Covid-19 Financial & Crime

The Covid-19 pandemic has led to unprecedented global challenges，human suffering and economic disruption. The global community is sparing no effort to combat the spread of the coronavirus by enhancing public health systems，minimizing economic damage and ensuring public safety and order. The coronavirus has caused widespread disruption to international financial markets and provided favourable climate for generating and laundering illegal proceeds. Criminals have been agile to grab opportunities to exploit the crisis. Financial institutions are experiencing compliance challenges linked to the outbreak and government resources have been reprioritized in the effort to respond to the challenges of the coronavirus.

Limitations to Customer Due Diligence

Many banks have closed their physical branches，shortened their business day or limited in-person financial services. Such challenges currently facing banking practitioners encompass the difficulties associated with undertaking customer due diligence (CDD)，including appropriate levels of identification and verification –- particularly where on-site inspections are suspended and customers cannot be met face-to-face. According to the recommendations of the Financial Action Task Force (FATF)，a global standard setter on anti-money laundering，financial institutions are obliged to put appropriate due diligence procedures in place to prevent customers from opening accounts anonymously or under fictitious names. These due diligence measures should be taken whenever a financial institution begins a new business relationship，when certain types of transactions take place，and when there is suspicion of money laundering or indeed any doubts about a customer's identity. Many money laundering indicators such as a client exhibiting nervous behavior or taking a defensive stance to questioning can only be caught in face-to-face meetings. Under such non-face-to-face circumstances，banking practitioners are deprived of the aid of on-site inspection or in-person communication with customers. The lack of face-to-face interaction and inability to view a client's body gestures or facial expression results in lost opportunities to detect suspicious criminals. Additionally，when banks turn to regulatory authorities for supervisory advice on CDD，they may face "a much slower process" in dealing with their regulators in such a lockdown period where regulatory agencies are shorthanded just like financial institutions.

Surge in Cash Transactions

"People are withdrawing hard currency in a state of panic," said a compliance expert from the Financial Crime Enforcement Network (FinCEN)，a bureau of the US Department of the Treasury. On account of the closedown of a substantial number of bank branches and the shifting of financial services online，many senior citizens who have never used digital banking services have tended to hold cash and this has brought a sharp increase in cash withdrawals. When the elderly get used to on-line banking after several months of engagement，together with an influx of people using digital banking services，people are inclined to re-deposit cash for interest income and the convenience that online banking brings: real-time access to their cash positions and payment with a simple mouse click. In the meantime，criminals exploiting the pandemic and an economic downturn move into cash-intensive and high-liquidity lines of business，both for operating funds for illegal activities and the laundering of illicit proceeds. Large movements of cash could provide cover to efforts by criminals to launder illicit funds. Such surges in cash transactions represent intensifying challenges for anti-money laundering compliance than before，in that the increased volume of transaction data is making it more difficult for compliance teams to discern between legal and potentially illegal activities.

Business Continuity Issues Distract from Compliance

At a time of acute economic uncertainty，financial institutions may become preoccupied with business continuity issues，focusing on core operations while still struggling to satisfy regulatory compliance requirements. The financial crisis in 2008 is a good reminder of the need to identify an increasing threat and vulnerabilities of the financial system in such a period. As the former leader of the United Nations Office of Drugs and Crime，Antonio Maria Costa declared that during the 2008 financial crisis，banks became desperate for cash and allowed the transnational mafia's drug money to enter the financial system. Banking staff were being pressured to forego necessary due diligence checks or to speed up the process. With the shift to working remotely along with the banking staff's desire to maintain productivity in a time of economic downturn，risks from the failures of anti-money laundering compliance became a distant consideration. As a consequence of a shortfall in appropriate due diligence，banks paved ways for the world's criminal funds to become an integral part of the global economy. Banks tended to go to extremes on CDD during economic downturns: with the appearance of new wealth customers — such as money launderers posing as legitimate companies claiming to have received huge sums of government bailout help — CDD in banking seems to have gone out the window. On the other hand，in a prolonged economic recession，CDD is also simplified — those with financing needs are directly rejected by banks and may seek out alternative lenders，which sometimes includes criminal groups. Such criminal organizations thrive on borrowers in need and have an advantage in "efficient" loan collection.

Hindered Supervision and Enforcement

In an emergency context，resources and attention are focused elsewhere and normal standards for supervision，reporting deadlines and due diligence requirements are loosened. Professionals or working staff in regulatory authorities under "lockdown" or movement restrictions are increasingly turning to online systems to enable remote work. On-site inspections have been postponed or substituted with desk-based inspections，including the use of video conferencing. Under some circumstances，on-site inspections are merely conducted for high-risk sectors or entities. On May 4th this year，the FATF outlined concerns and challenges linked to the pandemic's effect on financial crime in a guidance paper summarizing recommendations and other input from member-states and law enforcement agencies around the world. In the guidance paper，FATF noted that the pandemic has caused governmental delays in taking remedial action to mitigate money laundering risks，such as the imposition of fines for compliance violations. National financial intelligence units in "lower capacity countries are significantly reducing their operations or even shutting down completely."

Money Launderers Adjusting their Modus Operandi

Europe's top banking regulator，the European Banking Authority (EBA)，has singled out the likelihood of international trade as a potential risk. The EBA made clear that banks should scrutinize the background and purpose of unforeseen and unusual activities and transactions to determine whether they give rise to suspicion or whether an economic reason or lawful explanation can be found. "As most economies are facing a downturn，<