As COVID-19 continues to impact financial systems around the globe, early reports are emerging on how the pandemic is affecting financial crime management programs. Financial institutions should have processes in place to minimize the impact of a pandemic and ensure the continuity of financial services. Industry agencies are urging institutions to remain vigilant in monitoring for rising fraud schemes and reporting of potentially suspicious activity capitalizing on consumer fear surrounding COVID-19.
While the pandemic has compelled financial institutions to adopt new business-as-usual processes, these changes have caused challenges for fraud, anti-money laundering (AML) and compliance programs at institutions of all asset sizes. As industry expert Jim Richards explains, the ability of institutions to adapt to this evolving situation depends on their size, complexity and preparedness.
“The reality is that three-quarters of banks in the United States have fewer than 100 employees in total, so regardless of their level of preparedness, they don’t have the luxury of shifting, say, ten people from their AML team to augment their twenty-person fraud team. For the vast majority of banks in the U.S., it’s about how their 2- to 5-person compliance and risk team can work smarter and more efficiently to protect the most vulnerable people.”
– Jim Richards, Founder and Principle of RegTech Consulting
On April 3, the Financial Crimes Enforcement Network (FinCEN) released an updated COVID-19 Notice providing additional information to assist financial institutions in complying with their Bank Secrecy Act (BSA) obligations during the COVID-19 pandemic. The Notice explains that financial institutions should continue following “a risk-based approach” and “diligently adhere to their BSA obligations.”
But there are a number of challenges that all institutions share, despite their differences in scale, including staff working from home, changing customer behavior, and a rise in pandemic-related fraud schemes.
Staff Shift to Work from Home
“Financial institutions are being forced to reevaluate their risk-based approaches to AML — the ways their people and systems are deployed — as they work to address the greatest financial crime threats in the face of the pandemic.”
–Sarah Beth Felix, Palmera Consulting LLC
Many institutions are encouraging employees to work from home to reduce the spread of COVID-19. Remote working is having an impact on operational efficiency and productivity, and is creating a host of challenges for financial institution staff who are “straining networking capabilities and business-continuity plans and [even challenging] cybersecurity defenses.” New challenges for institutions include:
- Adapting to a New Normal: the emotional toll on employees during this time of crisis cannot be understated. Health and safety concerns, family responsibilities, and adapting to a new remote working environment can place added stress on employees.
- Working with Less: with more employees working from home with varying levels of availability, some financial institutions are struggling to manage and maintain processes with limited resources for transaction monitoring, due diligence reviews, and fraud management.
- Managing Manual Processes: depending on an institution’s size and systems, many AML and compliance programs rely on manual processes or lack the technological resources to adapt business practices to remote working environments. These limitations can hinder investigative workflows, risk assessments, and reporting potentially fraudulent or suspicious behavior.
- Accessing Secure Systems: when working from home, financial crime management teams may have difficulties securely connecting to investigative systems or navigating multiple programs. Employees may need to travel to the office if they are limited by manual investigation tools, or lack adequate means to perform required compliance functions or file regulatory reports.
Changing Customer Behavior
In response to the need for physical distancing and with many financial institutions closing locations, customer activity has shifted away from in-person transactions to digital channels and online banking. This shift in customer behavior has introduced several challenges for financial crime management programs:
- Going Digital: with more people sheltering at home, now more than ever customers are moving their banking to online channels. With less in-branch and cash transactions and a shift to online, mobile banking and digital transfers — expected activity has changed for individuals and businesses. These changes in customer behavior can have an impact on transaction monitoring processes and alerting systems. Financial institutions need to be diligent in their monitoring efforts and distinguishing legitimate activity from potential fraud.
- Raising Limits: many institutions are increasing daily transaction limits to meet the increased consumer demand for additional cash, card purchases, and transfers during the pandemic. Financial institutions must weigh the needs of customers against the added risk that these allowances may pose. As institutions strive to support customers during this time, it is necessary for financial crime management programs to ensure that illicit activity is not slipping through the cracks.
- Hoarding Cash: in stark contrast to the decline in cash transactions, fear is driving a surge in “mattress banking”; institutions are reporting dramatic increases in large cash withdrawals by concerned consumers. As a result, strained compliance programs must also keep pace with a rise in Currency Transaction Report (CTR) filings.
- Increasing False Positives: changing customer behavior can increase false positives for fraud and AML compliance professionals to review. Programs with limited resources using conventional rules-based systems may find it challenging to manage the added workload that false positives can create, while ensuring effective monitoring for suspicious activity.
Fighting Fraud, Protecting the Vulnerable
“As older Americans appear to be at a greater risk for and disproportionately impacted by coronavirus (COVID-19), we are concerned that there will be a corresponding increase in the number of COVID-19 scams on U.S. consumers and specifically our senior population.”
– Letter from Patrick McHenry et al., United States House of Representatives Committee on Financial Services
As fraud schemes capitalizing on the COVID-19 pandemic rise, it is critical for institutions to identify fraudulent and potentially suspicious activity. Institutions should actively monitor for emerging trends that may target them and their customers:
- Detecting Disaster-Related Fraud: As noted in the 2017 FinCEN Advisory to Financial Institutions Regarding Disaster-Related Fraud, institutions need to be prepared for an increase in potentially fraudulent transactions during times of crisis, including benefits fraud, charities fraud, and cyber-related fraud.
- Preventing Losses from Scams: the pandemic has emboldened fraudsters to commit opportunistic crimes while processes and resources at financial institutions are strained. Many of the identified fraudulent schemes are based on known fraud tactics, but prey on consumer fear surrounding COVID-19 to facilitate the crimes, such as Business Email Compromise (BEC) fraud, information technology fraud, phishing scams, provider scams, testing scams, supply scams, charity scams and investment scams.
- Protecting Elderly Customers: institutions are being urged by industry agencies to be vigilant in transaction monitoring to protect vulnerable consumers during this crisis: “In light of the evolving nature of the coronavirus, there is an increased level of fear and subsequent vulnerability to fraudulent schemes. We are particularly concerned that bad actors will use this as an opportunity to take advantage of seniors.”
- Reporting on COVID-19 Trends and Losses: as criminals continue to capitalize on the COVID-19 pandemic, fraud management teams must track and report this activity to senior management. Detailed reporting of trends, losses, system performance and workforce efforts is critical to understanding the full impact of the crisis on a financial institution. Detailed case management and reporting will help institutions plan ahead to improve fraud risk management and mitigation efforts.
Banks and Credit Unions Rise to the Challenge
The impact of the COVID-19 crisis is far-reaching and will continue to effect financial institutions into the foreseeable future. Institutions must continue to ensure the health and safety of their employees and customers, while maintaining the stability of the financial system, protecting vulnerable consumers, and managing and mitigating the risks of money laundering and fraud losses.
FinCEN’s April 3 Notice has again encouraged “financial institutions to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their BSA/anti-money laundering compliance obligations, in order to further strengthen the financial system against illicit financial activity and other related fraud.”
While financial crime management programs are rising to the challenges of the COVID-19 crisis, the true health of fraud and AML programs will be measured once financial institutions’ operations return to normal.