Sharpen your fraud risk focus

The unprecedented impact of Covid-19 has manifested itself in many ways, not least in changes in the behaviour of individuals, companies and governments. Unfortunately, but perhaps not surprisingly, these changes have created opportunities for criminals to commit crimes and launder their proceeds.

The December 2020 Update: Covid-19-related Money Laundering and Terrorist Financing report from the Financial Action Task Force (FATF) documents myriad case studies that highlight changes in money laundering and terrorist financing activities since the beginning of the pandemic. In the context of ongoing efforts from the authorities and financial intelligence units to harmonise the EU’s anti-money laundering and counter-terrorism financing (AML/CTF) framework, the report is of considerable interest to those working for both credit and financial institutions and designated non-financial business and professions.

Technology increasingly offers effective solutions to address the complexities of evolving AML/CTF regulatory and compliance requirements.

The report details numerous Covid-19-related examples of cybercrime, investment fraud, charity fraud and abuse of economic stimulus measures. One Interpol case study outlines how a Nigerian suspect channelled funds through the Netherlands, via an Irish dealer, generated by fraudulently selling face masks to German health authorities.

Overall, and critical to the effectiveness of the Irish AML/CTF framework, the report emphasises two primary Covid-related sources of increased vulnerabilities to money laundering risks: changing financial behaviour and increased financial and economic volatility.

Risk-based approach

With an FATF national risk assessment expected in 2021, and in the context of the supranational risk assessment compiled by the European Commission setting out the ML/TF risks that apply to the EU as a whole, it is more important than ever for accountants to be aware of their AML/CTF obligations under the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018. Equally important, as advised in FATF’s guidance for the accounting profession, issued in June 2019, is the need to take a risk-based approach to identify, understand, assess and take action against money laundering and terrorist financing.

In terms of changing behaviour, global regulators are on the same or similar pages in their response to the pandemic. They have collectively acknowledged the critical need for continuity in the financial services industry, and many regulators (including the Central Bank of Ireland) have published guidance for financial institutions to consider. Specifically, regulators have encouraged the use of remote onboarding processes and flexible measures to identify and verify customers.

Technology

In the attempt to balance the benefits of innovation – for example, the very current challenge of regulating of crypto assets – with the protection of consumers and the stability of the financial system, regulators have increasingly endorsed the use of technology solutions.

Ireland is home to a significant number of regtech (regulatory technology) companies. The application of such technologies as machine learning, artificial intelligence  and blockchain increasingly offer effective solutions to address the complexities of evolving AML/CTF regulatory and compliance requirements.

Aside from reputational damage, the financial risks of inadequate or poorly managed AML/CTF programmes are far from trivial. Recent research from Irish regtech Fenergo has found that between October 2018 and December 2019 regulators issued more than US$10bn in enforcement penalties for financial crime-related violations, including AML, KYC (know your customer) and other compliance failures.

Covid-19 has accelerated the digital transformation of more and more of our lives, but manual AML processes in the financial services industry and professional practice continue to present a significant operational burden. The implementation of efficient, end-to-end onboarding processes that leverage the use of tech solutions and automate manual tasks is increasingly more important in optimising AML risk management, and ultimately improving Ireland’s collective response to financial crime prevention.

Regulatory focus

A legacy of Covid-19 is a heightened regulatory focus on AML/CTF and a shift from the traditional rules-based approach to compliance to a more outcome-focused regime. In the near term, the EU is expected to publish AML regulations in 2021, as it harmonises AML directives across the single market. Reform is also expected in the US in the form of the AML Act of 2020, which is currently making its way through the legislative process.

For Ireland, the challenge is to take a holistic approach and engage with all stakeholders in the AML/CTF cycle. Along with the adoption of technology solutions, that will play a crucial role in how we, as an industry, enhance our response to financial crime prevention.