Is a Pandemic the Prime Time for Scammers? Money Laundering in the Age of Covid-19

HodlX Guest Post

Covid-19 has brought numerous challenges to the global community – economic recession, surging unemployment and financial instability. Consequently, we witness new threats arising in the money laundering sphere and criminal activity becoming more and more sophisticated.

The AMLSafe team has researched a few related issues.

• How Covid-19 has changed financial behavior and the scope of financial crimes
• Types of criminal activity, new vulnerabilities and threats that have appeared in the money laundering and terrorism financing sphere
• Challenges for the authorized controlling bodies in the new conditions
• Ways to manage the exposure and vulnerability, and recommendations directed to minimize the risks and negative consequences of criminal activity

We have also paid attention to the issue of virtual assets. In preparation for this material, we have used various documents published by the Financial Action Task Force (FATF) on money laundering, local representative offices and other authorized bodies.

Trends in public financial behavior

It is worth pointing out the following tendencies in the changes in financial behavior.

• The number of remotely performed transactions has grown significantly
• Users lack experience in using online platforms
• Users resort to unregulated services

A growing number of remotely performed transactions

Widespread lockdowns and other limitations have caused many banks and financial organizations to limit their performance or switch to remote work. This has been reflected in user behavior, as well as public fiscal activity patterns. Many standard operating procedures for banks, including identity verification, have been moved online, which clearly does not contradict the risk-based approach to money laundering and terrorism financing risk assessment. However, FAFT points out that not all financial institutions are equipped with the tools necessary for such identity verification.

Insufficient experience in using online platforms

Certain demographic groups, especially the elderly population and citizens from remote regions, often lack even the basic skills needed to use online platforms. That makes them especially vulnerable and exposed to fraudulent activity. According to regulators, the number of recent online financial fraud cases has grown dramatically.

Widespread use of unregulated services

This pattern became widespread due to lower profit gains among the general public. People that go through financial hurdles often resort to non-traditional or unlicensed money lenders, including criminal groups. The latter often include illegal profiteers working within the legal financial system who restructure existing loans and credit lines.

Since the spring of 2020, the crypto industry has become a home base for several landing platforms that allow cryptocurrency loans. This phenomenon has been named “decentralized finance” (DeFi), and we can already see multiple fraudulent projects in this sphere. In the times of pandemic-driven demand for loans, security verification and proper due diligence processes become more and more important.

As Covid-19 caused a sudden surge in crime, including fraud, cybercrime, misuse of public funds and international financial aid, perpetrators have kept inventing new sources of income. The government’s crime prevention measures, driven by the threat of the pandemic, reflect the criminal economy and make offenders adapt to the new environment – driven by the urge to gain profits, they start to differentiate their criminal activity.

Certain criminal behavioral types and trends that developed during the pandemic are not well-studied yet. However, law enforcement agencies have already defined certain indicators of criminal activity and are now working to systematize them. It is worth noting that as of writing, the scope of money laundering activities includes unlawful use of virtual assets for the legalization of illegally acquired funds, as well as misuse of the official banking system.

Before the pandemic started, hackers have been actively using a scheme where they demand BTC payment for restoring the data they had encrypted themselves. It became widespread in 2016 – almost 16% of the “dirty” coins were connected to fraudulent programs like Locky. 2017 has picked up the trend with WannaCry and NotPetya, which held hostage multiple business and hospital systems all over the world. In March 2018, the Atlanta municipality ended up helpless because of a hacker attack demanding a ransom of approximately $51K in Bitcoin.

Now this criminal behavior is getting a new twist and adapting to the new environment. In one of the latest cases, an individual used virtual assets to legalize profit gained from selling counterfeit Covid-19 medicine.

Money laundering threats and vulnerability

More and more criminals are getting creative in getting around online identity verification procedures, which makes it easier to use financial services and virtual assets to move and withhold illegal earnings. To launder them, criminals are now starting to use governmental economic stimulus, as well as insolvency procedures, to their benefit. As you can see, the unregulated financial sector is becoming a welcoming environment for the money launderers in the time of the pandemic.

The economic recession caused by the pandemic has triggered the rise of new highly volatile, cash-operating businesses in developing countries. The Covid-19 pandemic has also impacted the ability of both government and private sectors to perform proper anti-money laundering and combatting the financing of terrorism (AML/CFT) activities. That includes monitoring, regulation, policy reforming, suspicious transaction reporting (STRs) and international cooperation. We are going to take a deep dive into the challenges that arise before the authorities.

