Welcome to this latest edition of Financial Crime in Focus, our first since the coronavirus pandemic gripped the world and threw everything into panic mode. Thankfully we haven’t spotted any serious toilet roll money laundering scams yet, but it’s clear that fraudsters and scammers are working overtime to take full advantage of the chaos, as we report in detail in this edition.
On the positive side, initial soundings from our customers and industry contacts is that the financial crime compliance community has more than risen to the challenge – no surprises there. It’s worth reflecting that in just three short weeks, we were able to morph almost entirely into a ‘working from home’ community that’s working really effectively, under the circumstances.
Nevertheless, there are a number of serious challenges facing compliance teams right now. Stretched and dispersed, we’re trying to not just continue meeting regulatory obligations, but also to stem the continuous onslaught from money launderers, fraudsters and scammers. We explore some of these challenges in more detail below.
Both the FCA and the NCA have been busy releasing everything from business plans, to a ‘Dear CEO’ letter and the latest National Risk Assessment data. More on all of these, below.
Trafficking in all its forms: drugs, human beings and wildlife included, continue to dominate headlines, particularly the latter, given its alleged role in the transmission of the Covid-19 virus to humans. We recently joint-hosted a very well-attended and informative webinar with PwC, in which we heard from a panel of experts on the very latest trafficking trends. Importantly, our experts explored how prepared the regulated sectors really are to deal with this fast-changing form of financial crime. More on this below.
The rise of the Fintechs is also covered in this edition. As innovation and technology play a crucial part in the delivery of the vast amounts of government support to both individuals and businesses in the short and longer term, we look at how agile solutions can support a recovering economy.
And last, but by no means least, we must return to the fraudsters and scammers, to take stock of some of the pernicious methods being developed to capitalise on this most unusual of situations.
Here’s wishing every one of our readers the very best as we navigate these extremely challenging waters.
Latest from the NCA and the FCA Business plan
The growing and pervasive nature of serious and organised crime in the UK is laid bare in the latest National Risk Assessment report from the NCA, published in March. Citing the cost to the UK at an estimated £37bn, with around 350,000 people involved, serious and organised crime touches all of our lives.
Cybercrime, fraud, firearms, drugs and people trafficking are among the offences identified in the report as of specific concern, where criminal activity is shown to be growing over time.
Detection of such offences is made even more challenging by the fact that criminal gangs are growing in sophistication; use of social media and technology, including encryption services, the Dark Web and payments using virtual assets such as Bitcoin, are all on the increase.
The fact that around 350,000 people and as many as 4772 crime groups are thought to be operating in the UK currently, many with international reach, really underlines the scale of the problem faced, both by enforcement agencies and organisations in their efforts to detect and prevent these activities. Interestingly, the report also highlights that many organised crime groups are involved in multiple crime types, utilising established money laundering networks and logistics channels to place ‘dirty’ money into the system from activities such as modern slavery, trafficking and illegal immigration.
April also saw the FCA launch its 2020/21 business plan, reflecting a shift in emphasis towards outcomes and effectiveness, as well as compliance, seen recently by other regulatory policy makers such as the FATF. Unsurprisingly the plan also focusses on how the regulator will address the huge impact Covid-19 is likely to have on the regulatory environment.
Will they, won’t they? It’s still unclear as to whether the 6th EU money laundering directive will be implemented in the UK later this year, but the need to truly understand the underlying predicate offences of money laundering remains crucial for businesses. This means firms investing far more in the risk assessment process and ensuring that their frontline teams are well trained to spot the typical red flags and behavioural patterns that define the wide range of criminal activities related to money laundering.
The FCA’s plan identifies how technology, data and analytics will perform a vital role in its regulatory activity. There is no doubt that the report’s indicative shift in focus towards outcomes and effectiveness-based activities, as opposed to just technical compliance, are going to be pivotal in the fight against financial crime, and as an organisation that fully appreciates the positive potential of such a move, LexisNexis® Risk Solutions wholeheartedly supports the FCA’s initiative. The Business Plan is a ‘must read’ for all regulated financial and professional service firms.
In the latest of our Facing Change series, former Home Secretary, Amber Rudd, gives her impression on how firms are coping with Covid-19, and emphasises that data sharing and digital identity are vital tools in the fight against both fraud and money laundering, as well as the virus itself. She also highlights the rise in cybercrime and the excellent role the UK’s National Cyber Security Centre plays in prevention.
