The new coronavirus pandemic is testing the ability of anti-money laundering (AML) analysts and compliance managers to adjust their methodologies and technology quickly enough to catch criminal activity.
Financial firms must still conduct due diligence when onboarding customers and file suspicious activity reports (SARs) if necessary within 30 to 45 days after an alert is generated from a transaction monitoring system, says the US Treasury’s Financial Crimes Enforcement Network (FinCEN). SARs must also be submitted even if a client isn’t onboarded, if criminal activity is suspected or for an attempted cybersecurity breach, such as phishing.
Many financial technology firms and banks are already accustomed to onboarding customer accounts without a physical presence, so all the remainder will have to do is digitize their new client processes. What will be a bigger change are the warning signs of bad conduct. “What seems like abnormal activity which merits further investigation could be normal and there are new scenarios defining what is abnormal,” says Debra Geister, a financial crime consultant with Section 2 Financial Intelligence Solutions in Minneapolis. “This may be djue in part to the impacts of COVID-19 on typical cash-based businesses as the typical laundering avenues for bybrid threat groups are reduced or shut down at the moment.”
Remote working is only compounding the difficulties in making changes in account opening procedures and activity monitoring. “Financial firms will face a balancing act to manage the priority of filing SARs with a decline in the availability of staff due to illness and family obligations,” says Aaron Kahler, an AML advisory consultant and founder of the Anti-Human Trafficking Intelligence Initiative (ATII) in Beaufort, South Carolina. “Likewise, the ability to connect with each other seamlessly or access applications could be compromised thanks to remote working conditions.”
AML consultants suggest that financial firms leverage workflow management tools typically embedded in some transaction monitoring systems. QuantaVerse and NICE Actimize, say that their platforms can transfer investigative work from employees unable to do the jobs to others. “Using employee monitoring tools can certainly help AML compliance chiefs ensure that their teams are still keeping up to speed with their workloads,” says Stephen Taylor, general manager for AML at NICE Actimize, a financial crime and compliance technology firm headquartered in Hoboken, New Jersey. “Setting the tone for the right communications and minimizing unnecessary emails can also go a long way to increasing productivity.”
Knowing what to look for will also help. Acknowledging that AML departments could have trouble sifting through more customer and transactional data, FinCEN and other regulators are urging financial firms to prioritize their attention to potential scams. FinCEN has characterized the new typologies of coronavirus financial crime as being similar to those in the wake of natural disasters. Europe’s top banking regulator, the European Banking Authority, has also instructed financial institutions to pay closer attention to transactions linked to international trade as criminal groups seek to move funds across borders.
Ross Delston, an AML attorney running his own firm in Washington, D.C., recommends that financial firms start off by carefully reviewing any business offering a drug to fight the coronavirus with instant success. “All of the remedies being touted, including the drug cocktails of real chloroquine and real antibiotics, have not been shown to be clinically effective against the virus,” he says. “Therefore, any claims of an approved drug other than the limited FDA approval of chloroquine for emergency use in COVID-19 patients should not only be investigated by a bank, but also made the subject of a SAR and referred to law enforcement.”
As the case in any financial crisis, Ponzi schemes can quickly surface as a result of investor redemptions.”Any investment program that provides a rate of return that is consistently above market-level and has an opaque investment approach should be subject to further investigation,” says Delston. The lessons learned from the Bernie Madoff scenario still apply. If the directors of the program refuse to discuss their strategy and a bank’s investment officers cannot understand how the high rates of return an be achieved, chances are it’s a hoax.
If bogus remedies and Ponzi schemes won’t be enough to tax the patience of AML managers, charities will be. AML experts warn that analysts should be on the lookout when charities raise money through legitimate sites, but want to have the funds transferred elsewhere such as to personal accounts, a newly created firm’s account or an offshore bank account in countries known for fraud such as Russia, Nigeria, India and Cyprus. Criminals often rely on front-people or “mules” to initially collect the money or change the fiat currency into cryptocurrencies which are more difficult to trace. “Cryptocurrencies provide a quick method of transferring funds overseas and an additional path for transferring and layering funds for hybrid threat groups as typical laundering mechanisms may be unavailable,” says Geister. “In most cases, we see transfers from traditional bank accounts into cryptocurrency exchanges to move laundered proceeds or even evade sanctions.” She recommends that financial firms ask what the sources of the funds are and if they are coming from or going to a high-risk location.
