Fraud, corruption and money laundering in a pandemic – why compliance and risk based approaches should remain top-of-mind

9 minute read
19 May 2020

World economies are quickly shrinking, supply chains are breaking, and financial strain is rising. A perfect storm has arrived for the proliferation of fraud, corruption and money-laundering.

According to the Canadian Anti-Fraud Centre, nearly $1.2 million dollars was reported lost as a result of 766 instances of COVID-19 related-fraud between March 6 and May 1, 2020. Figures suggest that nearly 188 Canadian victims were impacted by these instances of fraud. The Canadian government warns that consumer fear, uncertainty and misinformation has created an ideal environment for the exploitation of victims through fraud and cybercrime (COVID-19, Canadian Anti-Fraud Centre). Notably, these figures do not account for unreported instances of fraud or corruption.

In addition to consumer-targeted crime, fraud, corruption and money laundering concerns are also emerging at the corporate level, both domestically and internationally. As supply chains are threatened by quarantine/social-distancing measures, outbreaks in the manufacturing sector and tight border controls, financial desperation will grow.

In a globalized world, corruption and fraud know no borders. In May 2020, the Financial Action Task Force (FATF), an independent inter-governmental body monitoring money laundering and terrorist financing, released a report on the stark realities of the impact of COVID-19 on money-laundering, fraud and corruption. The FATF identified a host of vulnerabilities emerging as a result of the pandemic, including but not limited to:

The FATF also identified similar concerns across other domains in the financial sector. For example, FATF members have reported an upswing of electronic transactions which reference COVID-19 as the transaction purpose to mask the actual reason for the transaction. Reports also suggest a rise in investor fraud due to the state of the global financial market. Apparently, business network security systems have also become more susceptible to security breaches and cybercriminals seeking to obtain customer contact and transaction information. (Ibid)

INTERPOL reports similar concerns about fraud, albeit on a larger scale. In one recently reported case, a corporate buyer discovered that its payment of $1.5 million (EUR) for 10 million protective masks was conveyed to a Dutch company that never existed. The masks never arrived. With the help of INTERPOL and other financial institutions, the $1.5 million dollar payment was ultimately frozen.

Despite concerns about fraud and corruption, due diligence measures have relaxed across the board in Canada and abroad. For example, in Canada, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is providing "temporary" flexibility to reporting entities in respect of certain due diligence requirements, such as verifying the identity of individuals. As it pertains to Canadian workers, federal service employees are being asked to ignore fraudulent claims for emergency benefits being claimed by Canadians across the country.

Overseas, relaxed due diligence measures have been coupled with cautionary tales about changing or ignoring safeguards against fraud. In the United Kingdom, the Financial Conduct Authority has issued various warnings to firms on its expectations around systems and controls that are designed to prevent financial crime. In the United States, the Financial Crimes Enforcement Network has made clear that financial institutions should continue to operate on a "risk-based approach" and diligently adhere to their obligations under the Bank Secrecy Act, among other obligations.

As supply chains continue to be threatened, fraud and corruption are bound to permeate the markets. The question will be whether corporations are equipped to identify these transactions and relatedly, whether fraud and corruption can be swiftly identified. This includes whether non-compliance in various sectors, such as the securities industry, will be as readily identifiable during a pandemic. Indeed, there is a likelihood that secret commissions, insider trading, and money laundering will go unnoticed in part due to new relationships with new suppliers and overall financial desperation among employees and suppliers.

All of the above suggest that corporations, whether operating transnationally or domestically, should consider enhancing existing anti-fraud/corruption frameworks and business strategies to address corruption and bribery within their companies, and as it pertains to external business transactions. As companies become more concerned about supply chains, sales and profit, it can become easy to ignore best practices and frameworks to prevent fraud and corruption, all the while making a corporate entity more susceptible to the current climate.

In this respect, corporations must consider:

  • Enhancing frameworks to protect consumer data, financial or otherwise.
  • Ensuring that record-keeping standards are well-maintained. Corporations should be well-equipped to deal with investigations and audits post-pandemic.
  • Ensuring compliance management is at the forefront of one's operations. Whether this means regulatory compliance for tax purposes, or compliance with the Corruption of Foreign Public Officials Act or the Competition Act, this should be top-of-mind. Companies can still be held liable for the conduct of their employees.
  • Ensuring awareness of relevant emergency orders or changes to legislation that have a direct impact on one's corporation. When in doubt, obtain advice on the applicability of orders and legislative changes to ensure compliance.
  • That on June 1, 2020, amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations will come into effect. These amendments introduce a number of changes to Canada's anti-money laundering and terrorist financing legislation, including the addition of registration and compliance obligations for foreign money services businesses ("FMSBs") and virtual currency dealers.
    • As of June 1, 2020, FMSBs will be required to register with the FINTRAC and will have the following additional obligations:
      • Designate a representative for service that resides in Canada and is authorized to accept, on behalf of the FMSB, FINTRAC related notices and inquiries;
      • Report certain financial transactions to FINTRAC;
      • Keep certain records;
      • Identify clients; and
      • Have a compliance program in place (For further information, see our Financial Services Regulatory Group article).

While due diligence measures have been relaxed, that is not to say compliance will no longer be at issue. Corporate liability has not been relaxed and is here to stay.

For further guidance on these issues, please do not hesitate to contact our White Collar Defence and Investigations Group at Gowling WLG. Gowling WLG's Financial Regulatory team is available to act as the representative of FMSBs in Canada (including, virtual currency dealers that are FMSBs) and to help them understand and comply with their obligations pursuant to Canadian anti-money laundering laws.

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