Further to its communication published last month, the Financial Action Task Force (FATF) has now published a report into COVID-19-associated money laundering (ML) and terrorist financing (TF) risks and expected policy responses.
Key ML/TF risks
The report identified the following key ML and TF risks:
- Increased remote transactions – given the closure of many physical branches, there is an increase in use of online services and banks’ ability to adequately verify their customers has been limited if not postponed. In particular, some of these institutions are not adequately equipped to make use of any online verification tools and there is a risk they may on board customers who have not been subject to a satisfactory or sufficient customer due diligence (CDD) screening.
- Unfamiliarity with online platforms – certain customers, such as the elderly or low-income groups, may not be as familiar with online banking platforms. This may make them more susceptible to fraud, and FATF notes there has been an increase in bank fraud incidents targeting account or financial information.
- Increased use of unregulated financial services – this is a recurrent theme which has been observed during the past economic crises. Individuals struggling financially may turn to alternative, unlicensed lenders, which may include criminal groups. This may then be overlooked by the traditional financial institutions which are preoccupied with maintaining business continuity leading to potentially not identifying suspicious transactions as promptly.
- Economic downturn – criminals may be turning to investing their money in real estate or troubled businesses to generate cash and launder illicit proceeds. They may also seek to restructure their lines of credit or existing loans to introduce criminal proceeds into the economy. In addition, existing struggling businesses may increasingly divert their budget away from combatting ML/TF as they seek to survive.
- Increased physical transactions – individuals have been seen to liquidate their portfolios, transferring large amounts of funds electronically and withdrawing substantial cash sums which can be:
- used to purchase less traceable assets, such as gold;
- redeposited once the economy stabilises; or
- a result of a cash-out scheme, where criminals take control over individual’s bank account.
Local government responses
FATF continues to call on individual governments to continue communicating and cooperating with the private sector in relation to those ML/TF risks and how they can be addressed. FATF has noticed governments’ efforts to tackle ML/TF, ML/TF supervisory visits, enforcement actions as well as policy initiatives being postponed or put on hold with focus being limited to business continuity. Local supervisory, enforcement authorities and financial intelligence units are being encouraged to share information and intelligence with the sector in relation to emerging or increasing ML/TF risks and to publish policies to reinforce their expectations.
What firms could do
Nevertheless, there are certain things firms could already do to minimise their exposure to ML/TF risks:
- Make full use of a risk-based approach to CDD and (reliable) digital identification solutions to the extent possible.
- Appreciate the new and recurring ML/TF risks and seek to adjust their operational responses or at least, focus their efforts on increasing the AML/CTF monitoring of the customers they have identified as most vulnerable in this challenging environment.
- Engage in information sharing with their peers, particularly where suspicious activity is involved, suspicious activity report needs to be submitted to the National Crime Agency and there is evidence of suspicious funds or the activity being linked to other financial institutions.
We expect this report will encourage local supervisors, including the Financial Conduct Authority in the UK, to engage with the financial services sector and provide the much needed guidance in the nearer future.