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Hidden costs of the COVID-19 pandemic: part 1


Johannesburg, 01 Jul 2020
Read time 5min 20sec
Lizette Sander, product manager, Bateleur Software
Lizette Sander, product manager, Bateleur Software

The global COVID-19 pandemic is wreaking havoc on the profitability of banks and financial institutions around the world – and South African institutions are not immune to the fallout.

Apart from the bottom-line impact of the recent cumulative almost 3% decline in interest rates, the dramatic falloff in transactions, a rise in defaults and the interest rate and repayment “holidays” necessitated by the pandemic, local banks are battling increasing levels of money-laundering attacks.

“Criminals are using the pandemic to launch new and increasingly innovative scams related to the COVID-19 pandemic. This is increasing pressure – and costs – for banks and other financial institutions, which are required in terms of anti-money laundering (AML) and Know your Customer (KYC) regulations to monitor and prevent such activities,” says Lizette Sander, product manager at Bateleur Software.

Concerns about the rise in COVID-crime were raised early in the pandemic. In March, the intergovernmental organisation, the Financial Action Task Force (FATF), also known by its French name, Groupe d'action financière, warned that “malicious or fraudulent cyber crimes, fundraising for fake charities, and various medical scams targeting innocent victims are likely to increase, with criminals attempting to profit from the pandemic by exploiting people in need of care and the goodwill of the general public.”

Similar warnings were sounded by the Financial Crimes Enforcement Network (FinCEN) in the United States; the Financial Conduct Authority (FCA) in the United Kingdom; and the European Banking Authority, which cautioned national regulators and banks that evidence had already emerged as far back as February of new criminal activity linked to the deadly spread of the virus.

The targets of these scams range from large corporations – in one recently reported case, a major pharmaceutical company was defrauded of more than US$7.4 million – to individuals who, for example, made payments to scammers impersonating officials of the World Health Organization (WHO) or the Center for Disease Control and Prevention (CDC) for a “list of infected people in your area”.

In addition, Sander points out that the large flows of money being hastily directed towards pandemic relief has also increased the risk of money-laundering and corruption. “If they are to meet their AML obligations, banks have to step up their monitoring and reporting of suspicious transactions, particularly those related to COVID-19,” she says.

The FATF has noted the importance of extreme vigilance and risk-based supervision of COVID-19 transactions to ensure that authorities use their resources wisely – and recommend the increased use of technology to do so.

After all, a World Bank research document published in February 2020 noted that “aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centres known for bank secrecy and private wealth management, but not in other financial centres”. Does this indicate, the World Bank wondered, that foreign aid is being captured by the elites in those countries?

Not surprisingly, Transparency International has called for increased vigilance by banks and other financial institutions to ensure they are not inadvertently enabling the misuse of much needed resources during the COVID-19 pandemic.

This will place additional cost pressure on these institutions.

However, Sander notes that even before COVID-19, AML and KYC regulations around the world have cost financial institutions an estimated $321 billion since 2008. In 2017 alone, global AML spending was around $8 billion.

South African institutions have not been immune to the costs.

For example, local institutions have been heavily fined for falling short on their implementation of local AML and KYC regulations. In April 2014, the Reserve Bank fined the country’s top four banks a total of R125 million over lax AML controls: Absa was fined R10 million; FirstRand R30 million; Nedbank R25 million; and Standard Bank R60 million.

Banks have continued to be fined over the years. In May 2017, Investec, Absa, Standard Chartered and Habib Overseas Bank were fined a total of R46.5 million for offences ranging from weaknesses related to their transaction monitoring to not implementing adequate processes to screen the related parties of customers. The latest reported sanctions against financial institutions instituted by the SARB were in December 2019 when Standard Bank was fined R30 million and four smaller banks – GroBank, Bank of China’s Johannesburg branch, Ubank and HBZ Bank – had to pay a total of R7.5 million for weaknesses in their AML and KYC compliance provisions.

In all reported instances, none of the sanctions were an indication that the offending banks had actually facilitated transactions involving money-laundering or the financing of terrorism.

“But the fact remains that they had failed to comply adequately with the legislation and regulations – regulations that had been designed to prevent money-laundering and terrorism and can and should be used to help prevent, or at least identify, potential instances of corruption which are likely to increase in the wake of the COVID-19 pandemic,” Sander adds.

However, even if banks and financial institutions comply with all the regulations – and thus avoid the fines – the cost of simple compliance is often extremely high.

Between 2015 and 2018, Credit Suisse employed an additional 800 people to bolster its compliance with Switzerland’s regulations – and was still fined for falling short of the requirements.

In the US, AML compliance staff numbers have increased tenfold over the past five years.

These costs are becoming unaffordable, especially in the face of a global recession. So what is to be done?

According to Bundesbank board member Joachim Weurmeling, the crisis precipitated by the pandemic is likely to accelerate the digitisation of banking business as banks seek to deal more effectively with low interest rate and low profitability challenges.

Sander agrees: “Financial institutions cannot continue to try and fight the rise in money-laundering and fraudulent and corrupt transactions using traditional methods. They have to embrace technology – particularly artificial intelligence and robotics – in order to do so,” she concludes. 

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