From war to pandemic, there is always a class of profiteers seeking to take advantage of a country or world in crisis. Unsurprisingly, the behaviour has emerged once more in response to the escalating international outbreak of COVID-19. US cyber security firms and news agencies have repeatedly warned about the rise in coronavirus phishing scams, where emails purporting to be from trusted authorities like the Center for Disease Control and Prevention (CDC) and World Health Organization (WHO) are being sent to unsuspected victims, tempting them into downloading malware onto their devices. Scam cures, such as colloidal silver and essential oils, are also on the rise. The Federal Trade Commission (FTC) and Food and Drug Administration (FDA) have even issued warning letters to several companies, who may be found to have violated federal law for selling unapproved products using false claims.
Unfortunately for financial crime compliance professionals, coronavirus risks go far beyond old scams targeting new fears. The landscape and scale of financial crime compliance risks are fundamentally changing, and without sound risk management, we might find ourselves among other overwhelmed, underprepared industries in the face of a pandemic.
It’s Not Just Fraud
While fraud has understandably received the most immediate financial crime-focused coverage, this is not the only financial crime area that we should analyse for potential spikes.
For example, we could see spikes in certain types of money laundering activity. Look at money mules - who are often recruited online through fake social media employment or romance scams. As individuals lose their jobs or have to find work from home, the prospect of being able to earn funds quickly through moving money from one account to another may become even more attractive. Some sites are even directly recruiting money mules in the name of supporting coronavirus victims.
It’s not all bad, however! Cash-based activity is on the decline in countries hard hit by coronavirus, and potentially cash-based money laundering along with it. Major international terrorist groups, such as the Islamic State, are advising their fighters not to travel to Western countries undergoing severe outbreaks of coronavirus, which could impact terrorist financing flows.
The best thing for financial crime professionals to do is to spend time thinking about how the pandemic may impact the specific financial crime risks they face as a business. They can then adapt their controls accordingly, to best mitigate the evolving threat landscape.
Investigation and Enforcement
Investigations are beginning to stall in the face of coronavirus as well, hindering the ability to meaningfully prosecute complex, cross-border cases involving bribery and corruption, organised crime and sanctions evasion. As the pandemic spreads across the globe, with travel bans, home working and quarantines being used as containment measures, compliance officers and lawyers investigating bribery and corruption have been forced to delay meetings and interviews, which could allow cases to drag on and bad behaviour to continue to proliferate.
In addition to stalling investigations potentially allowing for compliance risks to slip through the cracks, law enforcement is also facing pressure to keep up with demand. Police in the US are now shifting gears to enforce coronavirus rules and in some areas, have been urged to avoid “unnecessary arrests” as this could only lead to the virus spreading. Law enforcement priorities are fundamentally shifting, and financial crime is unlikely to get the focus or resources it needs.
Compliance Ops
Particularly in FinTech hubs like New York City and San Francisco, the latter of which is under a shelter-in-place order, employees are having to work from home in order to keep the business running smoothly, and this includes BSA/AML compliance operations staff and analysts. While FinTech workplaces generally encourage more working from home and may have better controls in place to ensure data security, the hasty transition can still generate problems if not managed effectively.
While internal fraud is often viewed as less of a concern in small and medium sized FinTechs, given the close and collaborative nature of their teams, this risk should still be fully mitigated. More than half of all frauds committed against business are done so either internally or by an internal actor colluding with an external one. And this is something we have increasingly begun to see in the FinTech sector. We have personally experienced cases where FinTechs have had to engage in trying internal fraud investigations, or where staff have been contacted by organised crime groups asking them to engage in fraud.
Generally speaking though, the vast majority of internal staff are team members trying their best for the company. Front line team members need to be supported now more than ever in the work that they complete. Staff may fall ill, leaving others having to balance heavier workloads. Staff may not find it as easy reaching out for help evaluating a new alert. And responding to crises can also detract from other important financial crime tasks, like filing SARs (if this is the case, make sure to contact FinCEN). In-person training and support that staff need in order to thrive, excel and finish work on time may not be readily available. By taking steps to ensure regular team communication, health, wellbeing, and safety, as well as access to educational resources, firms can build out more resilient teams.
Recession?
Finally, we get to the elephant in the room: it’s difficult to find an economist that doesn’t think the coronavirus pandemic will bring the global economy into recession, especially as we seemed to be nearing one prior to the outbreak. With transportation and hospitality industries suffering major blows, and with outbreak hotspots like Italy already facing a delicate economic balance, we should start looking at what impacts a recession could have on financial crime levels now.
Data from the last global recession indicates that financial crime and crime generally can go up during a recession. The first 6 months of 2009 for example had the highest fraud rate observed to that point in KPMG’s Fraud Barometer, and 36% of senior executives reported to Kroll that they believed fraud risks had increased due to the recession.
One report from the World Economic Forum indicated that, for young people struggling to find employment during a recession, the arrest rate increases by 10.2%. The difficulties in pursuing legitimate employment make criminal enterprise more attractive; what’s worse - once involved in criminal activity, it can be very difficult for these individuals to leave, making the level of recession-rooted crime increase further.
When thinking about financial crime contingency planning in the face of coronavirus, we need to think even bigger than just the short term impacts and start evaluating what our response will be in the face of possible recession. This also includes considering what typologies may evolve or proliferate, such as benefit fraud as more people apply for unemployment.
What You Can Do
There is a lot of uncertainty out there in the face of coronavirus, and we will benefit as an industry by working collaboratively to tackle financial crime challenges as they occur. The below are just a few tips and tricks for how to tackle coronavirus as a financial crime threat:
Reconsider your BSA/AML risk assessment. Which inherent risks are more or less impactful in the face of coronavirus? Which controls might be weakened?
Evaluate whether your second line controls can provide the same level assurance in the current situation. For where external expertise is needed, work with digitally-focused consultancies who can easily support you remotely.
Check up on your internal fraud procedures, to ensure strong whistleblowing protocols are in place, as well as appropriate access rights and 4 eyes checks.
Increase staff engagement through financial crime catch ups, remote training and clear lines of communication.
Don’t stop contingency planning, and add a potential recession to the list of events you’re planning for.
We are working hard with the FinTech FinCrime Exchange community to learn more about what specific steps the international FinTech sector is taking in response to coronavirus as part of their contingency planning. Stay tuned for future insights.
If you have questions about how your business should proactively take on financial crime in the context of coronavirus, reach out to Megan Millard or Meredith Beeston.