Providers may be charged with supporting the broader economy while fending off increased financial crime.
The effects of the current pandemic have been staggering and continue to evolve and grow every day. In addition to the direct human impact, the new and uncertain condition created by this crisis has shocked the economy, the healthcare system, infrastructure and society. One of the first sectors to be affected is financial services.
Government mandates such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the United States mean banks may be thrust into situations to help support the broader economy, and Financial Crime Compliance (FCC) functions should ramp up operationally to support rapid distribution of funds to impacted customers.
Concerningly, criminals are expected to exploit the uncertainty and chaos of the current environment, leading to increased fraud and financial crime activity. Regulators have continued to emphasize that banks must comply with applicable Bank Secrecy Act/Anti-money Laundering (BSA/AML) obligations while remaining alert to emerging financial crime schemes.1
Managing financial crime programs during a global health crisis
As a direct impact of the CARES Act passage, we believe banks should make immediate changes to how they manage financial crime risk associated with distributing government relief funds to impacted customers. In the immediate term, FCC functions should develop Know Your Customer (KYC) policy and procedural guidance for extending Paycheck Protection Program loans to eligible customers. KYC functions should anticipate a surge in new loan applications and ramp up team capacity to support loan volumes. In the short term, FCC functions should better understand the financial crime risk of lending products related to the CARES Act and update AML transaction monitoring scenarios to provide adequate risk coverage.
In addition to expected impact from the CARES Act, there likely will be broader program impacts across KYC, AML transaction monitoring and screening that have immediate-, short- and long-term implications.
- FCC organizations are expected to experience capacity constraints from the shift to remote working, and a surge in loan volumes:
- Front line should continue to follow existing KYC policy and procedures.
- Assess current periodic review schedule and make risk-based adjustments to address capacity constraints.
- Enhance existing branch processes to adjust for remote/digital onboarding of customers.
- FCC functions should investigate introducing perpetual KYC for reviews and digital channels to simplify collection of information from bank clients.
AML transaction monitoring
- FCC functions should anticipate volatility in alert volumes for behavioral monitoring scenarios and adopt a risk-based approach to prioritize investigations.
- FCC functions should monitor for emerging fraud and financial crime patterns by staying in close contact with their regulators, industry counterparts, and the bank’s cyber and fraud functions.
- Consider deploying new transaction monitoring rules to identify any financial crimes exploiting recent distress.
- Diverging approaches between the United States and the European Union (EU) on related humanitarian aid can create complexity on how to manage banks’ sanctions obligations. As a result, FCC functions should make sure their front lines follow existing sanctions guidelines while continuing to monitor for regulatory relief.
- Additionally, banks should enhance their adverse media screening procedures to monitor and prioritize clients impacted by financial crime and non-financial crime risks.
Managing regulatory expectations
The FCC functions should maintain an open and continuous dialogue with their regulators. Communicate any proposed FCC program changes to adapt to the new normal, including disruptions to existing regulatory obligations. The FCC functions should ensure their program evolves in response to the crisis, and that related regulations are fully documented and available for regulatory examinations. To address this, banks should consider developing reporting capabilities to monitor their incremental risk exposure.
Once business returns to normal, FCC functions should evaluate the effectiveness of their business continuity plans (BCP) and resilience plans, and incorporate any lessons learned to further enhance their FCC programs.
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Philippe Y. Guiral
- “The Financial Crimes Enforcement Network (FinCEN) Encourages Financial Institutions to Communicate Concerns Related to the Coronavirus Disease 2019 (COVID-19) and to Remain Alert to Related Illicit Financial Activity,” Financial Crimes Enforcement Network, March 16, 20120. Access at: https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-fincen-encourages-financial-institutions.