COVID-19 has changed our daily lives, and we are in the process of creating a new normal. With governments around the world encouraging people to stay at home, there is a corresponding surge in online, cashless transactions.
For instance, Singapore’s largest bank, DBS Bank recently shared that the volume of cash deposits and withdrawals have plunged 11 per cent in the first three months of this year, as compared with the same period last year.
Meanwhile, the volume of cashless transactions has nearly doubled during the same period. Some 100,000 customers have transacted online for the very first time, of which 30 per cent were above the age of 50 years.
Other Singapore banks such as UOB saw online grocery shopping growing 44 per cent in Q1 2020 as compared to 2019, and OCBC Bank saw customer spends rising by up to 50 per cent on food deliveries apps, online video as well as on music streaming services including Netflix and Spotify.
With more and more transactions moving online, it serves as an ideal breeding ground for money laundering and criminal activity, including around illicit activities such as human trafficking, arms trafficking, and illegal trade. Prior to COVID-19, the annual cost of financial crime to the economy in Asia Pacific was estimated to be at US$166 billion, according to the 2018 Thomson Reuters True Cost of Financial Crime report.
The damage could range even higher, per the United Nation’s Office on Drugs and Crime 2018 estimates which pegged the amount of money laundered each year is equal to two to five per cent of global Gross Domestic Product (GDP), roughly between US$800 billion and US$2 trillion.
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In order to adhere to the new normal, regulators and banks are working together to meet the increasing demand for virtual and mobile payment solutions, however, it is not without friction. Money laundering-related activities are becoming more far-reaching, complex, and sophisticated, with regulators seeing the need to improvise stricter compliance requirements.
But the need to keep up to speed with the ever-changing rules now seems a challenge to some banks and Financial Institutions (FIs), with some already suffering major setbacks to their compliance programmes.
In Australia, its second-biggest bank Westpac has 23 million alleged breaches of AML laws and has set aside AU$900 million (US$586 million) to cover various fines and penalties. Similarly, Swiss regulators hit Julius Baer with a number of sanctions as a fall out from its own money laundering incident.
The Industrial Bank of Korea was recently fined US$35 million to resolve criminal charges against its AML program, which made it possible to funnel large sums of money.
Since 2008, regulatory fines imposed on FIs around compliance lapses stood at over US$300 billion; and this is expected to surge due to the growing complexity of compliance regulations.
Different monetary authorities in Asia are taking action to help reduce the impact of financial crime. For example, The Hong Kong Monetary Authority (HKMA) offered guidance to assist authorities with their Anti Money Laundering (AML) and counter-terrorist financing risk management practices during the COVID-19 pandemic.
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In Singapore, The Monetary Authority (MAS) reassured that it will adjust selected regulatory requirements and supervisory programmes to enable financial institutions to focus on dealing with issues related to the COVID-19 pandemic, alongside providing monetary support amidst the crisis.
The global standard-setter for combating money laundering, the Financial Task Action Force (FATF), is encouraging governments across the world to work with financial institutions and other businesses to use the flexibility built into the FATF’s risk-based approach to address the challenges posed by COVID-19 whilst remaining alert to new and emerging illicit finance risks.
Some banks today are still relying heavily on manual efforts for their AML compliance. Rules-based applications produce 95 per cent false alerts, creating huge backlogs and massive ageing of alerts. With legacy systems, the costs of managing the process to read, analyse, and implement the changes in operations will only increase over time.
To align with the changing regulations, banks and FIs are opening up new digital onboarding capabilities for any type of banking services. Some banks are working with regulatory technology companies (regtech) to tap on technologies such as Machine Learning and Artificial Intelligence to assist their internal teams and better manage compliance risk.
The algorithms created can be used to identify risky customers, accounts or transactions and file timely reports with regulators while minimising operational costs with significantly reduced false positives. By doing so, FIs can focus their efforts more on their core business and build a sustainable compliance framework within the company.
With COVID-19, one can expect thousands more online transactions a day, but banks cannot afford to miss monitoring any transaction, especially dirty money. That is the reason, automation with the help of regtechs, helps keep money launderers at bay capturing unsolicited activities that could be easily missed by humans.
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2020 is a year of ‘new normals’ and everyone has their part to play in helping the economy recover. Digital transformation is no longer new but more relevant than ever when change is happening faster than expected.
There is a need for banks and FIs to quickly pivot and consider the risks and challenges created by these rapid and radical environmental and regulatory changes to ensure uninterrupted operations even during difficult times like today.
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