The Challenges of Combating Money Laundering in a Pandemic World

By Adriana Babi – Compliance Researcher and member of OAB Compliance Commission

In a pandemic scenario full of uncertainties, efforts are directed towards the pursuit of normality, and what we know is that for some time to come, we will live this “new normal”, but how to conceptualize the current reality in the perspective of combating Money Laundering and Financing of Terrorism (LD / FT)?

In general terms, money laundering consists of transforming resources obtained illegally into lawful resources. In Brazil, the crime of money laundering is regulated by Law 9,613, of March 1998, whereas terrorism consists of the practice of criminal acts intended or calculated to create a state of terror in the general public, the latter, regulated by Law 13,260 of March 2016, which not only regulated the provisions of item XLIII of art. 5 of the Federal Constitution, disciplining terrorism, and dealing with investigative and procedural provisions, but also reformulating the concept of organized crime, changing preambular regulations. It is important to point out that the money laundering offense has ancillary aspects and needs to have a connection with a derived or previous crime, hence a previous crime, from which the obtaining of a money financial advantage resulted. Among the sectors subject to the rule are the majority of the agents and entities that operate in activities related to the National Financial System, as well as the sectors of luxury goods, credit cards or accreditation cards, factoring and securitization of assets, securities, or receivables, jewellery, precious stones and metals, transfer rights for athletes and artists, alternative remittances of resources, advisory services, consultancy, auditing, counselling, and assistance.

Terrorists finance their activities in a variety of ways and seek to raise funds both from illicit sources and also from apparently lawful sources, such as non-governmental organizations, and regular businesses, through crimes such as fraud, smuggling, illegal drug trade, and arms smuggling, among others. According to the Institute for Economics and Peace (IEP), a global non-profit research organization, global terrorism indicators have been declining. The report, 2019 Global Terrorism Index, showed a significant drop in death indicators, according to the publication the absolute number of cases was 15,952 deaths, representing a 52% drop compared to the 2014 indicator, and evidence of the sharp decline in activity terrorist, although the intensity of terrorism has decreased, the extent has not reduced, in 2018 in 103 countries there was at least one registered terrorist incident, besides about 71 countries suffered at least one fatality in the same year, highlighting the need for continued actions for the assertive fight against terrorism, concomitantly if we look at the money laundering indicators, we find that the crime product laundered, annually, reaches a volume that varies from 2% to 5% of the planet’s GDP, about 1, 6 to 4 trillion dollars a year, according to estimates from the United Nations Office on Drugs and Crime (UNODC).

Among the entities dedicated to combating money laundering and related crimes, it is important to highlight the role of the Financial Action Task Force (FATF), international cooperation of an informal nature, initially established as a financial action task force to contain the financial flows associated with drugs and trafficking, within the scope of the Organization for Economic Cooperation and Development (OECD), in the national field the relevance remains with the Financial Activities Control Council (COAF), which aims to coordinate, discipline, apply administrative penalties, receive, examine and identify suspicious occurrences of money laundering activities, another entity of paramount importance is the National Strategy to Combat Corruption and Money Laundering (ENCCLA), main articulator of the discussions and arrangements between the three branches, the Public Ministry in the spheres, Federal, State and Municipal, in addition to formulating public policies and solutions aimed at combating money laundering and related crimes, ENCCLA develops numerous actions aimed at the production of knowledge, training, the development of structures and systems, as well as the advancing and improving standards.

Money Laundering and Pandemic

As mentioned above, although the crime of money laundering is often associated with terrorism, other criminal activities may precede laundering, and the current scenario has increasingly highlighted this situation, according to the document published in May this year by the FATF, COVID-19-related Money Laundering and Terrorist Financing Risks and Policy Responses, this new dynamic, i.e. the public health crisis – COVID19, proved this connection between the most diverse crimes and money laundering, allowing a more assertive assessment of the impact of the crisis and enabling a better direction in the adoption of measures that will impact society. The publication, which does not officially represent the group’s position, had information received from more than 200 members, among which were member countries, regional bodies, observer organizations, such as the International Monetary Fund, the World Bank, and the United Nations. The material has a qualitative bias, and the focus of the publication is to assist society in the search for swift answers to the threats about money laundering and related crimes, the construction of the report had as a central pillar the analysis of the documents shared by the network members themselves global.

