FI Challenges in Unprecedented Times

1. Challenges for Financial
Institutions In Unprecedented
Times
A Perspective : Financial Crime Compliance
12 Dec 2020

2. Agenda
1. Financial Crime Risk – An Overview
2. Challenges for Financial Institutions : COVID-19 crisis
3. Covid-19 : Fraud & Cyber Crime schemes
4. Financial Crime Risk Mitigation Measures – Role of Banks
5. Opportunities for Financial Institutions : COVID-19 crisis
6. Case Study – Money Laundering Modus Operandi
7. Red Flag Indicators – Key learnings

3. Financial Crime Risk – An Overview
• Money Laundering –
• Placement
• Layering
• Integration
• Hawala, Shell Companies, Tax Evasion, Smuggling, Drug trafficking, Cyber Crime,
Gambling
• Frauds (E.g. – COVID-19 related)
• Trade Based Money Laundering
• Bribery/ Corruption
• Financing of Terrorism

4. Financial Crime Risk – An Overview

5. Challenges for Financial Institutions : COVID-19 crisis
• Financial institutions are facing a potential increase in cyber-attacks and fraud
attempts due to the growth of digital banking interactions which is compounded
due to employees working remotely from home/ less secure environments
• Despite cyber threats and a significant increase in digital interactions, keeping
their systems stable and reliable is a key challenge for Financial institutions/ banks
• Adverse impacts of digital advancements such as work force reduction/ job cuts
• Resilience, stability, growth and expansion in the ‘new normal’ environment
• Stringent regulatory environment due to increase in Financial Crime

6. Covid-19 : Fraud & Cyber Crime schemes
• Fraudulent websites were being created for safety items such as masks & hand
sanitizers, where purchases were being made but goods never received
• Fraudulent websites where individuals transacted entering their credit or debit card
numbers intending to purchase items such as masks, gloves, hand sanitizers but no
transaction occurred
• Fraudulent airline customer service numbers on internet who asked for credit card
details in order to process refunds or re-booking requests
• Individuals posed as doctors, army personnel, travelers etc. on social media claimed to
be stuck in foreign country with high COVID spread without access to their bank
accounts and requested funds to purchase airline tickets back to their home country

7. Covid-19 : Fraud & Cyber Crime schemes
• Stocking & Black Marketing of COVID related safety items such as masks, sanitizers,
respirators, medical kits etc.
• Employment Frauds – Fictitious Employment offers
• Phishing scams – attempt of tricking people into voluntarily providing their personal
information such as login credentials, credit card or other banking details through
various social engineering techniques for financial gains by cyber criminals. Such
attacks may be in form of emails, text messages or telephone calls that appear to be
from a financial institution, government agency, medical facility or internet service
provider
• Imposter frauds – criminals impersonate government agencies, NGOs, Universities,
Charities etc. to deceive victims

8. Covid-19 : Fraud & Cyber Crime schemes
• Money Mule Schemes – a person who transfers illegal funds on behalf of, or at
the direction of another. Money mule remains unaware that he/she is part of a
larger scheme due to deception, the promise of a job, a work from home scheme,
or other proposition to establish trust in the master mind behind the money mule
scheme
• Cyber threats targeting technology for remote working arrangement

9. Financial Crime Risk Mitigation Measures – Role of
Banks
• Know Your Customer and Customer Due Diligence
• Governance of risk : Lines of Defense mechanism – “Three Lines of Defense”
• Customer awareness, data privacy & security, digital enhancements & controls
• Ongoing monitoring of client banking activities – Role of technology and human
expertise
• Dissemination of intelligence/ data to regulatory authorities
• Risk appetite on customer relationship
• Trainings, learning and knowledge management

10. Opportunities for Financial Institutions : COVID-19 crisis
• Backbone of economy – Financial Institutions/ Banks generate, invest, manage,
grow and protect the finances for country
• Banks have a key role to play in various government initiatives such as Make in
India and self-reliant India
• Covid-19 has acted as a major catalyst for digital transformation in the banking
industry
• Technological advancements promising growth & customer reach for the Banking
Industry, will help in financial strengthening of the nation
• Many customers who were prior reluctant to engage digitally with their banks,
were “forced” to do it during the pandemic

11. Opportunities for Financial Institutions : COVID-19 crisis
• Financial Institutions are designing Cost Reduction Strategies;
• Facility cost reduction
• Ease of connectivity on digital platform
• Time management
• Work-life balance & enhanced productivity
• Profitability & long term sustainability

12. Case Study – Money Laundering Modus Operandi
• Money Launderer ABC sets up an export company XYZ Consultants Pvt Ltd in
India
• The company was only existing on papers showing business of diamonds, gems
and jewelry with annual turnover declared of approx. INR 20 crores
• Address proof (KYC Document) given for account opening was the residential
address of money launderer ABC in a slum area

13. Case Study – Money Laundering Modus Operandi
• Money Launderer ABC also sets up two other import companies EFG Management
Services Pvt Ltd in Dubai and PQR Tech-serve in British Virgin Island (BVI)
• The Indian export company XYZ Consultants Pvt Ltd exports diamonds, gems and
jewelry to foreign import companies EFG Management Services Pvt Ltd and PQR Tech-
serve
• The foreign import companies remits illegal funds derived from drug trafficking to
pay for these goods on an over-invoiced basis
• These illegal funds gets reported in India as export earnings by the Money Launderer
ABC

14. Case Study – Money Laundering Modus Operandi
• Multiple advance payments were received by XYZ Consultants Pvt Ltd from these
two foreign import companies (counterparties) against showed exports
• Most of these transactions were either only paperwork without actual exports or
export of fake goods

15. Red Flag Indicators – Key Learnings
• Name of all 03 companies were not matching with business profile declared and
expected nature of business
• Address of Indian business entity was given as residential address of individual
• During the address visit, a board of XYZ Consultants Pvt Ltd was found at the Money
Launderer’s residence with one or two other persons at the premise declared as
employee by the Money Launderer
• Turnover of Indian export entity seems too high considering the facts that address is a
residential address in slum area and entity is managed by only 1-2 persons
• Underlying goods (diamonds, gems and jewelry) are high risk goods

16. Red Flag Indicators – Key Learnings
• Foreign import entities were in high risk jurisdictions (Dubai & BVI) & found
engaged in drug trafficking during investigations
• BVI is a well-known Tax Haven
• Same person noted as Beneficial Owner behind all 03 entities basis public domain
search
• Over-invoicing and multiple advance payments were received by Indian exporter
without regularization of exports
• All these entities were found to be shell entities
FI SUBMITTED INVESTIGATION FINDINGS TO REGULATOR AND EXITED THE CLIENT RELATIONSHIP

17. Thank You !!