Financial services regulation and COVID-19 video diaries: Financial crime

Hi. Welcome to the latest in our series of financial services video diaries. In this edition, I will share some views from risk consulting practice here at Norton Rose Fulbright, on the impact of COVID-19 on financial crime compliance in the UK market and how firms can seek to address these challenges. There has been continued focus and momentum for regulatory action in financial crime. Looking back, 2019 saw a raft of investigations uncovering poor practice, and then looking forward, the FCA’s business plan published last month, indicates a continued focus on reducing market harm caused by criminal activities. Like many other industries and sectors, dealing with COVID-19 has created further complexities in financial crime compliance and in particular I want to draw attention to three of these.

Firstly, criminal enterprises continue to become even more innovative and sophisticated and are now seeking to piggy back off the global pandemic to diversify and facilitate their illicit activities. In particular there has been a real notable increase in fraudulent activities and scams.

Secondly, whilst there is undoubted continual focus on financial crime, there is also a need to global regulators to change their priorities to respond to the current circumstances. This has led to some non-critical activities becoming delayed. So, for example, the FATF has postponed its mutual evaluations and also its reviews of black- and grey-listed jurisdictions and some independent control framework reviews have been delayed, especially where there is an element of on-site review needed.

And then thirdly, firms are really having to rethink how they perform KYC and CDD. Workarounds are being put in place, however, firms are still expected to maintain water tight risk management controls, comply with UK AML legislation, and demonstrate a risk-based approach. So as well as the general financial crime compliance challenges, the virus has also highlighted some more specific challenges in the AML and sanction spaces. So, for example, there has been an absolutely huge shift in customer behaviour from individuals panic buying to changes in global supply chains and this has really impacted AML transaction monitoring, tuning and configuration. Further, with a reduced or repurposed workforce, this might create operational challenges to actually disposition the alerts generated.

In the sanction space there has been significant pressure to lax certain restrictions relating to jurisdictions such as Syria, Iran and Venezuela to enable things like vital medical supplies and educational equipment to reach those in need. However, the proposition of new temporary licences and waivers could create confusion in determining which transactions are actually permissible. Also, last month, OFAC in the US acknowledged that temporary solutions like staff reshuffling might lead to breaches which may not have otherwise taken place. In these circumstances, it urges firms to continue to take a risk-based approach and report these breaches promptly and it is committed to considering each of these on a case-by-case basis.

So how can financial services firms adapt and maybe even thrive in these changing and evolving circumstances? Well firstly, there is a real need to remain agile and open to change. Creative solutions and workarounds are needed which are as optimal as possible from both a business process and risk management standpoint. For example, investigating more heavily in electronic verification technology could pave the way forwards. And firms can leverage existing recent guidance on this topic such as that produced by the FATF. Secondly, firms should really try and embrace collaboration and communication. There is now an even greater motivation for incumbent institutions to explore partnerships and alliances, especially with perhaps firms like newer road tech houses who are maybe more tech savvy and accustomed to operating with a remote workforce. Also from a dialogue perspective, it is crucial that firms maintain open lines of communication with regulators, law enforcement and other bodies. Maintaining awareness of compliance changes and how firms are expected to react is especially important right now in light of the imminent lockdown update from the UK government coming this Sunday 10 May.

And then thirdly and finally, proactively identifying controls to be attended to. Controls like KYC, AML transaction monitoring and sanction screening are perhaps obvious areas impacted by COVID-19. However, with challenges like different staff temporarily covering roles and maybe an increase in operational backlogs, firms might need to consider whether secondary controls like training, procedures and escalation channels also need to be uplifted.

So that’s all I wanted to cover in this video. We hope you found it helpful and please do get in touch if you would like to discuss further. Thank you.