COVID-19: Time to tackle new money laundering and fraud challenges?
20 April 2020
Many of us are still getting used to self-isolating and social distancing. But unfortunately the money launderers and fraudsters appear to be exploiting this coronavirus (COVID-19) pandemic to their advantage.
Fraudulent transactions are on a steep rise, and the National Crime Agency has warned that the situation is likely to continue, with criminals scamming people who may be vulnerable or increasingly isolated. With more people staying at home and change in working patterns, invoice and payment mandate fraud is an increasing risk to businesses. The FCA has warned of a surge in virus-related fraud and Action Fraud, the national crime reporting centre, received 509 reports mentioning the virus between February 9 and April 2, with total losses to victims of £1,583,023. It comes as no surprise that fraud is one of FCA’s financial crime priority areas in its 2020/21 business plan.
So what do regulated firms need to think about? With the impact of COVID-19 on fraudulent transactions, firms would be well advised to look at how changes in customer behaviour have impacted their fraud and AML processes. Fraud is already a predicate offence for money laundering and much of the data required to detect money laundering is similar to the information required to prevent fraudulent transactions. For example, similar product types (such as international wire transfers) and similar delivery channels (such as online and remote access), are at higher risk for both money laundering and fraud. Over time, the fraud and money laundering typologies are likely to evolve, and a ‘knowledge forum’ where firms can share these typologies would go a long way in gathering vital intelligence needed to combat the crime. As the impact of COVID-19 becomes increasingly visible in transactions, it would be helpful to start looking at possible synergies between current AML and fraud processes that identify new threats not covered by existing processes.
But first it is important to take a step back and understand how COVID-19 is likely to impact the current risk mitigation procedures. Remote working could delay the timely submission of suspicious activity reports and firms must ensure that these delays have been recorded to reflect the impact of COVID-19. The customer due diligence (CDD) process at the onboarding stage is also likely to be affected. Firms must not forget that the regulations require them to consider situations that involve non face-to-face business relationships or transactions in assessing whether there is a high risk of money laundering. As all business relationships in the near future will be established remotely, the need to obtain identification and verification documents from a reliable and independent source is crucial. Firms also need to ensure that any electronic identification processes are in line with the regulation and are secure from fraud.
It is likely that the FCA will be asking firms whether their current compliance framework is capable of identifying COVID-19 related fraudulent and other illegal activity. Firms must be prepared to satisfy the regulator that they have effective risk procedures and adequate internal control mechanisms to manage their financial crime risk.
Unprecedented times call for innovative solutions, and looking at improving the communication channels between AML and fraud to provide vital intelligence could prove hugely beneficial in tackling the increase in crime during these challenging times.