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Banks face elevated money-laundering risks amid coronavirus crisis

A hike in coronavirus-related financial crime is presenting new challenges for banks, which could face significant reputational and regulatory repercussions if they are found to have acted unethically during the crisis, regulation and compliance experts warn.

"There is a confluence right now of an increased risk of fraud, money laundering, bribery and corruption — schemes that are seeking to capitalize on the pandemic — and at the same time there may be an appearance of reduced capacity of compliance functions to stand guard," said Nicolette Kost de Sevres, who leads Mayer Brown's compliance, investigations and regulatory practice in Paris.

As business operations are disrupted and opportunistic fraudsters seek to take advantage of the coronavirus outbreak, it is becoming more complicated and challenging for banks to identify bad actors and suspicious transactions. The U.K.'s national crime agency warned March 26 that "criminals are exploiting the COVID-19 pandemic to scam people" and that "this is only likely to increase." This includes a rise in cyberattacks and online shopping scams where fraudsters sell nonexisting medical supplies or fake testing kits.

As criminals are highly adaptive, new techniques and channels of laundering money are likely to emerge, the European Banking Authority said March 31.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

"Inevitably, whenever you have the increased risk of cyber fraud and crime, you have a concomitant increase in the risk of money laundering occurring," said Julian Hui, a senior associate in the financial services regulatory practice at law firm Baker McKenzie in London.

What banks would characterize as business as usual by lawful companies before the crisis could now also be a money-laundering risk, particularly when it comes to sectors affected by lockdown regulations, he said.

"Any business that continues to trade in breach of emergency regulations, money that they're making from that is now criminal property and the banks themselves will need to be identifying that," Hui said. "For example, if banks are seeing that their restaurant customers are continuing to have the same turnover, that itself should be a red flag."

Identity theft and fraudulent applications for governments' crisis funds are other potential challenges faced by banks, particularly smaller, regional financial institutions that may not be used to dealing with such large volumes of requests, said Joydeep Sengupta, a Paris-based counsel in law firm Mayer Brown's compliance, investigations and regulatory practice.

Weakening controls

As risks emerge, the European Banking Authority highlighted the importance of "effective systems and controls" to prevent money laundering, and said financial crime remains unacceptable, "even in times of crisis such as the COVID-19 outbreak." The Financial Action Task Force, the global money-laundering and terrorist-financing watchdog, has also called for banks to remain vigilant and "ensure that they continue to effectively mitigate these risks and are able to detect and report suspicious activity."

The warnings come as banks focus on managing other crisis-related challenges and supporting clients through the downturn, which is spurring some concern over the potential negligence of compliance.

"One of the fears we have about banks giving credit is that they need to get the money circulating easily, and so the compliance controls might be weakened," said Laure Brillaud, a senior policy analyst at Transparency International, an NGO.

Internal control measures may be under pressure due to social distancing, reduced staff, remote working or reorganization as a result of the pandemic, which could lead to gaps in banks' ability to detect crime, according to recent guidance from Mayer Brown.

Reputational damage

Dirty money scandals have haunted European banks in recent years. HSBC Holdings PLC and Standard Chartered PLC have settled billion-dollar fines for lack of adequate compliance, while Danske Bank A/S is under investigation for an alleged €200 billion money-laundering scandal in the Baltics, one of the biggest in history.

But misconduct during the coronavirus crisis could cause banks much greater reputational damage than past money-laundering cases, said Angela Gallo, lecturer in finance at Cass Business School.

"If banks were doing something wrong and making extra profit while we were all in lockdown, for the public that is more unbearable than isolated cases. It could potentially create reputational damage for the whole industry again," she said, likening it to the backlash that followed the 2008 financial crisis.

Banks could also face regulatory repercussions. Sven Bates, a senior trade and sanctions associate at Baker McKenzie in London, drew a comparison with the 2008 financial crisis as well, saying there is "a good possibility" that banks at a later stage will face enforcement action related to conduct during the coronavirus crisis.

"After the financial crash of 2008, there were quite a number of high-profile banking enforcement actions, where the conduct that occurred during that period was related to some of the emergency actions that were being taken at that time. So it is reasonable that you could see that happening again," he said.

Reassessing risks

Hui said regulators will likely focus on banks' operational resilience and their ability to uphold control functions during the crisis. "If we're seeing breakdowns in their systems, regulators can come after banks for having facilitated financial crime, but also potentially for not having in place the operational resilience measures to prevent this going in the first place," he said.

A decision by banks to furlough financial crime staff before other employees "probably won't be received very well by the regulators," he added. In the U.K., the Financial Conduct Authority and the Prudential Regulation Authority asked banks to only furlough compliance oversight and money-laundering reporting officers "as a measure of last resort."

Financial institutions should also continually update their money-laundering risk assessments to be able to catch "the new normal," and use the occasion to assess where controls might have been lacking before, Hui said.

In particular, they should be vigilant when it comes to high-risk sectors such as the medical and charity sectors, Kost de Sevres said.

On a positive note, she said banks are generally well placed to deal with the elevated risks, given the investments made in anti-money laundering and compliance. In 2019 alone, financial institutions spent $181 billion on financial crime compliance worldwide, according to a LexisNexis Risk Solutions report released in the week of April 6.

"The tide right now is high, so a lot of things are happening," Kost de Sevres said.

"After the crisis, the tide will go down, and you'll see all the things that went wrong. But at least for now we are keeping our fingers crossed; banks' compliance is probably the strongest compared to any other sector."