On May 4, the Financial Action Task Force (“FATF”) issued a paper entitled “Covid-19-Related Money Laundering and Terrorist Financing – Risk and Policy Responses (“Paper”). This Paper follows up on the April 1, 2020 statement issued by FATF’s President on COVID-19 and measures to combat illicit financing, on which we previously blogged. As we also have blogged, the COVID-19 pandemic will cause many financial institutions to face significant Anti-Money Laundering (“AML”) issues because of the unfortunate confluence of increased fraud schemes seeking to capitalize on the pandemic, coupled with the fact that many BSA/AML compliance teams will be straining to maintain an adequate amount of staff and degree of communication.
FATF summarizes its Paper as follows:
As the world is focusing on responding to the COVID-19 pandemic, it is impacting on the ability of government and the private sector to implement anti-money laundering and counter terrorist financing (AML/CFT) obligations in areas including supervision, regulation and policy reform, suspicious transaction reporting and international cooperation. This could lead to emerging risks and vulnerabilities that could result in criminals finding ways to:
- Bypass customer due diligence measures;
- Increase misuse of online financial services and virtual assets to move and conceal illicit funds;
- Exploit economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit proceeds;
- Increase use of the unregulated financial sector, creating additional opportunities for criminals to launder illicit funds;
- Misuse and misappropriation of domestic and international financial aid and emergency funding; [and]
- Exploit COVID-19 and the associated economic downturn to move into new cash-intensive and high-liquidity lines of business in developing countries.
AML/CFT policy responses can help support the swift and effective implementation of measures to respond to COVID-19, while managing new risks and vulnerabilities. This paper provides examples of such responses, which include:
- Domestic coordination to assess the impact of COVID-19 on AML/CFT risks and systems;
- Strengthened communication with the private sector;
- Encouraging the full use of a risk-based approach to customer due diligence; [and]
- Supporting electronic and digital payment options.
Perhaps understandably, the Paper is full of generalized pronouncements, which we will not go through here. It presumably is understood at this point by everyone in the financial services industry that COVID-19 is creating a maximum risk of fraud on all fronts, coupled with a reduced ability to detect and combat such fraud, and that providing a list of the various possible threats has limited real-world utility. Having said that, the Paper dutifully provides such a laundry list of possible threats. And it is reasonable to assume that regulators’ downstream focus will center on this list of risks. Indeed, as the pandemic fades, we presume that regulators will focus on whether financial institutions heeded such guidance and will evaluate whether financial institutions took appropriate steps to mitigate such risks, all from a post-pandemic, post hoc prism.
However, one issue raised by the Paper deserves particular attention in the U.S.: the concern regarding the “misdirection of government funds or international financial assistance and increased risks of corruption.” As the Paper observes, “[m]any governments are providing stimulus funds to mitigate the economic impact related to COVID-19. FATF and [FATF-style regional bodies] report that criminals may try to fraudulently claim or misdirect such funds.” That observation invariably will prove to be correct. As we have observed, the Payroll Protection Program (“PPP”) rolled out by the U.S. government as part of the CARES Act – legislation intended to provide much-needed economic relief to small businesses in the form of government loans – is also a potential source of widespread fraud. Indeed, the U.S. Department of Justice just obtained the first indictment relating to PPP fraud. Financial institutions will need to guard against PPP-related fraud if they are PPP lenders themselves, and/or if they bank those committing PPP fraud.