After an account is opened, what is considered regular and irregular business activity should be based on the stay-at-home requirements and shutdowns, say AML experts. Excessive cash withdrawals and wire transfers of money overseas could be attributed to panic-buying and the desire to help relatives in coronavirus-affected areas. Premature withdrawals from retirement accounts could also become common as the US government waives tax penalties. However, money spent at nail salons or massage parlors that should be closed are red flags illegal activity such as human trafficking is occurring, cautions Kahler, whose organization focuses on catching human trafficking through money laundering activities.
Transaction monitoring systems are useful in nabbing the bad guys, but only if coded correctly with the new rules for regular and irregular behavior. Otherwise, they will generate too many false positives, leaving the true criminal activities to fall through the cracks. Only half of the ten AML managers contacted by FinOps Report say their brokerages and banks will tweak their transaction monitoring systems.
“There will be few changes to transaction monitoring system rules during the crisis as the process for changing rules requires identification, testing and roll-out that don’t allow for quick reaction times,” predicts David McLaughlin, chief executive of QuantaVerse, a Wayne,PA-headquartered firm specializing in AML transaction monitoring using artificial intelligence. As a result, investigators will still have to sift through alerts generated by transaction monitoring systems to see if there were any risks the rules didn’t pick up.
“Some institutions are prepared to delay adjusting or tuning their risk thresholds, while others may have no choice but to act more switfly so as not to get overwhelmed with false positive that need to be investigated,”says NICE Actimize’s Taylor. He predicts an uptick of 25 percent to 50 percent in the volume of alerts due to changes in transaction behavior.
Fortunately, advances in transaction monitoring technology might be a saving grace for AML managers who are finding it hard to adjust their rules fast enough. The use of platforms based on artificial intelligence and machine learning, such as NICE Actimize’s, can help financial firms fine tune the risk thresholds of their AML solutions to the “new normal” more quickly, says Taylor. McLaughlin says QuantaVerse has enhanced its platform to more quickly identify criminal behavior by analyzing non-transactional connections such as parent-subsidiary, shareholder and employee connections. The QuantaVerse platform can also determine if transactions between two businesses make sense and provide extra visualization so users can easily interpret transactional connections.
Despite technological progress, AML investigators tell FinOps Report they are still worried they might not be able to effectively sift through the higher number of alerts because of the unanticipated glitches of remote working. “Conference calls are being cut off sometimes, video chats often don’t work and we can’t look at multiple screens concurrently,” bemoans one AML investigator at a New York bank.
Whether fewer or more SARs will be filed remains uncertain. Some AML experts predict that there could be fewer, because AML investigators won’t keep up to pace while others believe AML departments will forgo investigations in favor of filing a report. “Financial firms will fall behind the volume of alerts and when we are all able to return to a normal work environment we will have a huge backlog to overcome,” warns McLaughlin. “If regulatory and management pressures lead to cutting corners, it may result in defensive filing or missed financial crimes.”
FinCEN and other regulatory authorities will ultimately have to decide how stringent they will be in deciding whether a firm has fulfilled its AML requirements. So far, they have given plenty of guidance about potential scams, but not enough about how they will judge AML compliance given the unprecedented circumstances of the coronavirus pandemic. “Nobody knows if FinCEN will decide that making a best effort is good enough or whether we will be held to the previous standards,” says one AML manager at a New York bank.
Gary De Waal, a financial services attorney with the law firm of Katten Lewis Muchin Rosenman in New York, suggests that AML managers, should continue documenting their reasons for refusing to onboard a customer, or filing a SAR or not. “At issue will be just how the audit can be maintained if automated applications become difficult to access, particularly for smaller less technologically-sophisticated firms,” he says. “When in doubt, writing everything down on paper may become necessary for the short-term. Firms can then decide how to transfer the documentation online.”
If there are any lessons AML managers must learn from the coronavirus pandemic is that they stay ahead of the curve. “Financial firms need to review their business continuity plans often and invest in technology to prepare themsevles for another similar scenario happening again,” says Taylor.