The current pandemic poses various challenges to organisations, one of which is the increase in financial crime risk, with criminals seeking new ways to launder illicit money and exploiting weaknesses in the global financial system. The pandemic has also changed the way financial crime risk is managed and controlled in Africa. The increase in lockdowns, travel bans, remote working arrangements, social distancing requirements, and general movement restrictions has upended the traditional ways of conducting due diligence in Africa. Criminals are getting more sophisticated, and the current environment is proving to be a good breeding ground for money launderers and fraudsters’.
According to a report on Covid-19 published by the Financial Action Task Force (FATF) in May 2020, criminals are taking advantage of the pandemic to engage in fraud and scams such as advertising and trafficking in counterfeit medicines as well as phishing schemes that prey on virus-related fears (FATF, 2020). Africa is not exempt from this.
Trade based money Laundering
Cross-border trade activities are one of the more common ways in which criminals launder their money from illegal activities. They channel money through trade finance systems; adding layers of legitimacy and opacity that make detection less likely. According to the Global Financial Integrity, Trade-based money laundering (TBML) and tax evasion contributed to a nearly $9-trillion loss for developing countries between 2008 and 2017. In the wake of Covid-19, governments around the world have had to take unprecedented measures to help their economies and people navigate the new landscape. Issues around shortages, tumbling commodity prices and an inability to service external debt forced governments to maintain a delicate balance between compliance with laid down procedures and the urgency of the problems brought by the pandemic.
Trade related financial crime risks may have increased due to relaxation of some of the governance around trade by African governments to take into consideration the needs of their people. Over-invoicing which is a commonly identified financial crime risk is not particular to Africa but might seem more prevalent due to its unique circumstances. The impact of factors such as people’s needs, foreign exchange, and all manner of local extenuating circumstances might give rise to the appearance of financial crime risk where there is in fact none. Additionally trade finance is traditionally very paper intensive and in light of the promotion of a digital way of doing things, there are potential loopholes that criminals could exploit as people get used to this new normal.
Traditionally, there have been issues accessing reliable and accurate information in many African countries when conducting due diligence due to inadequate digital data management systems. Even in countries with decent data management systems, the lack of historical data necessitates physical archive searches.
On-site visits have always been a very important aspect of the due diligence process in Africa. It helps with information validation and provides the opportunity to assess the quality of the team on the ground, evaluate the business model, and meet with key stakeholders such as customers, suppliers, and implementing partners. These visits are also relevant in assessing the Environmental, Social, and Governance (ESG) implications for investments, especially given the increasing importance of ESG issues in Africa and the rest of the world. The pandemic restrictions have made it more challenging to conduct the manual, on-site recovery of information, which is necessary when conducting due diligence. Institutions must be aware of these emerging risks, ensuring they have sufficient controls to mitigate their risks appropriately.
Mitigating the Risk
One way to mitigate these risks during the due diligence process is to seek third-party verification of identity (from reputable law firms and accounting firms), or use commercial providers who triangulate data sources to verify documentation provided. They may also gather and analyse additional data to triangulate the evidence provided by the client, such as geolocation, IP addresses, and verifiable phone numbers. A combination of these methods should be considered in order to verify the customer’s identity subject to the risk rating of the customer and the risk appetite of the organisation.
Secondly, financial institutions must monitor transactions to detect any behavioural anomalies. Spotting these red flags is vital in curbing money laundering. This can be done by using historical customer behaviour interaction. Special attention can be placed on cash-intensive businesses such as restaurants, retail stores etc. this is because a criminal may own a cash-intensive business to legitimise its criminal proceeds. Some red flag indicators include a sudden increase in volumes of cash being reported as profits, especially where the pandemic has negatively impacted other similar restaurants in that location.
Finally, your organisation can partner with reputable due diligence firms with a proven track record of helping organisations navigate their due diligence requirement in Africa.
Organisations such as the EBII Group have a wide range of products and services to enable their clients protect themselves against a wide variety of risks. The Group’s Training & Education and Advisory services provide due diligence solutions on various risks, including ESG; anti-money laundering; counter-terrorist financing; sanctions and embargoes and anti-bribery and corruption. EBII’s latest innovation – the Africa Compliance Hub- which is set to launch in the new year, is a one-stop-shop for investors considering doing business in Africa. It is a platform which hosts relevant regulatory documents, access to a global network of Africa investment risks and compliance experts, and information on the latest events and development in the African due diligence and risk industry.
EBII’s strong presence and reach on the African continent means that they provide your organisation with a more complete and nuanced understanding of current developments, therefore helping you conduct more informed due diligence. Contact us for further support.