What has the overarching impact of COVID-19 been?
We are currently living through unprecedented times. Most of us have never seen the world and our lives shaped so instantaneously by a single occurrence, the way COVID-19 has remoulded global relations.
With the effects of the pandemic now slowly receding and the world slowly regaining normalcy, it is time to step back and examine the impact of COVID-19, primarily on the finance sector in an effort to better understand and better prepare for such events in the future.
The primary impact of COVID-19 can be summarized as follows.
1.Reinvigoration of online systems: Digital and online methods have seen a massive boost in investment and interest due to the measures imposed by governments worldwide.
2.Increased demand for medical supplies including medicines and PPEs: Governments and healthcare institutions have been battling with shortages of medical supplies, exposing the unpreparedness of the present systems to handle a large-scale pandemic.
3.Limited functioning of the private sector, leveraged with digital systems: Businesses the world over have adopted “work-from-home” as a safer alternative to normal office work and have been using digital methods of collaboration and communication to bridge the gap, leading to increased investment in collaborative software.
4.Closure of several smaller businesses: Due to an acute lack of business, supply chain disruptions and disruptions in international trade, several smaller businesses without the capital to function during the pandemic have ended up going under, leading to massive unemployment and job security problems.
5.Reprioritisation of resources and work: Following the grave impact of COVID-19, governments and people have chosen to change the priorities of resource allocation in order to accommodate the demand for increased medical supplies, social distancing, and injections of capital from nationalized banks to keep the economy in good shape.
This is not a panoramic view of the entire impact of COVID-19, but serves as a useful marker to predict the financial implications of the pandemic.
So how has COVID-19 impacted finance, and especially money laundering?
The impact of COVID-19 on financial crime
Due to several businesses, in the BFSI sector in particular, moving to a more digital landscape, the risk of financial cyber crime has never been greater. This risk is further exacerbated by the unfamiliarity of most people with online platforms and the desperate position endured by people due to the economic downturn.
These factors create a situation ripe for exploitation by cyber criminals and have already had a debilitating impact on the financial sector.
The Financial Action Task Force (FATF) is a global money laundering and terrorist financing watchdog convened in 1989 to combat and recommend measures to combat money laundering.
FATF recently released a report which outlines the near entirety of the impact of COVID-19 on financial crime. Here are the salient points addressed by the FATF.
1. Increased Fraud: FATF has found that fraudulent activities have seen a steep increase in fraudulent activity, including:
a. Impersonation – Due to social distancing and the increase in digital processes, it has become easier for criminals to impersonate people by obtaining their data. Interpol reports that several cases have surfaced of criminals impersonating government and hospital officials, high-ranking officers in companies, to obtain sensitive email and financial data.
b. Counterfeiting – The increased demand for medical supplies, protective equipment, testing kits and other essential equipment, has resulted in several online scams. These scams usually involve the criminals contacting businesses or organizations, offering supplies of essential equipment, obtaining either credit card information or payment in advance, and then reneging on the supply of the goods.
c. Fraudulent investment scams – The pandemic has seen a rise in false promotions attempting to elicit investment by claiming that the products and services of certain publicly traded companies can control or cure COVID-19. Europol notes that microcap stocks are particularly vulnerable to these scams and recommends steps people can take to safeguard themselves against such scams.
2. Cyber Crime: As evidenced by the recent Twitter hacks and Chinese cyber attacks on Indian institutions, FATF has observed a rise in cyber crime, including:
a. Phishing attacks – Cyber criminals are using the panic induced by the pandemic to pose as trusted organizations such as the WHO and steal the information of individuals by sending texts or emails with malware or malicious links and attachments.
b. Business email scams – Due to large numbers of businesses moving to a digital channel for work, criminals are now able to exploit weaknesses in business’ network security to gain access to customer contact and transaction information. This has allowed cyber criminals to pose as customers of the compromised businesses, request payment for legitimate goods or services, and then redirect these funds into their own accounts.
c. Ransomware attacks – FATF reports that several hackers are using malicious websites and applications that appear to share information about COVID-19 to insert ransomware into mobile devices and computers. This software allows criminals to gain and lock access to devices until a “ransom” payment from the owner of the device is received.
