The COVID-19 pandemic and its Impact on Financial Crime

This article briefly examines the correlation between the COVID-19 pandemic and the increase in financial cybercrime and explains how the authorities have reacted and the regulations that have been issued to safeguard the public in the Kingdom of Bahrain.

Introduction

Following the outbreak of COVID-19, the world has faced extraordinary challenges varying from public health, economic disruption, and unprecedented crimes, all of which have exposed both the private and public sectors to various financial risks.

Such threats have paved new ways for criminals to successfully scam and defraud the public, thereby compromising the authorities’ ability to act swiftly in enforcing effective Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regulations. Consequently, the growth in financial crimes perpetrated during the COVID-19 pandemic has exacerbated. In an effort to mitigate and impede such crimes, entities and financial institutions in the Kingdom of Bahrain are urged to impose the reforms and guidelines initiated by the Financial Action Task Force (FATF) and the Central Bank of Bahrain (CBB).

Examples of financial crimes perpetrated during the COVID-19 pandemic

The shift to ubiquitous remote-working has exposed companies to many illicit actors who have relied on weak security systems to access sensitive information. By impersonating legitimate businesses and government structures, criminals are able to request payments, blackmail or deceive customers via email, SMS messaging and other phishing tactics.

The impact of COVID-19 has further proliferated the demand for cryptocurrency where cases of fraudulent trading, investment and money-laundering have increased. A notorious illustration of such exchanges during the pandemic is the $1.1 billion Crypto Ponzi scheme Wotoken. In 2020, the Wotoken culprits attracted approximately 715,250 investors by promising unrealistic returns and low menaces using non-existent algorithmic trading software. The culprits were able to continue their operation by reaping funds from new members and transferring them to old investors.

In 2020, the CBB issued a warning against a fraudulent organisation named ‘Bahrain.bitcoin’ who were involved in unlawful cryptocurrency trading. In an attempt to deter similar occurrences, the CBB asserted that appropriate precautions must be taken prior to transacting with any entity, such as ensuring that a license was granted by the CBB and that it is in compliance with Financial Institutions Law of 2006’s requirements.

The United States Department of Justice (DOJ) further noted that Darknet markets, where dealers operate cryptocurrency laundering services to trade nefarious goods, have increased rapidly since COVID-19. In 2021, Larry Harmon confessed to moving over $300 million worth of Bitcoins through an authorised ‘mixer’ known as Helix. In exchange for a fee, customers are able to transfer Bitcoins to designated recipients without having to reveal the Bitcoin’s source or owner.

FATF and CBB’s responses

Pursuant to the publication of the CBB’s guidance for financial institutions in May 2020, the CBB and FATF have stressed the importance of alleviating financial crime risks and implementing effective control measures.

The FATF affirmed that domestic coordination between governmental bodies and private sectors is crucial to addressing potential and ongoing illegal activity. AML/CFT supervisors will therefore be better equipped to identify and monitor potential risks aggravated by COVID-19.

The CBB advised that employees must promptly file a Suspicious Transaction Report (STR) where they suspect a customer is engaging in ML/TF related activities. In doing so, the relevant entity is able to respond to the risks or potential misconduct efficiently.

In an attempt to further mitigate ML/TF risks, the FATF stated that a more rigorous approach towards verifying a person’s identity should be enforced where reporting entities are able to accept recently expired and government-issued ID.

In instances where face-to-face customer onboarding has become strenuous, the CBB recommended that digital onboarding be implemented with accordance to its procedures. This includes ensuring that entities comply with the Financial Crime Module and that frequent risk assessments are conducted. The FATF further added that biometric authentication, facial recognition, and three-dimensional face matching algorithms are all appropriate methods for verifying customer identification and establishing security.

Conclusion

Considering the heightened issues generated by the pandemic, private sectors and governmental structures must consistently caution employees regarding the increase of COVID-19 ML/TF risks to further impede unprecedented illicit activities. Not only should these entities ensure that all guidelines proposed by the CBB and FATF are safeguarded, they must also further educate their customers on emerging fraudulent activities by informing them of the possibility of receiving phishing emails, phone calls or SMS messages.

Ronald Langat – Partner, Head of Banking and Finance

Maryam Alhashemi – Associate