Among the trends observed, it was found that work and remote interaction assumed a leading role during the crisis, the migration of employees from the corporate to the residential environment, certainly signalled a change in the direction of work relations, in the same way, jobs considered fewer essences have run out, there has also been a growth in online sales and a surreal increase in demands for health products and services, such as supplies and protective equipment and medical equipment, mainly respirators. Another factor observed during the survey was the maintenance of the operations of banks and financial institutions, although the banks have shown limitations in the provision of face-to-face services, they have remained stable, concomitantly the redirection of public resources to the health sector has occurred. focused on global trade, travel and tourism have been severely hampered. This new environment also affected organized crime, which, due to the new perspective, redirected and intensified its efforts on fronts such as cybercrimes, the exploitation of vulnerable groups, human trafficking, as well as the exploitation of children in the virtual environment.

The document portrayed the considerable increase and recurrence of fraud crimes, especially those in which counterfeiters are impersonated by employees of official services, to apply scams, as well as those in which intermediaries are used to purchasing products, in the latter case, imported lung ventilators, whose prices have been extremely inflated, the adulteration of inputs and equipment, the collection of funds for fake charities and even the offer of fraudulent investments among other crimes. In the sphere of cybercrimes, there has been an increase in complaints regarding phishing attacks, a fraudulent practice that consists of sending emails supposedly from reputable companies to induce individuals to reveal personal information, such as passwords and credit card numbers, fake e-mails, on behalf of recognized companies, as well as the use of malicious software, ransomware, used to stop systems and often the object of extortion and ransom collection. At the same time, there was a significant increase in complaints about corruption, embezzlement of government funds and international financial assistance agencies, especially through remote transactions, largely as a result of users’ unfamiliarity with online platforms. The economic slowdown, the increase in physical cash transactions, the trading of virtual assets, the practices involving insider trading and the greater volatility of the financial industry, as well as the financing of terrorism are also among the considerations reported and analysed in the document.

The consolidation of the reports and practices adopted by the FATF members allowed for the critical analysis and timely elaboration of recommendations for the jurisdictions of the member countries and other government officials, among which are: the need to establish an effective domestic coordination movement or that is, countries must internally and appropriately assess the risks and impact of COVID-19 on their systems for preventing and combating money laundering and related crimes, they must also correctly address the risks identified, both in the private sector but mainly in the public sphere, including the participation of intelligence units. Other issues such as strengthening communication with the private sector and greater proactivity in the application of preventive, detection, and combat measures, encouraging the use of risk-based methodologies and encouraging the use of innovative solutions – capable of identifying customers in the integration and while carrying out transactions, as well as supporting electronic and digital payment options, all signalled by the countries covered.

The observations point out that the focus on the most diverse segments should also be the object of government attention, in some jurisdictions there was a greater dedication to preventing crimes involving online games and transactions with coins and precious metals, such as gold, leaving a little aside efforts and attention to the financial sector, especially transactions in kind, in many cases with withdrawals and the immediate transfer of public resources. Many jurisdictions have adopted good practices, creating working groups and specific reports to deal with crimes related to the health crisis, understanding and forming partnerships across borders, as well as public and private partnerships were perceived as essential, the differential of the countries for the prevention and combat of crimes, the document underlines the relevance of cooperation between countries, especially concerning the reporting of intelligence units, especially those related to developments or any operational interruptions that may affect operations. International cooperation responses to the secretariat of the Egmont Group, an international organization that facilitates cooperation and information sharing between intelligence units, likewise, the emphasis was placed on monitoring the private sector, as the prolongation of the crisis can shake and the functioning and the role of regulatory agents.

