COVID-19: A perfect storm for the corrupt?
New and old money laundering risks during the coronavirus pandemic
Around the world, governments are intensifying their efforts to combat the global spread of the coronavirus by enacting various measures to support public health systems, safeguard the economy and to ensure the safety of citizens.
At the same time, criminals have been quick to seize opportunities to exploit the crisis.
The European Banking Authority has advised that while most economies are facing a downturn and financial flows are likely to diminish, “experience from past crises suggests that in many cases, illicit finance will continue to flow.”
In the European Union, supervisory authorities in several countries have already alerted financial institutions to increased money laundering risks linked to the pandemic. They have warned of the ‘new’ modus operandi of opportunistic criminals who may take advantage of the crisis to make short-term gains. Europol’s initial analysis of current developments shows an increase in cybercrime, fraud and trading of counterfeit goods.
In the United States, the Financial Crimes Enforcement Network (FinCEN) is monitoring new tendencies in financial crime during the COVID-19 crisis. Investment scams, product scams and insider trading have been identified as key emerging trends.
No rest for the wicked
But it is not only fraudsters and organised crime groups who could take advantage of the pandemic. Corrupt officials and businesses have the perfect combination in place:
· more opportunities for rent-seeking, as more domestic and foreign resources are made available to fight the pandemic;
· more discretion in decision-making and allocation of resources;
· less transparency and accountability mechanisms;
· limited supervision and enforcement.
Given the gaps and weaknesses in anti-money laundering systems of various countries, it is likely that corrupt individuals will continue to rely on existing mechanisms and networks to make bribe payments, as well as hide and launder the proceeds of corruption — particularly while they assume resources and attention are focused elsewhere.
Adjusting anti-money laundering practices in times of crisis
Due to the pandemic and lock-down, financial institutions are facing major operational challenges that could impact their ability to conduct checks and report suspicious transactions. Regulators from Australia to Canada have underscored their expectations that banks continue to meet their anti-money laundering obligations, in particular the monitoring and reporting of suspicious transactions related to COVID-19. Meanwhile, supervision, reporting deadlines and due diligence requirements have been relaxed.
In the Bahamas, for instance, the duties of financial institutions under the Register of Beneficial Ownership Act 2018 have been temporarily suspended as a result of commerce-related restrictions triggered by COVID-19.
At the same time, national supervisors are encouraged to adjust supervisory practices in a pragmatic and risk-sensitive way. Some suggestions include, for example, postponing on-site examinations where not deemed essential, by making greater use of virtual meetings and inspections, and delaying reporting obligations. The Financial Action Task Force’s (FATF) response to COVID-19 emphasises the importance of risk-based supervision at this moment to ensure authorities use their resources wisely.
The FATF also encouraged financial institutions and others to make use of technology, including Fintech (delivery of financial services), Regtech (complying with regulatory requirements) and Suptech (supervision of financial institutions) to the fullest extent possible. While this is understandable given the current circumstances, the risks in these sectors are still largely unknown to both financial institutions and supervisors. Additionally, mitigation strategies might not be in place in most countries. Therefore, a sudden shift in approach could entail additional risks and end up facilitating money laundering.
If these adjustments are not made with an astute appreciation of broader risks brought by the pandemic, it will be much more difficult to follow the money and hold the corrupt to account once the crisis is over.
Less information, less ability to detect crimes
In addition to reduced access to information from financial institutions and supervisory reviews, changes to reporting requirements by companies could have an impact on the ability of competent authorities, as well as activists and the media, to detect and uncover criminal activities during this time.
In the United Kingdom, for example, the deadline to submit company annual accounts to the company register has been extended.
Keeping resources where they belong
A recent paper published by the World Bank suggests that previous aid disbursements have triggered significant money flows to offshore bank accounts. To prevent this from happening with funds that should be going towards fighting the pandemic, Transparency International has been calling on multilateral bodies, such as the IMF and the World Bank, the G20 and other countries negotiating emergency rescue packages to ensure that funds are disbursed and managed in a transparent manner. This is essential for ensuring accountability can happen when the turmoil passes.
Countries should ensure that the measures they take now related to financial crime and money laundering are supportive of these efforts and do not ignore the risks related to corruption.
It is essential that financial institutions and supervisory authorities stop opportunistic criminals and protect citizens from cybercrime and fraud. However, this should not come at the expense of regular due diligence and enforcement actions that would help detecting and stopping corrupt money flows.
Financial institutions and other professional enablers should keep their eyes wide open to more ‘traditional’ approaches to money laundering, particularly involving shell companies and high-risk customers and jurisdictions.
Now more than ever, global financial centres should strengthen their systems to ensure that secrecy in company ownership, banking and other sectors are not enabling the misuse of much needed resources.
Moreover, more support, from advanced economies as well as intergovernmental bodies, should be given to financial intelligence units (FIUs) and other relevant competent authorities in countries with less capacity. This will help ensure that poorer countries are able to identify patterns and red flags and prevent dirty money from entering or leaving their countries. Increased communication and information-sharing between FIUs and other competent authorities — both formally and informally — will be crucial to ensure that the limited resources available during this time are used effectively and efficiently.
Exceptional times require exceptional measures, but these should never be used as excuse to relax obligations and cut costs in key areas. The failure to stop the flow of dirty money now will have both short-term and long-term consequences. It will affect the ability of countries to save lives and the economy. Ultimately, illicit financial flows during this crisis, and at any time, will lead to further decline in institutional capacity, trust in government and the rule of law.
