Covid-19 and AML: the impact, challenges and future

Julian Dixon

April 22nd, 2020

Covid-19 has taken, and is still taking, tens of thousands of precious lives. As the world continues to battle the virus, everything about the way we live and work has changed.

And yet amongst the chaos, heartache and fear, there are groups who see Covid-19 as an opportunity. These are the money launderers, the terrorists, the 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.

Here are my thoughts on some of the biggest questions right now.

1. What impact has Covid-19 already had on the prevalence of financial crime and money laundering?

Firstly, as it’s done for most of society already, Covid-19 has forced criminals to change the way they behave. They have to find new ways to launder and move goods as borders are shut, ferries are cancelled, flights are grounded.

In some areas military has been deployed to enforce lockdown. These changes will severely hamper certain kinds of criminal operations for many months to come.

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, 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 – I would certainly suggest this is an area to keep under scrutiny.

What will traditional cash launderers do with any stockpiles of cash during the pandemic?

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.

Organisations need to be on high alert to new and emerging threats – or what we call, the ‘unknown unknowns’.

Increased market volatility combined with the fact that many retailers are refusing to handle cash, has led to increased volumes of transaction going through the banking systems. These volumes make it easier to disguise money laundering and financial crime. 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.

2. What AML challenges is Covid-19 creating?

As it stands, detecting instances of money laundering and terrorist financing efficiently is very difficult without the right transaction monitoring technology and algorithms in place.

But what is happening right now, is that everyone’s transactions are anomalous.

People have halted all social spending, and many will now be shopping exclusively online and avoiding cash transactions. What that 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 behaviours.

There are also the further complications that lockdowns have caused - such as working from home. Activities like KYC and onboarding have to be approached differently because of this - the FCA has issued advice on what to do here.

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 reorganise 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.

3. 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 customers behaviours. With the help of machine learning, for instance, it’s possible to detect the unknown unknowns, which are vitally important right now.

For those with modern technology like ours, making these changes will be the case of users making some quick and simple rule adjustments.

There is no need to wait for and rely on specialist data scientists to intervene.

4. With so many people working from home, are AML efforts going to be hampered?
How does working from home affect operational resilience of firms?

Yes. An aspect of this was acknowledged by the FCA interim chief executive Christopher Woolard said in a public letter highlighting how the pandemic affects the operational resilience of firms as staff work from home in these volatile market conditions.

Organisations that are already using modern compliance technology are ahead of the curve.

The ability to work remotely, including at home, is a largely standard feature. The only key requirement is that the correct virtual private network (VPN) is set up, since this will help keep the system and its data safe.

With legacy technology, working from home is more difficult. Saying that, banks’ systems are usually set up for all sorts of crises. They will have protocols and processes to ensure staff can continue to work securely and safely from home.

My only concern would be about capacity of legacy technology – in terms of the number of people who can log on simultaneously from home.

Of course, there will be risks that working from home is less effective, but an effective AML team would certainly have measures in place to ensure staff can continue to work efficiently.

I am confident that AML staff are on heightened alert and doing a good job in such trying times.

5. Do you expect monitoring and deadlines for regulatory compliance to 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 emphasised 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.

It’s interesting to note that in Canada, money laundering monitor FINTRAC has issued pandemic guidelines to focus on the most urgent cases, with priority to be given to submitting suspicious transaction reports.

There are also expectations that Covid-19 will delay the implementation of new AML laws coming into force in the summer.

6. 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.

7. Is now a good time to invest in new AML technology?

Yes, now is a great time.

We are seeing a marked uptake in interest as people are realising how important it is to have modern systems in place.

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If you’re yet to invest in modern AML technology, now is the time to do your research.

Booking a demo is a great place to start.

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