Staying Ahead of the Criminals: Fighting Money Laundering in a Global Pandemic

By John Edison

The COVID-19 pandemic has created a new set of global challenges, including an economic downturn and a disrupted working environment. For the financial services industry, banks are dealing with closed branches, the challenges of serving customers remotely and the need to limit services or redeploy staff.

At the same time, the anti-financial crime and compliance functions are still expected to maintain effectiveness and drive efficiencies, even as banks look to manage costs and squeeze more out of every dollar spent. While the pandemic has complicated the fight against financial crime, here are three ways financial institutions can combat it effectively in today’s disrupted environment.

Adjust detection thresholds and rules. The economic recession has led both consumers and businesses to cut spending, leading to fewer financial transactions. Payment volume at Visa dropped 10 percent in June and July. Tradeshift also noted that business-to-business transaction volumes are down significantly year-over-year.

Anti-financial crime and compliance functions need to adjust their financial crime detections for what may be a prolonged period of below-average transaction volumes. For instance, rules or models built around set volume or dollar amount thresholds need to be reset to properly detect money laundering during this time. This may mean lowering thresholds in proportion to the decline in transaction volumes or modifying rules to consider volatility instead of static thresholds. Models built to consider volatility evaluate behaviors in the context of average peer and individual activity—an approach that continues to work even as averages change.

In today’s disrupted environment, agility is key. Banks need the architecture and capabilities in place to leverage their detection data pipeline. This allows teams to test, tune and re-deploy existing and new models, supervised or unsupervised—all against the same data pipeline.

Adapt with the criminals. Criminals have wasted no time attempting to profit from governments’ financial assistance and tax relief payments such as the Paycheck Protection Program. Indeed, the Federal Trade Commission estimates Americans have lost more than $77 million in fraud related to COVID-19—with the real number likely much higher.

It’s time for financial institutions to step up to the plate and be aggressive in pursuing these unique kinds of crime. Particularly at a time when hard-working people and essential companies are strapped for cash as it is, banks can make a significant difference by safeguarding their finances.

According to a FAFT report on COVID-19-related money laundering, recent tactics include impersonating government officials, counterfeiting essential goods like medical supplies and medicine, and online cyber-attacks like phishing and ransomware attacks. Not all of these necessarily fall under the scope of AML programs, but banks should focus on what they can control and determine the best ways to fight crime therein.

Focus on KYC programs. Typically, it takes banks several weeks to onboard a new business customer. However, as distributors of the U.S. government’s lending program money, U.S. banks were under pressure to more quickly onboard new business clients, many of whom needed funds urgently, while still complying with all know-your-customer requirements.

However, banks can balance the conflicting desire for faster onboarding and thorough due diligence by making some adjustments that streamline KYC programs. These onboarding improvements also provide the 360-degree customer view banks need.

To start, banks should take advantage of third-party data providers and entity resolution capabilities to gather and process the information needed to meet KYC requirements in a timelier fashion. With both internal and external data sources, structured and unstructured sources, banks can create the most accurate risk profiles of businesses and individuals possible.

KYC systems also need to be integrated with compliance and case management capabilities. Using connectors, third-party data can be integrated into the case manager, providing analysts and investigators with the information they need in one spot to write reports and complete onboarding processes.

As they leverage technology to improve KYC, however, banks should also continue to emphasize a risk-based approach to AML. Indeed, in its April guidance related to the coronavirus pandemic, FinCEN noted that it both “encourages financial institutions to consider, evaluate, and, where appropriate, responsibly implement innovative approaches” and that it “expects financial institutions to continue following a risk-based approach.” This aligns with the FATF report cited above, which encouraged full use of a risk-based approach to address practical onboarding issues like consumers being less able to provide certain information or keep their identification documents current.

The coronavirus has further complicated the already challenging task of fighting financial crime. But by implementing a few of these changes, banks’ financial crime and compliance teams can become more agile, efficient and effective. Adaptable and flexible detection capabilities coupled with a more streamlined customer-onboarding experience will allow banks to better keep up with criminals in today’s disrupted environment and ride out the uncertainties of tomorrow.

John Edison is global head of financial crime and compliance management products at Oracle Financial Services.