Fighting corruption in times of Covid-19: look out for money laundering

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Charlotte Gunka
Avocat à la Cour, Paris
charlotte.gunka@gmail.com

Whereas awareness over corruption risks in the public and the private sectors during the Covid-19 pandemic is constant, money laundering may not be at the centre of attention. Yet, corruption and money laundering are intrinsically linked. Criminal proceeds resulting from corrupt activities, such as bribery and the embezzlement of public funds, need to be laundered to enable perpetrators or beneficiaries of the crime to enjoy the proceeds without fear of detection and confiscation. The risks of enforcement actions resulting from compliance failures being currently higher than ever,[1] anti-money laundering and combating the financing of terrorism (AML/CFT) frameworks represent very powerful tools to identify corrupt individuals and detect, trace and recover illegal profits stemming from corruption.

As highlighted by government authorities,[2] non-profit organisations[3] and intergovernmental bodies,[4] the emergency of the Covid-19 crisis offers vast incentives for unscrupulous individuals to misuse entrusted power for private gain and take advantage of the current vulnerabilities of high-demanded sectors such as health, research, procurement and charity. Various typologies of corrupt behaviours include, among others, bribes given to customs or other officials due to shutdown of public offices or shortage of goods, fees paid to intermediaries and third parties to secure medical treatment or hospital capabilities, favouritism and over-invoicing in public procurement processes and contracts, and donations that disproportionately benefit a public official who can improperly influence medical research.

In addition, funds unlocked as part of massive fiscal and liquidity support packages adopted by governments, central banks and intergovernmental bodies (eg, credit facilities and loan guarantees, debt relief, equity injections, cash transfers to businesses and households) risk being diverted from their original purposes if not subject to strict transparency and accountability. Such abuses were observed during previous humanitarian crises (eg, the 2005 hurricane Katrina, the 2010 Haiti earthquake, the 2014 Ebola outbreak and the 2017 hurricane Maria),[5] as well as in the context of the 2008 global financial crisis,[6] leading to a surge of government investigations and enforcement actions against corporate entities and officials for accounting and financial statement fraud, insider trading and corruption.

To avoid detection, corrupt individuals and entities are likely to look for innovative opportunities to conceal the criminal origin of the funds illegally gathered during or after the Covid-19 pandemic. On 1 April 2020, the Financial Action Task Force (FATF, the international AML/CFT standard-setter) called on its member countries’ regulators, supervisors, financial intelligence units (FIU), law enforcement authorities and other relevant agencies to remain alert to new illicit finance and money laundering risks and provide guidance to the private sector on the application of AML/CFT laws and regulations.[7] Concerning specifically the financial sector, the US Financial Crimes Enforcement Network[8] and the European Banking Authority[9] urged relevant authorities and institutions to identify and raise awareness of emerging money laundering techniques, and keep monitoring transactions by paying particular attention to unusual or suspicious patterns in customers’ behaviours and financial flows.

Focus should be on implementing risk-based measures such as enhanced customer due diligence on clients in sectors that are considered to be effected by the economic downturn resulting from the Covid-19 crisis. In particular, heightened scrutiny should be exercised by financial institutions and other entities subject to AML/CFT measures (eg, insurance companies, lawyers, accountants, real estate agents and dealers in precious metals and stones) to prevent trade-based money laundering (TBML)[10] through cash-intensive businesses in the retail sector, companies involved in international trade and shell companies, which, despite the absence of real economic activity, will keep similar volume of financial flows.[11] While international trade operations should be drastically reduced as a result of the global restrictive measures introduced by governments, companies that unusually continue to receive and transfer high level amounts of money should be able to explain and justify with relevant documentation the origin of the funds and the economic rationale behind each transaction.

Although certain unexplained inflows may not necessarily be related to TBML activities, huge variations currently observed on certain markets, such as gold trade, deserve closer scrutiny. Gold prices have jumped exponentially since the beginning of the pandemic,[12] with prices rising to the highest level since 2013. The gold market is characterised as cash intensive and anonymous, which explains why international gold trade is often pointed out as a common method for laundering criminal proceeds from illegally mined gold, drug trafficking or other illicit activities.[13] Enforcement authorities have increased their oversight over the gold market in recent years by acknowledging the high risk of gold-based money laundering and severely sanctioning AML/CFT compliance failures.[14] In practice, corrupt officials may wish to distort the links between themselves and bribes by asking kickbacks to be paid in gold,[15] while illegally purchased gold will then be traded through shell or front companies using false or incomplete documents.

Ensuring transparency of companies’ ultimate beneficial ownership (UBO) information in times of the Covid-19 crisis is, therefore, also essential to monitor corrupt individuals and proceeds as well as to avoid future compliance risks. Legal entities and arrangements (eg, trusts) are often used to disguise operations of one or several other companies and those of their UBOs to facilitate laundering of bribes or other illicit profits.[16] In order to avoid the use of companies and their bank accounts for money laundering purposes, increased verification should be undertaken before processing any financial transactions or validating a public procurement bidding to ensure full transparency of companies’ direct and indirect ownership and/or control based on accurate and up-to-date supporting information.[17]

In any event, internal controls should be strengthened and suspicions of money laundering or corruption activities must be actively reported to the FIU or other relevant authorities, whereas customer’s operations remain suspended during the Covid-19 shutdown. On 23 April 2020, US officials from the Foreign Corrupt Practices Act’s units of the Securities and Exchange Commission and the Department of Justice (DOJ) urged companies to remain transparent when facing compliance challenges during the pandemic and communicate quickly about any related difficulties.[18] The non-prosecution agreement concluded on 30 April 2020 between the DOJ and an Israeli bank for conspiracy to launder over US$20m in bribes to officials at the world soccer governing body (FIFA) confirms enforcement authorities’ growing vigilance over the relationships between corruption and money laundering. It shows the US authorities’ commitment to holding to account financial intuitions and other businesses when they knowingly facilitate corruption, laundering of bribes and proceeds of corruption, as well as any other related criminal conduct.[19]

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