Reforming the Response to Financial Crime: Making the Most of a Crisis

In mid-March, the US Financial Intelligence Unit (FinCEN) posted a short news release encouraging financial institutions to remain alert to COVID-19-related illicit financial activity, listing a series of potential scams and the steps FinCEN expects banks to take in response. In the UK, law enforcement agencies have likewise highlighted the range of ways in which the public risks being defrauded at this time of increased stress, including targeting people looking to buy medical supplies online, sending emails offering fake medical support and scamming people who may be vulnerable or increasingly isolated at home, as well making appeals to support bogus charities or people who are ill or suffering financial hardship. Fraudulent text messages offering tax rebates are circulating and websites are offering fraudulent vaccines. And the threat of heightened financial crime triggered by the COVID-19 crisis is real. Evidence of large-scale money laundering linked to pandemic-related scams is already emerging.

In the private sector, banks are equally urging their customers to be alert to the range of scams seeking to defraud them – some state sponsored – as they spend more time shopping online, working from home and anxiously searching the web for goods, medicines and services that are in short supply.

But in addition to seeking to counter the lurking and exploitative criminal threat and the restrictions posed by staff shortages and increased demands on staff time, other challenges are emerging for the public and private sector, challenges that – with vision and leadership – could pave the way for a step-change in the way in which the current anti-financial crime system operates.

Notably, the current environment is exacerbating two existing weaknesses of the system: the inefficiency and ineffectiveness of many customer due diligence processes and requirements; and providing support to the unbanked, an issue that afflicts not only countries with lesser-developed financial sectors, but also a meaningful number of people in advanced economies such as the US.

For the latter, consider, for example, the English pensioner who has drawn her pension in cash from the local post office every week for the past 40 years – she has never had need for a bank account.  Now, she sits in isolation at home, unable to visit the post office, unable to receive her weekly income and few – certainly none if she does not have a smartphone – banks will allow her to open a bank account without a face-to-face meeting, a meeting she is not currently allowed to attend.

For the former, as the corporate clients of banks struggle to stay afloat by applying for loans and other forms of financial support from their bankers, a conundrum will emerge. Will banks have the staff and time available to conduct the ‘know your customer’ (KYC) checks required to ensure that loan applications are appropriate? In many cases, the loans will be guaranteed by the government and thus credit-risk checks are less important, but KYC checks should – in theory – still take place.  We are all familiar with the bureaucratic requests from banks to provide paperwork to prove our identity and bone fides. Companies are equally required to update their bankers with their corporate information on a regular basis, or prior to any form of material transaction. How will this be achieved when staff are working from home or off sick and loans for maintaining cashflow are needed at short notice? As the CEO of Natwest Group has acknowledged, banks are facing huge operational challenges, noting that their call centres that normally take 3,000 calls a day are now receiving 25,000.

Banks will inevitably be torn between taking all the measures demanded by the compliance culture that has developed over the past decade, measures that – in part – are widely viewed as unnecessary but are nonetheless required by supervisors, and the reality of client pressure, staff shortages and increased demands on staff time.

The good news is that key authorities are recognising the challenges posed by these systemic stresses. The Financial Action Task Force, the global standard setter for anti-money laundering, is encouraging ‘the fullest use of responsible digital customer onboarding and delivery of digital financial services in light of social distancing measures’ and exploitation of innovative technologies, along with emphasising the importance of making full use of a ‘risk-based approach’, in other words, using judgement to determine what checks are genuinely needed. It also calls for governments to share information with their private sectors so they can prioritise the deployment of their resources to address key money-laundering risks.

Reflecting this guidance, in response to travel restrictions in the UK, the Financial Conduct Authority has confirmed its willingness for banks to conduct remote KYC checks allowing customer identities to be verified via the submission of scanned documents and the use of videos and ‘selfies’ – still only a solution for those with a smartphone and the necessary technology. And FinCEN is likewise emphasising the importance of a risk-based response to financial crime threats, suspending some reporting obligations and encouraging the implementation of innovation.

Such actions are not confined to developed markets. In his address to the nation in March, President Uhuru Kenyatta of Kenya encouraged the use of cashless transactions such as mobile money to avoid the risk of transmitting the coronavirus via handling cash; he also urged mobile operators and banks to reduce their transaction fees to encourage this switch to cashless payments.

As the global financial sector and its supervisors grapple with the immense challenges posed by the pandemic, all are being forced to take action to make processes more flexible and efficient, actions that – in many cases – have been resisted or made only glacial progress until now. The answers and solutions exist. The use of technology to make due diligence checks more efficient and less onerous must be incentivised; the embedding of genuinely risk-based responses to financial crime – at banks and with their supervisors – rather than the perpetuation of ‘compliance for compliance sake’ must be encouraged; and the revolutionising of unnecessarily burdensome and restrictive regulatory environments must be expedited. What is now needed is a concerted effort to ensure that the tragic catalyst that has led to the rapid recent reassessment of ‘what matters’ in fighting financial crime is grasped and the opportunity to improve the system permanently is not allowed to pass.

The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.