following are possible scenarios money launderers could try to make use of:
- Opening New Bank Accounts – Money launderers are aware that visiting bank branches would be difficult due to restricted movements; therefore, they would prefer to open an online bank account (non face-to-face channels) with limited documents. They have convincing reasons for the unavailability of documents and may offer to provide another document later since the required documents are currently inaccessible. They may also show urgency to open a bank account to transfer money to help friends, relatives, etc.
- International Money Transfers – Since this pandemic has impacted the entire world, money launderers may take this opportunity to transfer money abroad or to high-risk countries on the pretext that they are trying to help relatives who are suffering from COVID or lost jobs. Similarly, the same reason may be provided on receiving funds from other countries. Also, it is easier for terrorists to transfer money globally for financing their activities.
- Trade in High-Demand Items – Money launderers may try to engage in domestic or international trade for specific, high-demand items like hand sanitizer, masks and PPE kits. They may also inflate the prices of goods, as these are in high demand, and they may buy and sell between themselves to clean their dirty money.
- Financial Help/Loans – Since many people have lost jobs and businesses are not doing well, they may give loans in cash on easy terms on high-interest rates and ask the borrower to return the loan in the bank account. This would help them clean their tainted money. They may give cash to some people and ask them for a bank transfer for a small commission or fee. Banks can keep watch; if counterparties paying into the account are suddenly increasing, then it could potentially be a case of money laundering.
- Government Grants and Money from Charities – Different governments across the globe have given grants to businesses and individuals to help them sustain themselves in this difficult time. Money launderers may try to showcase their illegal proceeds as if they have received from governments or some charities.
- Start Charities – Criminals may try to open a charity organization (without any registration) and show the funds received/collected in the charity from the public whereas they will “donate” their dirty money to the charity and use it for their own purposes.
- Increase in Online Banking – Due to restricted movement, more and more people will use online banking. Since the number of new online users will be very high, money launderers may try to target such users to get their account details and/or take over their accounts and use them for layering purposes.
Problems Banks Face
It seems most organizations were not prepared to deal with this peculiar circumstance. On one hand, banks need to maintain and make available to their customers all services – an uphill task under current circumstances – but on the hand, banks are required to keep themselves safe and prevent their exploitation for financial crime. Thus, they face the following challenges:
Unique Circumstances and Understanding the Scale of the Problem.
This situation is unique; no one thought it would have such massive impact or that the situation would be so grave. Therefore, banks sat in wait-and-watch mode, unable to immediately respond to the situation. And while banks have business continuity plans, they are often not detailed enough to provide solutions for the entire bank, covering each department and branch and all employees.
Up-Scaling IT Infrastructure
To ensure business as usual, banks must immediately enhance their IT infrastructure so that employees can work remotely and provide uninterrupted access to online, mobile banking, etc. This in itself takes a lot of time and money, but banks need to do this for all their global branches.
Lack of Knowledge of Risk
Since such a situation has never before been faced, banks are unable to fully identify the risk arising out of the situation or how money launders can make use of it through different means.
Clearly, financial institutions worldwide have been badly hit; however, it is important that banks maintain their focus and try to ensure no one takes undue advantage of this crisis. It is expected that banks may take measures necessary to deal with the situation. Some of the potential steps expected in this direction are the following:
- Introducing Robust On-Boarding/Customer Due Diligence Controls – During the pandemic, customers will primarily open new accounts through non face-to-face channels; therefore, banks are expected to introduce robust CDD rules to ensure checks are performed before opening any bank account. It is important to keep a check on the industry, the reason for opening account, the expected amount of transactions and the countries the customer will perform transactions with once the account is opened. Banks may need to be a bit flexible for genuine cases based on their experience; the bank may introduce limited access with a limited transaction amount for such customers.
- Dedicated Team to Carry Out Assessments – Banks can form a dedicated team to carry out financial crime risk assessments to understand vulnerabilities, weaknesses and control design issues so that they can suggest key action points in order to improve resiliency.
- Keep a Watch on Regulatory Guidance – Regulators globally will provide financial institutions with red flags to watch out for and guidance to keep them safe. A close watch must be kept on regulatory guidance and any news items so that the bank can foresee or assess what is coming their way in the near future.
- Educate the Customer – Since unemployment has increased and businesses are closed and financial distress has soared across many countries, it is important that banks take the initiative to educate their customers about any potential misuse of their account for potential money laundering.
- Greater Monitoring for Customers in Particular Industries – Banks can make tight thresholds for customers in particular industries – like those dealing in hand sanitizers, masks and PPE kits – as well as cash-intensive industries and high-risk sectors (like jewelry, etc.), as money launderers will try to exploit these industries to launder funds. Customers who start making international transfers after COVID should be monitored, as these could be cases of potential money laundering.
- Upsurge in Revenue – Banks may also keep a watch on clients from any industry where sales and revenue show surges and bank transactions increase. Because most industries have not yet been operating at 100 percent capacity, such a situation is potentially suspicious.
Banks must be ready to face these situations and do quick assessments to understand their impact on the bank’s various functions and processes so that quick action can be taken and so that any adverse impact remains minimal. At times, quick decisions and system-up gradation are required to manage present or future situations. The bank can nominate persons with dedicated roles and responsibilities to monitor for such adverse events and decide on actions and next steps.
Banks must assess money laundering and other financial crime risks arising from such situations so that the bank can remain strong and act as a deterrent for money launderers. There is a lot to learn from this pandemic – for everyone; therefore, every bank can dive deep to understand what they did correctly, what went wrong, where they can improve and what actions they can take to deal with situations of such magnitude in the future.