Prasad Chintamaneni is a Managing Director in Treliant’s Global Financial Crimes Compliance practice. He has over 25 years of experience in financial systems, data analytics, model validation, compliance, governance, and risk management. At Treliant, he has led data analytic teams on several engagements including independent consultancies involving Office of Foreign…
Warren Buffett famously stated that “you never know who’s swimming naked until the tide goes out.” Although this quote is primarily used to describe overleveraged individuals and entities during periods of declining credit availability, it is also applicable in situations where there is not enough financial activity to cover illegitimate behavior—such as an economic crisis.
The Trump administration has declared a national emergency to combat the coronavirus disease. States have closed universities and K-12 schools, and the National Collegiate Athletic Association has cancelled March Madness. Professional sports leagues have postponed or cancelled their seasons as well. Disney and Universal Studios closed their U.S. resorts; the Disney closure is expected to be the longest in the park’s 65-year history. Bars and restaurants all over the country have been ordered to close. These shock contractions of activity will cause both predictable and unpredictable impacts on the economy.
Financial crimes compliance (FCC) professionals will be challenged in the coming weeks and months as the financial impacts of the pandemic unfold. Many models designed to detect behavioral changes in customer activity—models which have normalized over many quarters of steady economic activity—will be upended as consumer-spending patterns rapidly change. For example, the aforementioned closure of bars and restaurants will have an immediate impact on those bars’ and restaurants’ depository activity. Cash-intensive grocery stores may have spikes in activity as panicked consumers buy food and hygiene products, followed by rapid drop-offs as shelves are emptied and supply chains slow down. Erratic transaction patterns will likely have deleterious effects on behavioral transaction-monitoring scenarios until a new normal is established, leaving FCC professionals to discern if the new transaction patterns are legitimate.
There are some unanswered questions as to whether financial crime will increase or decrease during the pandemic. Will there be a general slowing of financial crime as the economy slows? Or will criminal activity rise?
There is evidence from prior black swan events, such as the 2007 financial crisis, that criminal organizations take advantage of periods of economic weakness. For example, following contractions in credit availability in Italy between 2008 and 2010, the Sicilian Mafia was able to meet demand for capital funding because it had large amounts of cash on hand, making previously legitimate businesses pawns in its money-laundering schemes.
Additionally, there always seems to be a considerable amount of fraud during negative events. The Federal Trade Commission has already published warnings that “scammers are taking advantage of fears surrounding the Coronavirus.” Similarly, the U.S. Securities and Exchange Commission has warned that it has “become aware of a number of Internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus, and that the stock of these companies will dramatically increase in value as a result.”
But are new perpetrators entering the market, increasing the overall amount of fraud, or are old perpetrators changing course and developing new schemes? Given the rapidly changing transaction patterns in customer accounts, it is possible initiatives focused on detecting suspicious activity and models for rating customer risk will show patterns of customer activity that have not been previously detected. Financial criminals generally depend on a certain amount of legitimate transactions to fly under the radar. However, with so many people in quarantine, criminals are more likely to be caught swimming naked, so to speak. They will need to curb their activity to match the economics of the situation, which may be challenging given the suddenness of the disease’s impact. Any dramatic switch in behavior will be an opportunity to detect suspicious activity. FCC professionals should be focused on identifying behaviors that could otherwise be commingled with a baseline level of legitimate transactions.
A key red flag may likely be when a business continues to have the same number of transactions while similar businesses show declines. An example of evidence for such a trend may be a sustained level of filings of Currency Transaction Reports for certain customers. Many cash-intensive businesses—such as restaurants, bars, convenient stores, and money-services businesses—should experience reductions in activity as person-to-person transactions are curbed by quarantines and isolations.
Similarly, customers that maintain their trade-finance activity during an overall slowdown may also raise red flags. Or the traditional red flag of incongruous dealings (e.g., requested products that do not align with the company’s main line of business) may occur because perpetrators need to make rapid shifts in invoicing to accommodate the changing global landscape.
Just as the rapidly changing financial landscape exerts stress on law-abiding individuals, it will also exert the same stresses on criminals. As criminals change their practices, FCC professionals may have a unique opportunity to identify suspicious activity. So stay vigilant (and wash your hands).
 Scherer, Steve, Bloomberg, “Italy Cracks Down on Mafia Money Laundering in Crisis,” –July 21, 2010 https://www.bloomberg.com/news/articles/2010-07-21/bank-of-italy-says-financial-crisis-fosters-mafia-driven-money-laundering
 Tressler, Colleen, Federal Trade Commission, “Coronavirus: Scammers follow the headlines,” –February 10, 2020 https://www.consumer.ftc.gov/blog/2020/02/coronavirus-scammers-follow-headlines
 Securities and Exchange Commission, “Look Out for Coronavirus-Related Investment Scams – Investor Alert” – February 4, 2020 https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_coronavirus