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COVID-19

Beware business customers whose banking activity is unchanged during COVID-19 crisis – AML experts

Brett Wolf  Regulatory Intelligence

Brett Wolf  Regulatory Intelligence

As government mandates stemming from the COVID-19 pandemic keep many restaurants, bars and other businesses shuttered or doing limited to-go business, bank financial crimes compliance professionals would be wise to beware those whose transaction patterns remain unchanged, experts say.

As government mandates stemming from the COVID-19 pandemic keep many restaurants, bars and other businesses shuttered or doing limited to-go business, bank financial crimes compliance professionals would be wise to beware those whose transaction patterns remain unchanged, experts say.

At the same time, the activity of other bank customers, especially the elderly, can be expected to potentially change, they say.

Restaurants and bars that maintain a normal level of Automated Clearing House activity even though the cities or states in which they operate have issued closure or curbside-pickup only services “could indicate transaction laundering,” Sarah Beth Felix, who runs Palmera Consulting LLC, an anti-money laundering consulting firm, told Regulatory Intelligence.

For example, a restaurant that has little cash activity and normally receives mainly ACH deposits averaging $6,000 per week as their main source of revenue, but continues to average $5,800 per week despite government mandates, should be scrutinized, she said. “Could it be possible that this restaurant has historically been engaged in transaction laundering – blending illicit and legitimate business revenue channels into one channel? Possibly, but it took a pandemic plan approach to find them,” Felix said.

Transaction laundering is a common activity and most smaller institutions do not monitor for it, but “now is the easiest time to find those that could be transaction laundering,” she said.

From an AML and anti-fraud perspective, the COVID-19 pandemic and the related government shutdown of a broad swath of business activity is “unique” because “it’s a health crisis creating a change in economic behavior,” Jim Richards, a former Bank Secrecy Act officer at Wells Fargo, told Regulatory Intelligence.

Large banks monitor cash-intensive businesses as a class of customer by industry, such as restaurants, and track various payment activity such as cash, charge, debit and checks, Richards said.

“Let’s say a restaurant exists solely to launder drug proceeds. Maybe they’re not smart enough to change their (deposit) activity even though all the restaurants in their area are shut down, and we see that restaurant continuing its normal and expected activity, but now it stands out because it is the only one doing normal and expected activity. That normal and expected activity now becomes unusual activity,” said Richards, who now runs RegTech Consulting LLC.

Furthermore, and adding to banks’ transaction monitoring challenges during the COVID-19 crisis, activity that once would have been flagged as suspicious, such as elderly account holders suddenly turning to online transactions, may no longer be suspect.

That is because older people susceptible to COVID-19 are turning to online orders as a means of avoiding shopping facilities, Richards said.

“If you have someone who is 75 years old who has never logged into online banking and they are now doing online banking transactions, that may be flagged as unusual, but it is usual right now,” he said. “Where they used to go to their local Target to buy stuff, they’re now ordering it on Amazon, and so their (transaction) patterns are changing.”

As a result of the altered risks stemming from the pandemic, banks must work to amend their automated monitoring rules and triage alerts to ensure those linked to the most significant activity are addressed quickly, a particular challenge as the number of AML professionals working in the office is diminished, Richards said.

“You’re always adapting and changing your thresholds, but when new fraud and money laundering schemes come along, it’s not a matter of adjusting thresholds, it’s a matter of new rules, and those new rules need to be validated. They are models, and if you adhere to strict model governance requirements, it will take you months to (deploy) those models,” he said.

To keep up-dated on the latest news and information regarding the COVID-19 pandemic, the economic impact, and the government’s response, at Thomson Reuters’ COVID-19 Resource Center, and you can follow Reuters.com or the Reuters App.