COVID-19: beware of heightened AML risks

The Financial Action Task Force (FATF) recently published a report (PDF) on COVID-19-related money laundering and terrorist financing risks, and the possible policy responses ('the report').

COVID-19's impact on AML/CFT regimes

The report suggests that the COVID-19 pandemic is impacting the ability of governments and those in the private sector to effectively fulfil their anti-money laundering (AML) and counter-terrorist financing (CFT) obligations. In many instances employees involved with AML and CFT compliance are working remotely, have been re-allocated to COVID-19 response teams or are not working at all. 

As such, the FATF has identified a number of areas of AML/CFT operations that may be compromised, including the following:

• Supervision – some authorities have reduced reporting to risk-based or higher thresholds, and sanctions and remedial decisions have been postponed.
• Policy reform – suspended meetings and prioritisation of emergency measures has delayed progress of new AML/CFT policy or legislative initiatives.
• Suspicious transaction reports – reporting extensions and delays in the processing of reports in jurisdictions with paper-based reporting systems.
• Financial intelligence units (FIUs) – anecdotal reports suggest FIUs in lower capacity countries are significantly reducing their operations or ceasing them completely;
• International co-operation – delays in co-operation could be exacerbated by the global changes to working practices. Delays are already being experienced when it comes to formal processes such as mutual legal assistance.
• Law enforcement authorities – diversion of resources to the COVID-19 response in high-risk, poorly resourced countries may embolden terrorist financing activities.
• Private sector – although financial institutions have implemented business continuity plans in response to the crisis, the FATF believes that there is a risk that they may re-prioritise AML/CFT efforts in favour of broader prudential and stability measures.

Evolving AML/CFT risks 

The decline in trade and extensive travel restrictions that have been experienced globally as a result of COVID-19 are likely to impede conventional, transnational organised crime schemes. 

Despite this, firms need to stay alert to the new opportunities that criminals may exploit in the current circumstances because of the impact on AML regimes (mentioned above) and the measures taken by governments and organisations to adapt to the ‘new normal’. 

Emerging risks identified include the following:

• Bypassing client due diligence (CDD) measures – many banks have closed branches or limited face-to-face services in response to the COVID-19 outbreak which has led to an increase in online banking activities. Certain institutions may be ill-equipped to complete adequate and timely CDD procedures remotely; criminals may exploit any weaknesses in the onboarding process or ongoing due diligence.
• Exploitation of economic stimulus and emergency measures – the various means of emergency economic support being provided by governments and insolvency schemes could be used as a means of concealing and laundering illicit funds.
• Increased use of the unregulated financial sector – in previous economic downturns individuals have moved money out of the banking system and into the unregulated financial sector, creating additional opportunities for the laundering of illicit funds.
• Increase of physical transactions – the volatility of securities values can lead to individuals liquidating their portfolios which, in turn, may lead to an increase in substantial cash withdrawals that could be used to purchase hard to trace assets, be re-deposited once the markets stabilise to conceal laundering, or encourage cash-out schemes.

What steps can financial services firms take?

Although the report focuses on actions public authorities could take, financial institutions can use the recommendations to identify possible measures to minimise their exposure to the emerging risks. These include the following:

• Adapting CDD procedures – firms must continue to ensure that adequate CDD is completed. However, they should review their existing framework and consider whether any amendments need to be made to address widespread changes in working practices and social distancing measures. For example, the report encourages responsible use of risk-based due diligence measures and digital identity and other solutions for identifying and onboarding customers. Specifically, it notes that non-face-to-face onboarding and transactions conducted using trustworthy digital ID are not necessarily high-risk; they can be standard or even lower-risk.
• Engage with the relevant regulatory authorities – firms should look to proactively engage with regulatory authorities, identifying any issues they encounter with the application of their AML/CFT procedures or satisfaction of regulatory requirements as a result of the impact of COVID-19.
• Monitor and prioritise AML and CFT risk – the report notes that trends emerging from COVID-19 are still in the early stages of identification. Firms should therefore continue to monitor and assess how AML/CFT risks are evolving as the global response to the pandemic develops and adapt their controls accordingly. While, of course, they will be faced with additional and challenges in the wake of the human and economic impact of COVID-19, firms should, wherever possible, resist re-prioritising AML and CFT actions.