3. Misdirection of funds & increased corruption: The pandemic has caused governments to move large sums of money around, either as stimulus for their own economies, to purchase large volumes of medical equipment, or to provide financial aid to other countries. FATF reports that criminals can falsely claim to give access to stimulus funds and thus gain access to financial information. Additionally, with a lack of oversight, the funds used to provide aid or purchase medicines is vulnerable to exploitation from officials or fraudsters.
4. Other predicate crimes: The reduced functioning of government agencies, the rise in unemployment and a general increase in online presence, has resulted in the increased exploitation of vulnerable groups, through human trafficking and online child exploitation. Additionally, with a lot of property left uninhabited, there have been reports of increased property theft and fraud.
These scams and frauds paint a bleak picture of the state of the finance sector. However, in order to prevent more of them, we must first be cognizant of the risks posed due to the current climate.
What are the current risks related to money laundering?
In its report, FATF provides a concise overview of the most potent risks for financial institutions associated with money laundering.
These vulnerabilities, which are condensed from the impact of COVID-19 on finance described above, are as follows.
- Criminals exploiting the remote working situation to bypass Customer Due DIligence or CDD measures and conceal and launder funds
- Misuse of online financial services to launder funds
- Siphoning off economic stimulus measures and exploiting insolvency schemes to conceal and launder illicit proceeds
- Increased usage of the unorganized financial sector as a means to conceal ill-gotten funds
- Misappropriation of financial aid and emergency funding
- Usage of new cash-intensive and high-liquidity lines of business in developing countries, for the laundering of funds and funding terrorist operations
These risks paint a bleak picture of the post COVID-19 financial world. However, there are steps that institutions and individuals can take to prevent the rise of money laundering.
How to respond to AML vulnerabilities
FATF, in its report, details a set of steps that governments and institutions can take to effectively combat money laundering. These steps range from a global context to a national one.
The steps prescribed are as follows.
- Strengthen communication with the private sector
The current situation calls for a reinvigorated partnership between regulators and the private sector to minimize the adverse effects of COVID-19. Such a partnership can take many forms such as the provision of a contact point where businesses face difficulties in meeting compliance requirements and engaging with the non-profit organisations sector.
However one of the most important areas in which this partnership can be taken further is digital onboarding. FATF specifically identifies this area since the usage of digital onboarding reduces the risk of infection from COVID-19. Additionally, the usage of digital KYC verification allows businesses to harness cutting edge technology to mitigate AML & KYC threats.
FATF in its Guidance on Digital Identity report, also identified the benefits of digital ID verification techniques, these include –
1. Strengthening CDD by minimizing human control measures
2. Improving customer experience and generating cost benefits
3. Boosting the ability to monitor transactions
4. Increased financial inclusion
- Employ risk-based CDD
The usage of risk-based CDD allows businesses to simplify KYC and onboarding for customers and lessen the burden of compliance. FATF notes that the application of simplified due diligence measures for lower-risk cases, allowing entities to accept recently expired IDs, implementation of delayed verification on a case-by-case basis, and the usage of digital documents for KYC, are all seen to have a net positive impact on the finance sector.
- Support electronic and digital payment options
Making provisions for digital payments is a no-brainer in the current scenario where social distancing precludes the possibility of in-person interactions. FATF suggests increasing point of sale purchase limits, raising the maximum limits for digital wallets, and reducing charges for domestic money transfers.
- Understand new risk and adapt operations
The pandemic has exposed the finance sector to new risks and the best forward involves understanding these new risks and adapting operations accordingly. Several institutions have created task forces specific to COVID-19 and its related crimes, and regulatory entities are also using keyword-based strategies to combat fraud and cyber crime.
- Implement risk-based supervision
The current situation calls for a risk-based and pragmatic plan of action. Supervisors must adjust their priorities based on risk and ease compliance accordingly. For example, regulators are now increasing their focus on online gambling and trade deals involving precious metals.
The private sector needs to be cognizant of these measures in order to fight the growing trends of money laundering and fraud. RegTech startups the world over are now offering businesses AI-powered KYC verification solutions with anti-fraud and compliance features in place to help in this fight.
Fraud-proof KYC verification
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