March 23, 2021
Unfortunately, financial crime is always a growth business, and 2021 will be no different. Economic fears fueled by COVID-19, coupled with the proliferation of electronic payments, mean people are more susceptible to fraud. After a brief lull in narcotics trafficking in early 2020, cartels are now pushing more drugs into markets as worldwide demand increases.
Financial institution Anti-Money Laundering (AML) and fraud groups radically changed how they work. No longer in offices collaborating on investigations, sharing information, and learning from one another, investigators work by themselves at home.
In 2021, with new AML laws in the United States and a new U.S. administration emphasizing regulatory oversight, financial institutions cannot lose focus on the critical responsibility to detect, investigate, and report suspicious activity. At the same time, institutions are being pushed to explore ways to deploy better technology to keep pace with fraudsters and money launderers.
5 Financial Crime Trends
COVID-19 created an environment where fraudsters easily target individuals and financial institutions. The availability of trillions of government dollars, much of it made available through banks, is too attractive for criminals to pass up.
The Paycheck Protection Program (PPP) increased loan fraud as financial institutions dealt with unprecedented numbers of applications, a compressed time frame for approvals, and fast loan funding. Recent PPP changes require banks to make new loans to businesses with 20 or fewer employees and to sole proprietorships. These changes, which require smaller community banks to take a more active role in lending to these businesses, may create more opportunities for wrongdoers because smaller financial institutions often lack the fraud detection systems and processes larger banks spent years implementing.
The fear and economic instability caused by COVID-19 make people more susceptible to new variations of age-old frauds such as advance fee scams and identity theft. Frauds promising financial assistance or vaccine access are now common, targeting people with promises of relief, but only after those people either share private bank account information or pay upfront fees. While neither of these schemes is new, fear and desperation caused by COVID-19 make people more likely to become victims.
In June 2020, the United Nations Office on Drugs and Crime released a report saying nearly 300 million people worldwide used drugs, a 30% increase from a decade earlier. Hardships caused by COVID-19 are sure to increase drug use as the emotional and psychological impact of unemployment and an uncertain future wreak havoc worldwide. The just-released U.S. State Department International Narcotics Control Strategy Report for 2021 (INCSR) notes that, from May 2019 to May 2020, there were over 81,000 drug overdose deaths in the U.S., the highest 12-month total ever. The INCSR states Mexican drug cartels are the source of nearly all U.S. seizures of heroin and methamphetamines. The coming increase of unlawful border crossings in 2021 is sure to bring more heroin, cocaine, marijuana, methamphetamines, and–perhaps the worst killer of all–fentanyl. With fewer border controls, there is sure to be an increase in human trafficking, an issue many financial institution AML departments identify as a high priority.
As U.S. states decriminalize marijuana sales and pot becomes readily available, there is evidence users seek a more potent high. Legal pot sales may be expanding markets for cartels to sell more powerful marijuana. Cartels, of course, are not bound by state potency regulations. Creating millions of new marijuana smokers fuels further drug trafficking.
Like all investments where returns are high, and the reasons remain unclear, the recent surge in cryptocurrency valuation will attract fraudsters. Con men will convince many unsophisticated investors they can make you rich in crypto, but of course, only through them and only if you invest today. Beyond separating victims from their money with promises of spectacular low-risk gains, schemes will include hacking of cryptocurrency exchanges and wallet theft.
Digital Payment Risk
COVID-19 promoted the adoption of technological models that generate alternatives to the use of physical money and that this new year will be consolidated as a real alternative in people’s daily lives.By: BPC Banking Technologies, ENTREPRENEUR
COVID-19 changed how many people purchase goods. With lockdowns worldwide, the use of cash in 2020 fell, while digital payments more than doubled in some countries. Digital payments are easy and fast, making them convenient to consumers and attractive to fraudsters who apply their experience with social engineering, phishing, and identity schemes to e-payments. Official-looking emails and websites requiring private information such as credit cards, bank account, or login credentials are used to phish. Digitalization makes identity theft even more attractive to criminals, enabling them to steal an individual’s funds and use credentials to log into corporate systems where they access hundreds or thousands of people’s private information.
As we move into 2021, the global picture for financial crime compliance is one of unprecedented change and a need to be flexible, efficient, more collaborative and smarter with the use and application of data.by Sebastian Hetzler, FICO
Increasing fraud coupled with increasing drug trafficking means billions of dollars of criminal proceeds need laundering. Financial institutions remain responsible for monitoring, detecting, and reporting suspicious activity. In 2021, this job is more challenging as financial crime and AML professionals work from home. Video conferencing and chat tools enable staff to communicate, but the absence of in-person collaboration hampers information sharing, a crucial part of investigations. Hopefully, as states peel back work-place restrictions, AML and fraud teams can return to the office.
Regulatory Outlook for 2021
On January 1, 2021, the Anti-Money Laundering Act of 2020 (AMLA 2020) became law. While many of the new rules and regulations will take a year or more to write and implement, the law will force AML compliance program changes this year. By July 2021, the Treasury Department will publish U.S. National AML/CFT Priorities, requiring financial institutions to ensure their programs identify and mitigate the risks the government declares are most concerning. In addition to updating risk assessments and customer risk scoring, institutions will need to ensure that monitoring scenarios detect the activity Treasury determines is most serious.
Only a few weeks into a new U.S. administration, we can see changes coming to increase regulatory focus and increase pressure on U.S. institutions. The Biden administration is emphasizing that the Consumer Finance Protection Board will again play an active role in overseeing and examining financial institutions. The new Secretary of Treasury is committed to improving Financial Crimes Enforcement Network (FinCEN) operations, and the nominated head of the U.S. Securities and Exchange Commission (SEC) has a strong history of interest in cryptocurrency regulations.
Federal financial institution regulators, like most office workers over the past year, worked virtually. Examinations continue through email, Zoom, and WebEx. Examinations are meant to be in-person, where the active exchange of documents, information, and conversation can occur. The human-to-human dynamic of examinations is necessary to maintain strong compliance programs and keep tabs on financial institutions. The absence of full, in-person examinations for what could be two years creates an unknown level of risk for financial institutions and the government.
Technology Outlook for 2021
The AMLA 2020 requires FinCEN to modernize its software systems. The law also directs regulators to remove barriers impeding financial institution technology modernization. Improving technology will provide many benefits, such as allowing financial institutions to move financial crime compliance applications from on-premise installation to the cloud. Cloud-hosted software avoids the risk, cost, and headache of years-long implementation projects, enabling financial crime compliance teams to benefit from better software faster.
2021 will see more financial institutions avail themselves of interoperable software systems. While many end-to-end financial crime software applications exist, not all institutions want to use a single system for everything from monitoring to case management to reporting. Some newer systems excel in specific areas like customer risk rating, automated data gathering, visualization, analytics, or reporting. Instead of being tied to one system that may shine in one aspect but not others, institutions can integrate multiple software applications, constructing a system best suited for them.
The unforeseen events of 2020 made fighting financial crime more difficult for law enforcement and financial institutions. Criminals learned new approaches to traffic drugs and people. They harnessed digital payments to facilitate their crimes. They preyed upon fearful and desperate people. As COVID-19 fades and AML and fraud departments return to the office, how much of our work will change?
If you would like to learn more about our technology and how we can safeguard your financial institution from these emerging trends, contact us directly.