Challenges for the authorities in the new environment

Self-isolation and social distancing measures imposed by Covid-19 couldn’t help but affect the anti-money laundering work of the regulators – like many other industries, a lot of staff have now switched to remote work, or have been put on hold indefinitely.

To some extent, when governments try to restructure and set priorities, they end up moving the resources that have been allocated to money laundering and terrorism financing prevention to other spheres like financial stability support, humanitarian help and economic restoration. There are also reasons to believe that countries with limited resources and less stable anti-money laundering agenda will not be able to sustain proper monitoring until the priority gets shifted from reacting to Covid-19.

The pandemic affects a few different spheres of regulatory operation.

• Monitoring. Most FATF members have pointed out that on-site AML/CFT inspections have been postponed or replaced by online meetings and calls. In some cases, only high-risk areas remain subject to on-site inspections. Reporting bodies continue to comply with AML/CFT requirements and provide the requested information to supervisors. Some agencies provide more flexibility in filing reports based on the risk level. At the same time, some states suspended the imposition of fines for violations of AML/CFT, as well as postponed the registration of the new companies.
• Regulation and legislative reforms. Many governmental, non-governmental and international police departments have launched continuity plans and have moved most of their staff to remote work or redeployed them to Covid-19 response measures. In some jurisdictions, this has led to a significant suspension of work on AML/CFT policies and legislative drafts. The situation is aggravated by the fact that there are fewer meetings of legislative bodies – or they are simply focused on pandemic emergency coping measures.

Banks and other reporting bodies continue to file STRs. However, while these reports are normally submitted without interruption, they sometimes get delayed. Moreover, in some cases, STRs are only submitted if certain limits are exceeded. In addition to that, the authorities require reporting bodies to timely notify their supervisors about any obstacles or delays in reports.

It is also worth noting that certain countries are not fully equipped with the necessary software, and the reporting is done in writing – and under the new conditions, this procedure becomes very complicated.

How to manage emerging risks and vulnerabilities

Financial control, monitoring and law enforcement authorities simply cannot afford to stop the procedures connected to identification and monitoring risks in the area of ??money laundering. They are working together in this direction, focusing on providing advice to the private sector (banks, service providers in the field of virtual assets, etc.).

Supervisors and/or FIUs provide reporting bodies with contact details that they can use should they have any issues in meeting regulatory requirements. Providing financial services must comply with all basic requirements of a risk-based approach and implement all means of customer due diligence that are available in the novel environment.

Simplified customer due diligence measures are allowed for cases with low risk. Measures can be applied when accounts are being opened specifically for completing government payments to individuals or legal entities or providing access to digital/contactless payment systems. All monitoring bodies continue to supervise AML/CFT but can adapt their operating procedures to the current situation and act more pragmatically.

How can we minimize risks?

So, the pandemic has forced financial services to move operations online. As a result, both the patterns of behavior of the larger population and money launderers have changed. The population is increasingly resorting to unregulated services for loans, which exposes them to fraud. The perpetrators are using the complexity of monitoring procedures, as well as the due diligence drawbacks of online platforms. While the fight against the pandemic remains a priority, it is getting harder for law enforcement agencies to investigate and catch the criminals.

Of course, government agencies cannot afford to stop supervising and controlling activity; therefore, they are trying to use all available resources and tools. Now that many countries need urgent financial assistance to fight Covid-19, FATF points out the risk of misuse of financial assistance provided to countries – it can be misappropriated by corrupt officials, especially in countries with no rule of law and where the transparency measures have been insufficient.

There are a few suggestions as to combating financial crime

• Coordinated assessment of Covid-19 impact on AML/CFT risks and system conducted by the authorities
• Improving communication with private sector representatives
• A risk-based approach in customer due diligence is recommended

References

1. Methods and trends in AML/CFT risks in Covid-19, FATF
2. Typologies Covid-19, Financial Intelligence Unit – Luxembourg (2020)
3. Guidance on Digital ID, FATF
4. Economic stimulus scammers will be caught, Ministers for the Department of Social Services, Australia (2020)

Slava Demchuck

Certificated anti-money laundering specialist in the crypto industry, member of Blockchain Ukrainian Association. Founder and CEO of AMLSafe and AMLBot.

Featured Image: Shutterstock/Vjacheslav_Kozyrev