New FATF report: Covid-19 is increasing money laundering risks and impacting AML efforts

Julian Dixon

May 12th, 2020

According to a new report published this month by global money laundering and terrorist financing watchdog, FATF, the Covid-19 pandemic is impacting the abilities of the government and private sectors to implement anti-money laundering and counter terrorist financing (AML/CFT) obligations, which is creating emerging money laundering and terrorist financing risks.

FATF President, Xiangmin Liu, said: “Risk-based supervision and enforcement is more critical than ever. Financial institutions and other businesses should remain vigilant to emerging ML and TF risks and ensure that they continue to effectively mitigate these risks and are able to detect and report suspicious activity… In line with the FATF Standards, the FATF encourages the use of technology, including Fintech, Regtech and Suptech to the fullest extent possible.”

An evolving risky picture

FATF emphasises we’re still in the early stages of this health and economic crisis but money laundering trends are already emerging. The current circumstances are ripe for providing new opportunities for money laundering:

• Remote working has led to increasing use of potentially vulnerable/insecure online systems

• More people are shopping online, at a time when cybercrime is sharply rising

• There is a shortage of medical supplies, giving rise to an increase in counterfeiting

• The financial sector has cut back in-person services, which is impacting due diligence

• There is mass unemployment, which is reshaping economic and social activities

• Government resources have been reprioritised to focus on Covid-19

• Transnational organised crime schemes have been severely disrupted

On top of these changes, other crimes are also increasing. There are additionally concerns over risks associated with corruption, the misdirection of government funds/international financial assistance, as well as the real possibility of criminals shifting their activities to exploit new financial vulnerabilities, including increased physical cash transactions and insider trading.

The impact of Covid-19 on AML/CTF regimes

FATF reports that confinement and social distancing measures are impacting government and private sectors’ abilities to implement AML/CTF obligations. There is also evidence that in some countries, resources are being reallocated away from AML/CFT activities to financial stability, humanitarian and economic recovery efforts.


A brief summary of the AML/CTF areas affected by Covid-19 at the time of the report’s writing include:

Supervision:
The majority of FATF members are postponing or substituting AML/CTF inspections. For a number of countries, decisions including the imposition of monetary penalties for AML/CFT violations are also being suspended.

Regulation and policy reform:
FATF reports a significant pause in new AML/CFT policy and legislatives initiatives.

Suspicious transaction reports (STRs):
Some members are providing extensions to submit STRs.

FIU analysis:
While FIU units are still widely operational, staff are working remotely as far as IT systems and security allow.

Law Enforcement Authorities (LEAs):
LEAs in FATF member countries appear to be continuing to prioritise AML/CTF efforts, and emerging Covid-19 related offences are receiving a heightened focus.

• Private sector:
Many financial institutions have made significant operational changes. There is a real risk these institutions may reprioritise their AML/CTF efforts to focus on wider prudential and stability measures.

FATF recommended action

The FATF report sets out a range of actions that jurisdictions are taking or could consider taking in response to the challenges Covid-19 presents:

• Coordinate on a domestic level to assess the impact of Covid-19 on AML/CFT risks and systems, and to develop responses to engage with the private sector.

• Strengthen communication with the private sector by proactively engaging on the application of their AML/CFT measures and working constructively with them to minimise potential impact.

• Encourage full use of a risk-based approach to CDD and address practical issues.

• Support electronic and digital payment options.

• Undertake pragmatic, risk-based AML/CTF supervision. All supervisors should review supervisory priorities and plans, and adjust to emerging risks as necessary

• Understand new risks and adapt operational responses

• Clarify AML/CTF requirements in the context of economic relief measures. Regulated entities across all countries should remain vigilant to detect suspicious financial transactions.

• Continue cooperating across borders.

• Monitor the impact of Covid-19 on the private sector. In particular, if some regulated entities are forced to shut down as a result of the economic disruption Covid-19 is causing, this may expose significant ML/TF vulnerabilities.

Summary

The FATF Covid-19 report is yet another reflection that now more than ever, it is essential to have an accurate and current understanding of the risk profile each customer presents. This will allow high risks to be managed with appropriately focused enhanced due diligence and monitoring. With staff absences high and many regulated entities suffering operational challenges, it is essential to avoid resources being needlessly drained on low-risk customers.

This global pandemic is reinforcing how essential AI-enhanced AML technology is in the fight against money laundering. AI is not only able to reduce the burden of repetitive analytical work on human resources drastically, but also quickly identify genuinely anomalous patterns in huge datasets.

For those struggling  to comply with the money laundering regulations, Napier can help. Now is a great time to invest in upgrading or replacing legacy AML systems.

For more information on how Napier can help, please contact us here.

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