After the publication of the document by FATF, COAF issued a note with some clarifications on the institution’s performance in the context of the public health crisis. In the statement, the institution reported that “it has been working in a vigilant and coordinated manner, promoting interaction with other public administration bodies and with the obligated sectors”, at the time, in addition to the indicators on suspicious communications received from the obligated sectors (189) and of the competent authorities (121), COAF released the main warning signs detected by the institution at the national level, some of them converge with the experience reported by the FATF report, others bring an internal perspective. Local suspicions fall on the obtaining of a loan by employees of medical equipment companies to carry over resources possibly diverted from administrative contracts, with the subsequent return of values to the employing company or associated companies, the hiring, with no bidding and overpricing, of companies with façade characteristics and intermediaries, the immediate transfer to third parties without apparent financial relationship of public resources destined to the purchase of equipment or supplies to fight the pandemic, the transfer of resources to public servants by companies that received payments resulting from administrative contracts , payment orders from abroad justified as commissions for sales of hospital machines per person with no history of activity in the industry, the creation of front companies on behalf of family members to carry forward diverted resources, fraud in the payment of emergency aid, as well making cash withdrawals immediately after receiving transfers of public funds.

In Brazil, in addition to the impacts pointed out in the FATF document and by COAF, other measures to deal with the public health emergency defined by Law no. 13,979, and related rules, express the existing fragility and gaps, which may represent an additional threat in the detection and punishment of money laundering and related crimes, especially concerning the waiver of the bidding process for the acquisition or contracting of goods and services, and the flexibility in estimating prices of situations considered exceptional, such as the eventual hypotheses of contracting, in the eventual character of supplier of good or service provider, even impeded by sanctions or suspensions.

National and International Recommendations

In the mutual evaluation report prepared in 2010 by the FATF, and based on the 40 recommendations regarding the fight against money laundering and the 9 special recommendations on the financing of terrorism, on Brazil, other criticisms were indicated, among which are the criminalization structure In the country, the entity’s view at the time was that the system had complexity and limited resources, especially about statistics on investigations, complaints, and convictions, as well as a compromised ability to process and obtain final convictions for money laundering. The response of Brazil came in 2012 through the changes made to the law, among the reformulated aspects are the elimination of the list of antecedent crimes, which made the laundering of any proceeds from crimes or misdemeanours criminal, the expansion of the list of agents subject to registration and reporting suspicious transactions to the regulator or intelligence unit, to cover other similar entities in addition to financial institutions, which also included branches of Brazilian companies abroad, the requirement to create policies and internal controls compatible with the size operations, as well as the need to register with the regulatory, supervisory body or COAF, also comprising the declaration of non-occurrence of facts that can be reported (negative statement), as well as the mandatory prior notification of international transfers and cash withdrawals.

When we broaden the focus and observe other member countries, it is possible to say that the challenge is not only with Brazil, in this endeavour the country does not go alone, the update of the document entitled “International Standards to Combat Money Laundering and Proliferation of the Financing of Terrorism “Also from FATF and which occurred in 2012, brought very reasonable and worrying indicators to the more than 150 member countries that participated in the survey, of which only 1% showed a high level of efficiency in the PLD / CFT programs, the others showed levels substantial, moderate or low, respectively 24%, 32% and 18%, such a result brought up the debate about what still needs to be done, and among the changes revealed, the need to strengthen the structures used to detect, prevent and punish financial crimes, thereby changing the scope of the follow-up assessment by directing its efforts to areas where countries have reached low or moderate levels, the group wants to ensure that member countries have appropriate laws, regulations and bodies, capable of assessing whether the measures are effective and the expected results will be delivered.

