COVID-19 and the implications for fraud, credit risk and money laundering

Apr 29, 2020

How soon will we understand the COVID-19 impact on fraud, credit risk and money laundering?

It is feared that the coronavirus will send long-lasting shockwaves through the global economy. Governments around the world are therefore seeking assistance from banks to help distribute various stimulus packages for companies in need of cash injection. Against this backdrop, there are two themes to consider: fraud and credit risk as well as money laundering.

Fraud and credit risk
Companies ranging from the very large to the very small have started to see their profitability evaporate. And with this, many may lose the ability to repay their existing loans. Such a widespread phenomenon presents an opportunity to the unethical – and a minority of unscrupulous business owners may soon be tempted to capitalise on the support available and default on payments.

As such, banks face a challenge: how do you distinguish between those that are actually in need of assistance and show propensity to recover, versus those that are trying to abuse the situation or simply fabricate information to get access to funds?

The ultra-low interest rates that have emerged as a result of many central banking decisions will put further pressure on the banks’ ability to generate profits from lending. One of the best ways for banks to turn this challenge into a potential future benefit is to up their understanding of current and potential customers. It all comes down to the simple principle of Know Your Customer or even Know Your Customer’s Customer.

Money laundering
The principle of knowing the customer and understanding the supply chain is applicable for the prevention of money laundering too. And in fact, from an anti-money laundering perspective, it is not expected that any government will be granting permission for financial organisations to loosen controls. Banks are still expected to detect suspicious activities and report in a timely manner to the authorities, irrespective of other world events.

The changed economic dynamics and rapid digitalisation of society will create opportunities for money laundering schemes. For example, so called ‘money mule’ activity is already identified as rapidly increasing. Criminals have been targeting individuals who might have lost their jobs recently with ‘large salary working from home’ job ads. These are designed to trick victims into using their personal bank accounts to funnel money illicitly obtained by criminals.

Against this background, banks are also reporting an increased volume of false positives in their systems. Their customers’ financial behaviours have suddenly changed, and this is boosting false alerts of suspicious activity that can take up precious time and resources to investigate. Yet again, this is where an up to date and dynamic knowledge of the customer becomes more important than ever.

In short, knowing the customer allows banks to put customer behaviours in the context of today’s environment, so that they can better assess a customer’s risk (or in other words their potential for committing a crime or becoming an accessory to crime).

(Editor's Note: The article was written by Mariola Marzouk; original article here. Reposted with permission.) 

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