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Increase in money laundering as a result of the Covid-19 pandemic

By Charl Geel and Kgomotso Molefe - Office of the General Counsel (FSCA)

The World Health Organisation (WHO) declared the COVID-19 outbreak an international pandemic in March 2020. South Africa and other countries have responded by imposing lockdowns with a variety of public health measures and implementing stimulus programmes¹ to help protect individuals and companies. These measures have in turn presented criminals with new opportunities to commit crimes and launder the proceeds.

The Special Investigating Unit (SIU) issued a report on 5 February 2021 on their investigation into procurement irregularities as a .result of public health measures and stimulus programmes. The report indicates that the SIU is, inter alia, investigating 2 556 PPE contracts for COVID-19-related services to the value of R13 334 240 581. This is over and above investigations into fraudulent COVID-19 Temporary Employer-Employee Relief Scheme (TERS) claims. These fraudulent activities are, however, not only limited to South Africa, as it is a worldwide phenomenon.

The Financial Action Task Force (FATF)² has been monitoring these changes in criminal activity, their impact on anti-money-laundering/counter-terrorist-financing (AML/CFT) regimes, and the measures that governments have implemented to respond to the different types of challenges presented. As a result, the FATF issued two papers³ on COVID-19-related Money Laundering and Terrorist Financing⁴.

FATF analysis demonstrates that criminals are continuing to exploit the opportunities created by the pandemic across the globe, with mounting cases of the counterfeiting of medical goods, investment fraud, adapted cyber-crime scams, and exploitation of economic stimulus measures put in place by governments. There have also been examples of online child exploitation due to an increase in the time spent online, increases in property crime due to properties being left uninhabited, and corruption in relation to contracts for medical supplies. While it is difficult to determine whether criminal activity has increased overall as a result of the pandemic, and while the nature of the risks vary between countries, a number of countries have reported dramatic increases in the numbers of particular types of cases. For many countries, these increases appear to relate to certain types of fraud, such as counterfeiting of medical goods and abuses of economic stimulus measures or corruption relating to public contracts.

As a result of the global COVID-19 pandemic there has been an increase in the following crimes:
Counterfeiting medical goods

The counterfeiting of medical goods continues to be a particularly common offence, with countries around the world reporting increases. The impact of these crimes is particularly significant. Faulty or unregulated medical material has the potential to cause physical harm to the individuals using it.

Cybercrime

As governments’ actions and individuals’ interests have changed over the last six months, COVID-19–related SMS and email phishing schemes have adjusted too. These now include emails with fake links to government stimulus packages, banks distributing aid, infection rate maps, and websites selling masks

Investment fraud

Countries in most regions continue to report risks of investment fraud involving the fraudulent advertising of companies that are supposedly developing so-called “miracle cures” for COVID-19. Scammers have attracted victims by making false claims that their investment will exponentially grow in value as a result of the pandemic, with the funds then withdrawn and laundered by the criminals operating the scheme.

Case Study

California, United States of America: Investment Fraud In June 2020. A man in California was indicted on fraud charges alleging that he solicited people around the nation to invest in companies that would market pills he claimed would prevent coronavirus infections and produce an injectable cure for those already suffering from COVID-19. The defendant falsely claimed to have developed a cure for the COVID-19 virus and a treatment that prevented a person from being infected by the COVID-19 virus through text messages, videos, and statements sent to potential investors and posted on the internet. The indictment alleges that he fraudulently solicited investments in two companies with a series of false promises, including miraculous results from the prevention product and the cure, and risk-free and 100 percent guaranteed “enormous returns” on investments. To bolster the claims, the defendant falsely represented that an unnamed party in Dubai had offered to purchase the two companies for USD 10 billion, claiming this offer would secure the victim-investors’ investments in the two companies, and that he had secured funding from seven investors who had each already invested between USD 750 000 and USD 1 000 000. The FBI arrested the defendant in March 2020 after he delivered pills – purportedly the treatment that prevents coronavirus infection – to an undercover agent posing as an investor. He has been charged with 11 counts of wire fraud stemming from solicitations he allegedly made to potential investors in Nevada, New York, Texas and Colorado. Two of the charges relate to communications with the undercover agent. Source: Department of Justice, United States of America (2020)

Charity fraud

Fraud through fundraising for fake charities has continued throughout the pandemic. In these schemes, scammers contact individuals, misrepresent themselves and seek money for a non-existing charity, or make use of social media platforms to appeal for funds. In some instances, fraudsters have deceived victims by acting as if they were representatives of well-known global charities, and in other instances they have created fake charities.

Abuse of Economic Stimulus Measures

The abuse of economic stimulus measures has continued to evolve. This has provided criminals with opportunities, and resulted in cases where individuals, companies, or organised criminal groups attempt to fraudulently claim money from governments.

Money laundering and terrorist financing risks

With increasing unemployment, and larger numbers of citizens conducting transactions remotely, there are also risks that vulnerable citizens will be exploited as money mules. Other vulnerabilities relate to increased financial volatility caused by the global economic downturn triggered by confinement measures to curb the spread of COVID-19. These include increased amounts of cash in circulation, and the use of virtual assets.

Changing Financial Behaviours

Changes in customer behaviour are continuing to make it more difficult for financial institutions to identify anomalies. Customers’ financial patterns, for example, are changing as they work from home and conduct more online transactions. In some cases, moves to remote working have impacted the effectiveness of reporting entities’ systems and controls, with compliance staff unable to carry out their functions with the same efficiency as they would have done before the pandemic.

Increased Financial Volatility and Economic Contraction

Many countries are facing economic contraction, and this is also resulting in a number of vulnerabilities for money laundering. One risk is that funds from illicit sources can be used to exploit businesses in distress or subject to rapid changes in demand through the provision of capital or a takeover. Meanwhile, concerns about the economy have led to an increase in cash withdrawals and a growing amount of cash in circulation. Combined with the closing of borders and restrictions on individuals’ movements, this has increased criminal groups’ use of fiat currency to store cash and launder the proceeds of their crimes. Other vulnerabilities include individuals turning to unregulated financial services, and scams to appeal to individuals who may have lost their jobs or suffered a loss in income, including potentially being exploited as money mules. Increased financial volatility also poses a vulnerability for insider trading, where large shifts of value as a result of the pandemic may create opportunities to commit insider trading. Tied to increased financial volatility, there may be additional vulnerabilities linked to the misuse of virtual assets (VAs) in pandemic-related schemes (e.g. VAs may be used for payments in fraud schemes linked to the pandemic). This is largely because like with cash (as above), stockpiling of VAs increases when there are general concerns over the state of the economy.

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