Understanding the pre-pandemic history regarding money laundering and the fight against related crimes is a relevant factor in raising awareness, prioritizing, and speeding up the actions that still need to be taken, Brazil will undergo another FATF mutual evaluation from January 2021, in this context it is possible to affirm that the country has been using efforts and adopting measures not only aiming at maintaining the group but also focusing on meeting the demands and demands brought recently by the discussions that took place in the Paris plenary, such as the need strengthening of normative structures and greater control of LD / FT practices by countries. Internally, it is already possible to see some of the measures adopted over this period and which are aimed at meeting the requirements, among which we can highlight the publication of Law 13,810, of March 2019, which establishes the blocking of assets of people and organizations linked to LD / FT crimes and Decree 10.270 of March 2020, which established the LD / FT Risk Assessment Working Group and Financing for the Proliferation of Weapons of Mass Destruction at the national level, the group will be responsible for preparing diagnostics to identify, assess and understand the risks in the country, to subsidize the actions of competent bodies and entities and should prepare its first assessment within one year. COAF will also coordinate the actions that will be developed within the scope of the Federal Public Ministry (MPF), see Ordinance 195, of March 2020, the invitation from COAF and the acceptance of the MPF will make it possible to obtain various statistical data on the main threats that money laundering and related crimes have on the country, the latter group composed of members and servants of the Criminal, Environmental and Cultural Heritage Chambers, Combating Corruption and the Prison System and External Control of Police Activity, in addition to members of the International Cooperation Secretariats (SCI); Research and Analysis Expertise (SPPEA); Documentation (SEJUD), will also participate in the development of the National Risk Assessment (ANR), a preparatory stage for the assessment of Brazil.

The report also mobilized the regulatory agents of the National Financial System, both the Central Bank (BACEN), the Securities and Exchange Commission (CVM), and the Superintendency of Private Insurance (SUSEP), published new rules that not only update but also modernize the guidelines related to preventing and combating money laundering, especially concerning its policies, internal risk assessment, procedures for the identification and diligence of customers, partners and employees, the registration of operations, the monitoring of operations and situations suspicions, as well as measures to ensure the implementation, adequacy, and assessment of the effectiveness of these procedures and internal controls. Among the requirements are those that will significantly impact and demand special attention from the financial industry, such as assessing the risk of money laundering and evaluating the effectiveness of programs, in other words, the financial sector needs to change the focus given to managing the prevention of money laundering, that is, leaving the detective pattern and migrating to a proactive condition. With this in mind, the agents of the financial system must organically integrate ideas, mechanisms, risk control requirements, in the same way, develop business management unified with risk management, enabling the establishment of a solid structure and compatible management and effective, the new guidelines are internally provided in Circulars No. 3,978 from BACEN and No. 612 from SUSEP and Normative Instruction No. 617 from CVM.

Another indication that Brazil has been committed to the LD / FT agenda is in the commission of lawyers that will propose changes to the Money Laundering Law, the work team was created by the President of the Chamber of Deputies, Rodrigo Maia (DEM-RJ) , and will be chaired by the Minister of the Supreme Federal Court, Alexandre de Moraes, the initial focus of the group will be to elaborate a preliminary project that delimits and establishes guidelines that contemplate the investigative and procedural measures and also to propose legislative changes that assure the exchange and sharing of information Among the competent and intelligence agencies, side by side, in progress is the bill No. 4516, by Senator Arolde de Oliveira (PSD / RJ) that recommends the inclusion of individuals or legal entities that provide legal services or of legal advice in the list of people subject to the mechanisms of control and prevention of money laundering, although it is not a precursor the senator’s project puts Brazil in line with international guidelines.

Other Crises

The continuous restructuring of COAF, now provided for in Law 13,974 of January 2020, the dismissal of the director-general of the Federal Police, Maurício Valeixo, and the departure of the Minister of Justice, Sergio Moro from the government represented a blow to the country’s credibility, not only felt by the financial market, which at the time caused the Bovespa index, an indicator of the average performance of the prices of shares traded on the Brazilian stock exchange, B3, to fall by more than 6%, reaching 74,681 points while the American currency reached the level of R $ 5.60, in a new record, but also represented a shock to the country’s image.

