By Eray Arda Akartuna
Anti-Money Laundering Analyst
It is no secret that criminals look for opportunities in every new development – and the coronavirus is no exception. Authorities across the globe have reported surges in Covid-related frauds, including fake charities and scams for ‘miracle cures’.[i] In October, Bloomberg reported that Americans had lost $161m to Covid-related scams.[ii] Perhaps more significant, however, is how criminals are laundering their illicit proceeds (i.e. disguising their criminal origin), so they can spend them without alerting authorities. Money laundering is a requirement for any profit-motivated criminal wanting to avoid capture – and the pandemic does not exempt them from this necessity.
For money launderers, decreased cash use, travel restrictions and non-essential business closures all pose problems. Their traditional methods, such as transporting bulk cash across borders or injecting it into cash-intensive front businesses, have all become more difficult.[iii] Despite these inconveniences, the virus has, nevertheless, created a new and perhaps deadly criminal opportunity: the demand for personal protective equipment (PPE) has surged, and criminals are already raking in the benefits.[iv]
The sudden rise in demand for PPE has caught the medical supplies industry off-guard. Civil servants in the UK were told to scour the world for available imports, as it transpired in April that billions of stocks would be necessary.[v] Meanwhile, the US Government invoked the Defence Protection Act to address PPE shortages.[vi] To facilitate imports, customs procedures have been relaxed and lucrative new government contracts have been tendered.[vii] [viii] This has given money launderers new avenues to clean their proceeds while exploiting the distracted and desperate nature of importers.[ix]
Criminal investment in PPE firms
With the PPE trade suddenly becoming lucrative, opportunistic entrepreneurs have established medical supply companies to capitalise on demand. Few, however, have the industry experience or financing required to stock up on PPE initially.[x] Such firms have therefore increasingly turned to short-term investments from wherever they can find it, which has attracted the interest of questionable financiers.
According to Debra Geister, CEO of Section 2 Financial Intelligence Solutions, some firms have been tied to drug cartels, organised crime groups and shell companies close to questionable governments.[xi] Since PPE is seen as a short-term but sure investment, criminals expect guaranteed returns, which also serves to clean their funds once the PPE firms make their sales.
Some PPE firms may be a direct money laundering front for criminals themselves. During an interview on the matter in July 2020, ISMG Banking and Payments Director Nick Holland and Section 2 CEO Debra Geister emphasised that PPE is a universal, valuable and highly demanded asset. [xii] This makes PPE an attractive alternative medium to invest illicit funds – effectively using it as a new form of currency.
It was suggested, for example, in an April 2020 news report that a Floridan aircraft leasing company World Jet, previously under federal investigation for facilitating drug trafficking, had been contracted by the US State of Oklahoma to provide PPE.[xiii] In essence, this shows that launderers that have had their operations impacted by the pandemic can use illicit funds to purchase PPE instead, which they then sell on for clean funds to those that highly demand it. The new normal of the pandemic is such that even governments have now become willing recipients.
PPE-related trade-based money laundering
Trade-based money laundering (TBML) has long been a key money laundering risk, with border agents having long being subject to extensive guidelines on identifying and preventing it. A recent Delphi study conducted at University College London (UCL) identified, through a panel of experts, that lax customs checks associated with extreme demand had only made TBML easier for perpetrators.
TBML occurs when two associated front companies sign dubious trade agreements and either over- or under-invoice one another (based on the direction of illicit financial flows). Some companies simply invoice non-existent goods or services, known as ‘phantom shipments’, allowing funds to be received in return for nothing at all. The diagram presents these TBML methods in more detail.
In late May, the Central Bank of Russia announced that $1.3m had been seized from an alleged ‘purchase of masks’ which never actually occurred, indicating a possible phantom shipment scheme.[xiv] While governments are becoming aware of these risks, the pandemic is nevertheless reducing their physical capacity to remain sufficiently vigilant in these desperate times.
The advice of compliance firms and government institutions aware of this issue seems to be the same: enhanced due diligence – that is, know your customer extensively before facilitating their financial transactions.[xv] However, with the physical due diligence capacity of institutions reduced due to work-from-home orders, this is unlikely to be sufficient on its own. Regional co-operation to determine appropriate quality standards and prior inspection routines to prevent bogus PPE exports is a must. This will not only prevent money laundering but also counterfeit goods fraud and terrorist financing, as terror groups such as ISIS have also been found to have engaged in selling bogus PPE online to fund themselves. [xvi]
A recurring frustration within compliance circles has long been the need to increase data sharing between law enforcement agencies and financial institutions. Such collaboration is crucial for these PPE-related risks in particular due to the suspicious nature of the involved entities (PPE firms) themselves, rather than just their transactions. Intelligence-sharing about dubious persons engaging in PPE trade, by relevant authorities, can facilitate the pre-emptive flagging and prevention of associated illicit transactions by financial institutions.
