AML during Covid-19: no room for complacency

Even common criminals and drug dealers are affected by Covid-19. As lockdowns and quarantines kept almost a third of the human population indoors, violent crime rates dropped drastically all over the world.

Sadly, the same cannot be said about white collar crime, thanks to another after-effect of the pandemic – global recession. AML teams in banks and financial institutions are in for a challenge of unprecedented scale and intensity in 2020 and beyond.

Recession and the “Fraud Triangle”

Though experts differ its potential severity and duration, there is no doubt that the world economy is headed towards one of the worst recessions in decades, or even the last century. With the virus expected to be a threat until a vaccine is found, we don’t have a clear roadmap to recovery.

And this is very bad news from a perspective of fraud prevention, as a recession provides the ideal cocktail of circumstances for proliferation of white-collar crime. The great criminologist Dr. Donald Cressey dubbed it the “fraud triangle.”

While criminals will always find incentives for fraud, loss of livelihood or wealth will pressure hitherto honest folk to resort to desperate measures. The hardships of recession give people an easy way to rationalize criminal behavior. This can lead to a huge spike in instances of financial crimes.

Opportunity comes in the form of sudden change, both in firms and in the economy at large. As workforces are downsized, compliance becomes even more difficult. Billions of dollars flowing into the economy in the form of welfare checks and small business aid also present new opportunities for criminals.

Unique challenges posed by Covid-19

AML teams at larger banks and financial institutions may be less at risk of getting furloughed when compared to smaller firms and compliance teams in other sectors. But their jobs are not made any easier by the coronavirus pandemic.

For instance, lockdowns have forced millions of employees to work from home. Compliance teams working remotely can and will take some hits to productivity and efficiency. Then there is the psychological impact of the pandemic to consider as well.

As banks are forced to close branches due to quarantines and social distancing, there is increased reliance on fintech. This increases digital onboarding and simplified due diligence/KYC, potentially exacerbating the risk of fraud and money laundering.

The impact of changing consumer behaviour

Covid-19 has had an unprecedented impact on the “real” economy – shops, restaurants and offices are closed, and the roads are near empty in many major cities. The loss of freedom of movement has resulted in unprecedented changes in how people access and use banking services.

For instance, a senior citizen suddenly opening a digital account and regularly using it would be a common red flag in pre-Covid times. But thanks to lockdowns, even customers wary of technology are being forced to use it out of sheer necessity.

While on the topic of senior citizens, it is also important to remember that their lives are highly vulnerable to the virus. Sudden increase in mortality among this key demographic could create more avenues for account and insurance-related fraud.

As consumers indulge in highly unusual transactional patters due to the financial crisis, the number of CTRs filed under compliance regimes could spike. Zeroing in on actual instances of criminal activity will become harder still.

All this will undoubtedly require increased vigilance, which may not be possible due to reduced workforce. Automated monitoring rules would need new tweaks and thresholds for better triage of suspicious activity. But such changes will take months to develop and validate.

The nature of fraud under Covid-19

Given the increased activity in fields like healthcare and insurance during a viral pandemic, there is every indication that fraudsters will target these sectors. Ambulance fraud, involved inflated invoices and fraudulent claims, are rising.

As the healthcare sector faces a drastic shortage of essential supplies, scams involving fraudulent or unapproved products have also risen. Investment and product scams related to vaccines or cure for the virus are also rearing their ugly heads.

Imposters claiming to be anything from bank representatives to hospitals claiming treatment bills of relatives, government agencies promising relief payments have all been reported in the last few months. The latter is a serious concern in countries like the US, where the Federal Government has sanctioned billions of dollars to be paid to ordinary citizens and SMEs.

Online data theft is also on the rise, exacerbated by the weakening of firms’ cybersecurity systems. Employees working from home do not have the same level of security as office networks. The plethora of security issues discovered on Zoom, the video conferencing app used by millions, is a case in point.

“Between a rock and a hard place”

The systems that have evolved quickly over the last two decades or so, under the stewardship of FATF and other global agencies have placed increasing responsibility for fraud prevention on the shoulders of banks and financial institutions.

As the economy careens into recession, banks must find ways to balance the overhead with increasing AML duties. Regulators and industry watchdogs in major markets, while supportive, have been quite stark in demanding sustained vigilance. The recent press release by FinCEN in the US is a fitting example.

There are no easy answers, especially for smaller firms that are more vulnerable to the economic tremors. Technology, in the form of AI, e-KYC, and blockchain might offer a way out in the long-term. But increased collaboration and coordination between the AML stakeholders is needed now.

Preetam Kaushik

Journalist/Writer – Published in WIRED, World Economic Forum, Times of India, Economic Times, The Huffington Post and Business Insider.