Minister Sergio Moro is a world reference in the fight against corruption, his work is recognized internally and by numerous entities, including as one of the most influential personalities of the decade, by the Financial Times, and his departure will certainly have a bearing on the conduct of the anti-corruption agenda of the country, something that we are already experiencing, either through the interference of politics in anticorruption institutions or through the influence in the judiciary. Recently, the confirmation of the understanding by the 2nd Panel of the Supreme Federal Court, that whistle-blowers can question prize-winning plea agreements to defend themselves, corroborated this perception, according to the rapporteur, Minister Gilmar Mende “the jurisprudential protection of plea agreements served to shield illegalities”, this among other issues were the subject of the complaint made by the NonGovernmental Organization, Transparency International to the FATF, the first complaint against Brazil being, in 2019, the National Union of Tax Auditors of the Federal Revenue of Brazil (Sindifisco Nacional), had already made a complaint about the institutional setbacks in combating corruption and money laundering in Brazilian territory, as well as about the knowledge and impact of the Supreme Court’s decisions on criminal investigation work in the country.

Inexplicably, the Brazilian crisis and a certain delay on the part of Brazil in meeting international guidelines, do not put the country in a less uncomfortable situation than that experienced by the United States, the scandals involving the leakage of internal documents from the Financial Crimes Enforcement Network, FinCEN, The intelligence unit linked to the United States Treasury Department over the past five years points out that some of the world’s largest banks have allowed criminals to move dirty money across the border. The documents mention an amount of about $ 2 trillion in transactions and further demonstrate how Russian oligarchs used banks to avoid sanctions that should prevent them from putting money in the West. In response, the American intelligence unit, FINCEN, published a regulation proposal, Advanced Notice for Proposed Rulemaking, whose comment period will end near the end of this year, increasing concern over the matter, as no new rules will be proposed until that date. The American press is unanimous in claiming that existing regulations and bank compliance processes are insufficient, such a situation will impact and mobilize the industry to de facto develop a culture based on the principle of a risk-based approach is a path of no return. , raising the need to reinforce customer due to diligence processes, the basis for effective management, prevention, detection, and combating money laundering and related crimes, the concern with monitoring transactions in realtime will become fundamental, product risk assessment and the need for advanced information technology tools will be on the agenda.

Given this scenario, there is an opportunity for the domestic industry to anticipate and already do their homework, mitigating the possibility of making the same mistakes. Regarding what happened, the FATF said it was aware of the press reports and the disclosure of FINCEN documents, but informed that it would not comment on the content of the reports, since the information produced by the intelligence units is confidential and deals with one of the principles of the Egmont Group. Brazil has a long way to go, however, it is possible to affirm that the prospects for combating Money Laundering in 2020 and 2021, considering international guidelines and work, the pandemic scenario, crises, the economy, and internal developments at the very least challenging. Despite advances in scientific research and the prospect of completing effective vaccines, we are still living in a pandemic world, and although the return to normality is somewhat predictable, we will also have to deal with the legacy of adopting sudden, thoughtless measures. Adopted by most government officials due to the health crisis.

The Egmont Group is an international organization that facilitates cooperation and information sharing between national financial intelligence units to investigate and prevent money laundering and terrorist financing.

The International Financial Action Group (FATF; in English, the Financial Action Task Force, or FATF), is an international governmental group of an informal nature, created in 1989, to develop and promote national and international policies to combat money laundering and the financing of terrorism.

The group created a guide with 40 recommendations for signatory countries to adopt standards and promote the effective implementation of legal, regulatory, and operational measures to combat crimes that threaten the financial system.

Article Credit: https://heliocor.com/wp-content/uploads/The-Challenges-of-Combating-Money-Laundering-in-a-Pandemic-World-_-Adriana-Babi_v1.pdf