The FCA’s ‘Dear CEO’ Letter and Digital Identity
In a significant departure from convention, the FCA has issued updated guidance, in light of the Covid-19 pandemic, to enable retail banks and other financial services more freedom to use digital verification techniques during Know Your Customer (KYC) on-boarding checks.
This guidance was given as part of a raft of changes to regulatory compliance in its so-called ‘Dear CEO’ letter, recognising that the vast majority of financial services and regulated businesses are operating with nearly all staff working from home, for the time being.
Most firms following the JMLSG guidance continue to rely on independent and government-issued paper-based documents to confirm name, address and date of birth – typically provided in person as hard copies and manually certified by the onboarding entity. The key word in the FCA’s guidance is ‘confidence’: firms must have a high level of confidence that the individual is who they say they are, regardless of what method of verification is used. Firms are also asked to give some consideration as to whether documents could be forged.
The FCA make it clear that firms are still expected to meet their obligations on client identity verification and points out that existing regulations already allow firms flexibility to carry out ID checks remotely, provided there is a high level of confidence that they can authenticate someone with a high degree of probability.
So, while the new guidance appears to give firms additional flexibility to onboard digitally, there’s no relaxation of the obligations on firms to make sure their customers are who they say they are. This may, in practice, mean finding other ways to electronically verify physical documents, such as sending scanned PDF documents to firms via a trusted third party, like a public notary or accountant. Authenticating using selfies has perhaps been the most controversial element of the new guidelines, but again it’s worth noting that an obligation is still placed on the firm to use various methods, such as ‘triangulation’ techniques to corroborate the authenticity of the identity.
All this is welcome, albeit challenging in a remote world. Firms can at least be assured that high quality and robust technology solutions exist to ensure that an infrastructure can be easily set up to support remote digital onboarding safely.
LexisNexis Risk Solutions and PwC joined forces again in March for the latest in the series of financial services sector seminars discussing some of the most challenging aspects of financial crime. Bringing together some of the industry’s leading practitioners and experts, the normally-live event was held as a webinar, and was very well attended by people from across the spectrum of Financial Services. Trafficking and illicit trade are firmly in the spotlight and we were lucky to be joined by Rob Campbell of United for Wildlife and Neil Giles of Stop the Traffik, both of whom gave insight into trafficking trends in the current environment.
The statistics are shocking and the social and environmental costs never plainer as with the present pandemic crisis, having allegedly originated from illegal wildlife markets in China. The key question for financial crime compliance teams is, what are businesses doing today to help prevent trafficking and what more can be done? This part of the discussion was led with insights from Simon Buckett of Standard Chartered Bank, whose firm has done much to highlight the global challenge of the illegal wildlife trade. Steve Elliot, Managing Director of LexisNexis Risk Solutions, added his perspective, based on his extensive experience across financial crime compliance and law enforcement and a strong passion for greater use of technology, data and analytics. Steve posed a challenge to all attendees to explore how we could all make a greater personal impact in tackling financial crime in our respective organisations. Access the webinar here.
Fintechs to the rescue?
On the whole, fintechs seem to be weathering the Covid-19 storm rather better than most. Reports suggest that many are continuing to recruit. Of course, working from home suits digital-based businesses perhaps more than most, and fintech solutions would seem ideally placed to adapt quickly in the present environment. In fact, since governments around the world began announcing massive financial rescue packages in light of the Covid-19 crisis, fintechs have been setting out their case as the ideal conduits through which to deliver these financial packages to where they’re so desperately needed – agility speed and flexibility being their principal advantages compared to traditional banks.
Beware the scammers!
We have seen reports of a wide variety of Covid-19 related financial crime and fraud attempts over the past few weeks. From selling bogus or non-existent medical supplies online, fake fundraising drives to support key workers, phishing emails offering fake medical advice and scams targeting the vulnerable or isolated at home.
Reports abound of online shopping scams where people have ordered protective face masks, hand sanitiser and other products, which never arrive. In some cases even fake testing kits have been seen offered for sale. With many thousands of people in the UK suddenly losing some or all of their income, financial scams are particularly prevalent. We are hearing of cases where fraudsters pose as government officials, including reports of using HMRC branding to make bogus offers of financial support, or asking for upfront fees for bogus loans. High-return investment opportunities and pensions-related scams are unfortunately also being widely used to prey on people’s desperation during the crisis.
With so many of us working remotely, we are, of course, all at greater risk of falling prey to the often subtle and deceptive cybercrime and fraud attacks. With new scams emerging daily, extra vigilance from everyone is absolutely essential.
Stay safe and stay well during these challenging times.