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COVID-19

Mitigating fraud, meeting North American regulatory imperatives during pandemic

As North American businesses navigate the novel coronavirus pandemic and with their employees largely work from home, operational risks are mounting.

In addition to sustaining day-to-day operations through the pandemic, firms also need to keep on top of critical obligations to detect and prevent fraud.

Regulators have made clear that, despite their own operational difficulties, they are watching and will continue to enforce standards. They expect firms to uphold financial consumer protections, especially for vulnerable clients during the crisis.

Recent US developments

The U.S. Securities and Exchange Commission (SEC) says its Office of Compliance Inspections and Examinations (OCIE) will be reviewing business continuity plans, particularly in the interest of protecting investors. Similarly, its enforcement division cautioned businesses that they must be vigilant over how material, non-public information is being used, particularly if earnings reports and required SEC disclosure filings are delayed due to the pandemic.

The Department of Justice (DOJ) filed its first coronavirus-related civil enforcement action against a company operating a website falsely purporting to offer for sale vaccine kits for COVID-19, the disease caused by the coronavirus.

U.S. Attorney General William Barr has directed all U.S. attorneys’ offices to prioritize the investigation and prosecution of coronavirus fraud schemes. New York state Attorney General Letitia James has sent cease and desist orders to a number of firms for deceptive marketing practices involving coronavirus cures or prevention tools.

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) has advised financial firms to be on guard for fraud related to the coronavirus, saying it has noticed a pattern of imposter scams (like impersonating government agencies to get personal data), insider trading, and other schemes.

There has been a marked increase in cybercrime, often involving phishing attempts in which the perpetrators send emails purporting to be from reputable companies to induce individuals to reveal personal information, hoping the busy and distracted user working from home will click, as the U.S. Homeland Security Office has noted.

Regulators and law enforcement agencies are particularly warning about COVID-19-related manipulation of vulnerable customers, such as senior citizens. The SEC issued an Investor Alert, warning about investment frauds relating to the outbreak. Similarly, the Financial Industry Regulatory Authority (FINRA) posted an Investor Tips with five questions to ask for “some financial peace of mind in the age of coronavirus.” The Federal Trade Commission also has posted multiple articles on this issue.


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Businesses must always monitor for sales practices that take advantage of vulnerable customers, an obligation given increased importance under stricter of customer-care standards, including the new Regulation Best Interest which faces a June 30 compliance deadline.

The financial strain and social distancing conditions that go along with the pandemic offer fraudsters an opportunity to deceive even more. A study by the FINRA Investor Education Foundation, the BBB Institute for Marketplace Trust, Stanford Center on Longevity and Federal Trade Commission found that key risk factors for susceptibility to scams and losing money are social or physical isolation from others and financial vulnerability.

Recent developments in Canada

Regulators in Canada have signaled that they will be keeping watch over financial consumer protection issues. Watchdogs are expected to scrutinize how financial services firms respond to the needs of their clients during the pandemic, with an eye on situations where financial consumers experiencing hardships could be exploited.

Close attention is likely to be paid to sales tactics and the treatment of vulnerable investors. Following widespread allegations of sales misconduct and high-pressure sales tactics at several large Canadian banks, the Federal Consumer Agency of Canada (FCAC) conducted a year-long industry review of bank culture in 2018. The revelation of the allegations also attracted strong public criticism.

How firms deal with financial consumers during the pandemic could further draw attention to sales cultures at banks. Misconduct could fuel public outrage and prompt regulators to take enforcement action against violations. Indeed, the FCAC has already warned banks that it will closely supervise how relief measures such as mortgage payment deferrals are offered to retail consumers experiencing financial hardship.

Separately, the treatment of vulnerable customers during the pandemic is likely to be scrutinized, in line with a growing focus by Canadian securities regulators and self-regulatory organizations on mitigating financial exploitation of vulnerable investors.

The Canadian Securities Administrators (CSA) recently proposed amendments to securities registration requirements that are meant to strengthen protections for such investors. Policymakers have also made a point of clarifying that the definition of vulnerable is not limited to age and could extend to any individual whose capacity to make informed investment decisions is impaired, even temporarily.

This wider view of vulnerability is especially significant as many financial consumers struggle with the economic consequences of lockdowns and other pandemic response measures. Hardship and stress during this time may make affected customers more vulnerable to financial mis-selling and other improper sales tactics.

Practical compliance tips

Financial regulators expect the institutions they oversee to help affected customers and deter fraud while ensuring the operational continuity during the pandemic, which is no small feat. Here are some practical pointers for compliance:

  • Identify and address any business-culture traits or incentives that could pressure staff to engage in misconduct, such as selling unsuitable investment products, commissions, fees or unreasonably costly refinancing. Managerial behavior that incites this type of conduct through monetary or continued employment incentives should be addressed immediately.
  • Advisers should document all interactions with clients and with internal staff, regardless of the platform used for liability and compliance reasons. Moreover, supervisory obligations do not disappear with remote working set-ups and documentation that a firm has upheld its duty to supervise is essential.
  • Training refreshers on spotting and reporting fraud such as phishing emails and financial scams is recommended.
  • Financial services firms must orient themselves around the idea that, presently, there is much to do in the area of detecting and remediating fraudulent activity, rather than assuming that their focus only needs to be on business continuity.
  • If more time is needed to comply with any regulatory obligation, open and prompt conversation with relevant regulators is always good practice.

This article written by Helen Chan & Julie DiMauro of Thomson Reuters Accelus Regulatory Intelligence.

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