Covid-19 has not fundamentally altered the predicate offenses for money laundering. Fraud is still fraud. Theft is still theft. Yet scam methodologies and money laundering typologies have changed. In this way, Coronavirus could prove to be a catalyst for change in the way regulated entities fight financial crime.
The Coronavirus has been tough for drug traffickers. Global lockdowns closed borders, ports and airports, making it harder for smugglers to move drugs. Criminals also rely on legal trade to camouflage their illegal activities, so as global shipments slowed, drug and cash seizures increased, particularly during the early part of the pandemic.
In the first three months of 2020, the UN Office on Drugs and Crime (UNODC), confiscated 17.5 tonnes of cocaine bound for Europe from South America. In Rotterdam, seizures shot up from 4.1 tonnes in the first quarter of last year to 6.6 tonnes in the same period this year.
It has been a similar story around laundering the proceeds of drug crime. The shuttering of non-essential businesses caused drug money to pile up in Los Angeles, according to the Los Angeles Times. At the start of national lockdowns, federal agents made three seizures in as many weeks in April 2020 that netted more than $1 million in suspected drug proceeds.
With business-as-usual disrupted, drug traffickers had to pivot. They had to find new transportation routes as well as ways to clean their dirty cash. This included new overland routes and new cash-intensive businesses and money mule networks as traditional black-market peso exchanges were at a standstill.
Criminals adapt well
Criminals are frequently well funded, highly skilled and highly motivated. They are not bound by accounting cycles or change approval boards. The epitome of agile development, they do not have to justify activities through endless rounds of committees and internal red tape before releasing it into the wild. The Covid-19 crisis has shown how quickly criminals are able to invent new scams and re-purpose old ones.
Counterfeiting is the biggest single trans-national criminal activity. It likely exceeds US$1 trillion in retail value, according to Global Financial Integrity, a US think tank. This makes it the #1 predicate offence for money laundering — bigger than illegal drug and human trafficking and cybercrime. During the Covid-19 crisis, criminals have prioritised purchase scams involving counterfeit, sub-standard or unlicensed drugs, vaccines, disinfectants, sanitisers and face masks.
Organised crime gangs have also defrauded government Coronavirus support programmes worldwide of billions. The UK National Audit Office has discovered evidence of “significant levels of furlough fraud” totaling more than £3 billion. This was a combination of error, identity theft and employers collecting money on behalf of staff to which they were not entitled.
Similarly, criminals are putting a Covid-19 twist on existing scams. With people locked in and lonely, there is increased opportunity for romance fraud. Scammers have re-purposed advance fee fraud, exploiting people’s financial vulnerability with offers for payday loans and debt consolidation. Or exploiting their generosity with fake charity fund raising scams.
Criminals have capitalized on the increase in online activity to develop tailored malware, ransomware, phishing and other cyberattacks. These include fake links to government stimulus packages, infection rate maps and websites selling personal protective equipment. Human trafficking, exploitation of workers and online child exploitation have also increased during the pandemic, according to FATF.
Money laundering will always be needed
While the contribution of particular predicate offenses to overall levels of criminality may change, Covid-19 has not fundamentally changed the nature of predicate offenses themselves. And money laundering still fulfils a fundamental need. Criminals must launder their criminal proceeds so they appear legitimate and can be enjoyed without fear of detection or confiscation.
Financially motivated crime is pointless without a pay-out. This is precisely the point for financial services professionals. Criminals are abusing the infrastructure of the legitimate economy, whether that is bank accounts, credit cards, shell companies or real estate purchases, to make their illegitimate activity pay. Acquirers and those providing payment acceptance facilities to merchants are at risk from and through their merchants.
Unscrupulous merchants may apply for a payment acceptance account and use it dishonestly to cheat their acquirer or introduce risk to the system. Merchants may also act collusively to allow someone else to commit an attack, for example acting as a shell or front company for another entity or allowing their merchant account tobe used in a trade-based money laundering scam. Attacks by unknown third parties on acquirers or their merchants are also a possibility.
It's time to change
Thirty years on from the first set of FATF Recommendations, the global context for money laundering is different. Coronavirus has changed it still further in a potentially significant way. Increased public borrowing, rising unemployment, falling economic output, negative growth rates and the very real, human consequences of this perfect storm could bring about a renewed focus on financial crime.
The ‘follow the money’ principle still applies when national and personal finances are spread thin, perhaps even more so. Banks, financial institutions and others in the regulated sector are handling the money that makes the world go around at a time when there is less to go around. They could well find themselves under increased scrutiny over their record on, and approach to, dirty money.
Those in the regulated sector must develop the breadth and depth of their capabilities to counter money laundering and terrorist financing threats. To do so, they need to extend their reach beyond their own organization and systems to the digital environment where partners, suppliers, customers and criminals are active.
After all, if organizations keep doing what they have always done, they will keep getting what they have always gotten. That may not be enough to protect their business, reputation and bottom line in the face of changes in regulation, technology and public sentiment around money laundering. It’s time to change.