PPE-related money laundering activities not only have inherent financial implications, but also, given the vitality of the exploited good of choice, potentially risk millions of lives. In this light, the key message is clear: there perhaps has never been a more crucial time for authorities and financial institutions to be aware and alert of the latest money laundering risks. Co-operation, both between and across governments and financial institutions, should underpin global efforts to prevent any further misappropriation of taxpayer money or, even more seriously, substantial loss of life associated with substandard PPE shipments.
[i] ‘COVID-19: Fraud’, Europol, 2020, https://www.europol.europa.eu/covid-19/covid-19-fraud.
[ii] Emily Cadman, Jack Pitcher, and Chanyaporn Chanjaroen, ‘The Covid-19 Pandemic Is Making Everyone More Susceptible to Scams’, Bloomberg Wealth, 23 October 2020, https://www.bloomberg.com/news/articles/2020-10-22/covid-scams-how-to-protect-money-from-being-stolen-during-pandemic.
[iii] FATF, ‘COVID-19-Related Money Laundering and Terrorist Financing: Risks and Policy Responses’ (Financial Action Task Force, 2020).
[iv] Herman Albamonte, ‘COVID-19 and Illicit Trade: When Organized Crime and Terrorists Profit from the Pandemic – Homeland Security Today’, Homeland Security Today (blog), 27 September 2020, https://www.hstoday.us/subject-matter-areas/counterterrorism/covid-19-and-illicit-trade-when-organized-crime-and-terrorists-profit-from-the-pandemic/.
[v] Faisal Islam, ‘Why a Billion Items of PPE Is Not Enough’, BBC News, 20 April 2020, sec. Business, https://www.bbc.com/news/business-52362707.
[vi] Nick Oberheiden, ‘COVID-19 PPE Fraud’, Federal Lawyer (blog), 20 June 2020, https://federal-lawyer.com/covid-19-ppe-fraud/.
[vii] Aaron R Hutman, Jenny Sheng, and David Oliwenstein, ‘COVID-19, Corruption and Money Laundering’, Pillsbury Law (blog), 5 November 2020, https://www.pillsburylaw.com/en/news-and-insights/corruption-money-laundering-aml-laws-covid-19.html.
[viii] John Basquill, ‘Fraud, Money Laundering and Cybercrime: How Covid-19 Has Changed the Threat to Banks’, RiskScreen – KYC360 (blog), 14 July 2020, 350, https://www.riskscreen.com/kyc360/news/fraud-money-laundering-and-cybercrime-how-covid-19-has-changed-the-threat-to-banks/.
[ix] ‘COVID-19: Suspicious Activity Reporting’, UK Financial Intelligence United Guidance Note (National Crime Agency (NCA), May 2020), https://www.nationalcrimeagency.gov.uk/who-we-are/publications/448-ukfiu-covid-19-communications-product-may-2020/file.
[x] Koos Couvée, ‘COVID-19 Lockdown’s Impact on Money Laundering Is Limited, Temporary’, ACAMS Money Laundering, 22 May 2020, https://www.moneylaundering.com/news/covid-19-lockdowns-impact-on-money-laundering-is-limited-temporary/.
[xi] Brett Wolf, ‘Banks Must Scrutinize Medical PPE Firms to Avoid Growing Laundering Risk, Experts Say’, Thomson Reuters Regulatory Intelligence (blog), 5 August 2020, https://blogs.thomsonreuters.com/answerson/ppe-money-laundering-risk-trri/.
[xii] Nick Holland, ‘How Criminals Are Using PPE as a Money-Laundering Tool’, BankInfo Security (blog), 24 July 2020, https://www.bankinfosecurity.com/how-criminals-are-using-ppe-as-money-laundering-tool-a-14698.
[xiii] Clifton Adcock, Kassie McClung, and Dylan Goforth, ‘Florida Company Allegedly Involved in Drug Trafficking among Businesses Oklahoma Made Coronavirus Purchases From’, The Frontier, 15 May 2020, https://www.readfrontier.org/stories/florida-company-allegedly-involved-in-drug-trafficking-among-businesses-oklahoma-made-coronavirus-purchases/.
[xiv] Elena Fabrichnaya, ‘In Russia, Scammers Exploit Pandemic to Launder Money Using Medical Goods Purchases’, Reuters, 28 May 2020, https://www.reuters.com/article/us-russia-cenbank-transfers-idUSKBN2342VS.
[xv] Wolf, ‘Banks Must Scrutinize Medical PPE Firms to Avoid Growing Laundering Risk, Experts Say’.
[xvi] Catherine Herridge, ‘ISIS Accused of Selling Fake PPE Online to Finance Terrorism’, CBS News, 13 August 2020, https://www.cbsnews.com/news/isis-accused-of-selling-fake-ppe-online-to-finance-terrorism/.