The pandemic has reshaped nearly every aspect of modern society. Schools and workplaces went remote, and social lives all but evaporated as stay-at-home orders went into effect to prevent the spread of COVID-19. The financial world moved largely online as well, with FinTech apps seeing a 72 percent usage increase in Europe. This digital shift was a blessing for financial institutions (FIs) and consumers who were limited in their ability to have face-to-face interactions, but it also piqued the interest of fraudsters, money launderers and other cybercriminals looking to take advantage of the digital influx.
Each new digital banking interaction represents an entry point for bad actors, with even legitimate-seeming users possibly being voluntary or coerced money mules. Banks are instituting new anti-money laundering (AML) and know your customer (KYC) procedures in response, but the financial market’s rapidly changing nature means that what works today may not work tomorrow. Widespread vaccine distribution could result in the health crisis fading away, but the money laundering world may very well be changed forever.
The following Deep Dive explores how the pandemic has changed money launderers’ tactics and the challenges FIs and payment providers face due to the pandemic-related changes that have taken place over the course of the last year.
How The Pandemic Changed Money Laundering
Worries of how the pandemic might accelerate money laundering date back to the early days of the pandemic when shutdowns began in the U.S. and the global economy started its freefall. A number of regulatory bodies, including the Financial Crimes Enforcement Network, the Financial Industry Regulatory Authority, the Securities and Exchange Commission and the Commodity Futures Trading Commission all warned FIs to be on the alert for illicit financial activities, such as money laundering schemes, that leveraged consumers’ economic insecurities. Some of these threats included money launderers exploiting stimulus payments and insolvency relief plans as a means to conceal ill-gotten proceeds, and others targeted the increased use of unregulated FinTech apps to move money around under the government’s nose.
The overall weakening of the economy also revived money laundering opportunities that had previously been used during 2008’s Great Recession. Some criminals invested in failing businesses or bought cheap foreclosed homes with cash to conceal their illicit proceeds, while others moved their funds through financial networks by restructuring their credit or previously held loans. Some individuals who had not previously been money launderers became so for the first time during the pandemic as investors and business owners tried to avoid paying outstanding debts on their failing companies by concealing the existence of funds.
All of these tactics were exacerbated by the fact that businesses and banks had less funds to devote to AML/KYC programs and ultimately catch launderers in the act. Many FIs were more successful in their compliance than ever before despite these challenges, however.
The Challenges AML/KYC Teams Face
The pandemic not only augmented fraudsters’ abilities to stage money laundering schemes but also hampered FIs’ abilities to fight them. One survey found that 42 percent of compliance departments had issues accessing information sources for KYC due diligence, and 41 percent faced difficulties in providing timely account onboarding. These were largely driven by remote working protocols designed to reduce the risk of exposure that had the unfortunate side effect of negatively impacting KYC preparedness.
Banks are devoting immense resources to meeting pandemic-induced AML/KYC challenges. Seventy-nine percent of FIs said that compliance spend has increased, with 68 percent of these budgets going toward technology solutions and 32 percent being devoted to hiring and training AML staff.
These investments seem to be paying off. AML compliance fines in the United Kingdom reached £36.6 million (approximately $47.6 million) during the first half of 2020 — a decline from 2019, when the year-end total clocked in at £98.2 million (approximately $127.9 million). The U.S. accounted for just 12 percent of the worldwide total of AML fines in 2020 as opposed to its 45 percent share in 2019 and 58 percent in 2018. Experts attribute this decrease not to American banks being better at AML, but to record-breaking fines imposed elsewhere around the world that dwarfed those of the U.S.
Nobody knows what the world will look like as vaccination strategies continue to roll out, but AML/KYC professionals will need to stay on their toes and adapt to any new threats that emerge. Failure to anticipate and counter evolving money laundering tactics could make the pandemic’s AML challenges look simple in comparison.
Selected by EFXA