The anti-money laundering, or AML, field continues to evolve and grow more complex. The pandemic has shown how fraudsters exploit emergencies. Climate change will exacerbate disaster-related fraud and abuse and drive mass migration. Economic inequality, political instability, and the rise of domestic violent extremism can lead to suspicious activity that financial institutions, or FIs, should monitor and report on. Tax evasion remains a common theme across these changing risk types. Innovations in technology, payment systems, and digital assets have the potential to both mitigate and exacerbate these risks. FIs assessing money laundering exposure should seek to understand the underlying drivers of those risks as they design programs commensurate with their size and complexity.
Pandemic and Disasters
The Covid pandemic drastically impacted the AML field. FIs had to distinguish potentially suspicious activity from that which was abnormal but benign during unprecedented and unpredictable times. In addition to driving massive shifts in economic activity for consumers and producers, the pandemic showed what experts had long forewarned: Fraudsters, criminals, and charlatans exploit disasters.
Following Hurricane Katrina in 2005, the Department of Justice formed the National Center for Disaster Fraud to “improve and further the detection, prevention, investigation, and prosecution of fraud related to natural and man-made disasters, and to advocate for the victims of such fraud.”
After Hurricanes Harvey and Irma in 2017, the Financial Crimes Enforcement Network, or FinCEN, Advisory to Financial Institutions Regarding Disaster-Related Fraud highlighted the risk of fraud related to benefits (including abuse of emergency assistance checks), charities (including emergence of illegitimate organizations), and cyber (including use of phishing and malware and exploitation of crowdfunding platforms).
The Covid pandemic has seen a surge of illegal activity, ranging across Paycheck Protection Program loan fraud, price gouging, counterfeit vaccine cards, insurance fraud, bogus medical treatments, and others. AML officers have been reporting these cases and more.
Climate change will cause more frequent and destructive disasters, from hurricanes and sea-level rise to droughts and wildfires. Disaster relief, in turn, will result in continued fraud and abuse. Longer-term aspects might be less acute but no less significant and will affect FIs’ ability to detect criminal activity. These include mass migration from climate hotspots to areas of relative safety, resulting in changes to the geography of cross-border remittances from the displaced diaspora while causing a growing segment of the population to remain under-banked. These factors alone will complicate the task of identifying risky customers and transactions.
Instability and Violent Extremism
The international political environment has seen continuations of longstanding instability, such as the tense relationships between the U.S./EU and Russia, China—including its own domestic economic situation, Iran, and North Korea; to localized instability in Afghanistan, Yemen, Haiti, and the border crisis between Armenia and Azerbaijan, to name a few. Sanctions administrators such as OFAC have made substantial additions to their lists of specially designated nationals, and this trend does not appear to be letting up, despite the Treasury’s 2021 Sanctions Review. FIs that have footprints in, or customers that interact with counterparties in, hotspots should be particularly careful.
Following the attacks of Sept. 11, 2001, AML programs integrated detection and investigation of terrorist financing through screening for OFAC-sanctioned parties and monitoring transactions involving regional hotspots, among others. Those efforts focused primarily on international terrorism. The rise of domestic violent extremism shows that the risks can be homegrown. FinCEN highlighted domestic terrorism as a focus area in its Anti-Money Laundering and Countering the Financing of Terrorism National Priorities, a factor likely to be exacerbated by widening economic inequality and persistent political instability. AML officers should consider these threats in designing their institutions’ programs.
Cybersecurity and Ransomware
Recent ransomware attacks, such as those targeting hospitals and fuel pipelines, pose national security threats. FIs can be targeted directly, or downstream when communities are affected, or even used to facilitate ransomware payments. Given that ransomware payments go to criminal enterprises, facilitating such payments poses significant AML and sanctions risks to firms, as highlighted by both FinCEN and OFAC advisories. FinCEN recently reported that the number of Suspicious Activity Reports related to ransomware activity was increasing rapidly, with the first six months of 2021 seeing 30% more such reports than in all of 2020. Firms should remain vigilant to cybersecurity threats and have processes in place to mitigate and report potential attacks.
Tax Evasion and Money Laundering
Like the Panama Papers and Paradise Papers, the ICIJ’s Pandora Papers highlighted the intersection of money laundering, potentially suspicious activity, and tax evasion. Most AML programs consider the risk posed by customers located in higher-risk jurisdictions internationally, but the Pandora Papers highlighted that some of these areas are, in fact, domestic. Firms should consider the risk posed by tax evasion, including customers located in areas with histories of lower transparency, as a key component of their compliance programs.
Emerging Tech and Payment Systems
The pandemic hastened an already increasing trend toward digitalization. New technologies and payment systems, including those that use digital assets and cryptocurrencies, have the potential to both mitigate and introduce risks. Innovation has led to advanced machine-learning techniques to prevent and detect money laundering, while blockchain offers unparalleled insight into past transactions and payment trails. The mainstreaming of digital assets, often subject to nascent or uneven regulation and oversight, has led firms to invest heavily in compliance skills and technology to address risks. The ease with which many of these technologies facilitate rapid, cross-border transfers adds risks. Firms will need to understand their potential exposure and how innovation in these technologies could impact their business in the future.
Doing More With Less
Despite these emerging and persistent risks, other challenges exist. AML programs long have been seen as inefficient and, despite the efforts of dedicated professionals, have limited effectiveness. Cost pressures and competing demands impact resource allocations across people, processes, and technology—and between AML and other risk and compliance disciplines. This dynamic is all too familiar to compliance officers. One way for an institution to address this is to gain a deeper understanding of the underlying drivers of the risks it faces and the extent to which it is exposed to those drivers. Getting that assessment right will help it to build a sustainable program that reflects the firm’s size, complexity, and ever-changing risk profile.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Christopher Sidler is a managing director and a leader of Berkeley Research Group (BRG)’s Financial Institution Advisory practice. Christopher specializes in financial crime compliance, with a focus on Bank Secrecy Act/anti-money laundering (BSA/AML), sanctions, export controls, fraud, and anti-bribery and corruption.
Deb Bonosconi is a managing director and a leader of BRG’s Financial Institution Advisory practice. Deb advises clients on a variety of regulatory, enforcement, and compliance matters, with an emphasis on BSA/AML, Office of Foreign Assets Control, and risk-focused services.
Valtteri Tamminen is a Senior Associate in the Financial Institution Advisory practice at BRG.
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