A record-breaking amount of money is being made available to small to medium enterprises (SMEs) due to the COVID-19 pandemic crisis. The US has a $2 trillion rescue plan for citizens and businesses, Germany has already begun distributing a €500 billion fund and China set aside 300 billion yuan. COVID-19’s impact on SME lending cannot be understated. The specifics of the plans themselves, however, are not the main concern for compliance functions. What matters is making sure that this money is only distributed to legitimate businesses.
COVID-19 Financial Crime
We’ve already commented on the increasing rate of fraud and COVID-19 financial crime. But SMEs represent both a real threat to financial institutions (FIs) and are also vulnerable targets for varied financial crimes.
Spinning up a business on paper or taking one off the shelf is a simple exercise for any money launderer with some skill. So it’s vital to make sure that the checks undertaken on businesses are precise and thorough, unfortunately, the lenders that are being engaged for these transactions face unprecedented levels of strain.
There’s immense pressure to process these loans as fast as possible. Many SMEs are unable to generate revenue and are on the brink of failure, not only does that represent lost revenue for a lender but nobody wants to take on the reputational damage for the bankruptcy of a business. Especially during this crisis. It wouldn’t take much for news articles to be created damaging a lender and accusing it of responsibility for an SME failing.
Part of the reason it’s so difficult to handle the volume and velocity of new customers for lenders is the KYB checks involved. Not only do these take an inordinate amount of time, but they’re also costly. Every minute a compliance officer spends in a search engine researching the history of a business is a minute they could have spent elsewhere.
Adverse media and negative news solutions cut through the noise generated by search engines and deliver combined profiles with actionable insight, so compliance officers can process applications and approve or deny new customers at speed. Customers get their money faster and lenders can onboard them with the confidence that no financial crimes are being facilitated.
Hiring on extra people may feel like a solution to monitor the high volume of transactions currently taking place. But in this environment it’s going to be difficult to find, hire, train and onboard new staff. And the real issue isn’t how many people you have, it’s about how quickly they can work. Having an automated solution means that the system is constantly monitoring at peak capability. There’s no issue of human fatigue, so compliance officers can leave the data work to the compliance tool and focus on doing the skilled judgment work that matters.
Fixing the Gap with COVID-19 SME Lending
While many FIs are focused on handling the influx of new customers and the transaction monitoring that will come along with it. There are other compliance issues brought about by COVID-19 financial crime.
Money launderers are always changing how they move money, adapting to the issues of the day and behaviors of law-abiding people. Money is moving differently thanks to the pandemic. In-person banking is impossible in most parts of the world right now thanks to various lockdown procedures and quarantines. For markets like Singapore, India and the UK which have embraced e-KYC this isn’t an issue. But not all FIs have managed to catch up.
FIs will be working hard to fix this gap as life moves to digital, but even if they manage to get past that hurdle it’s a process that’s vulnerable to exploitation by sophisticated criminals. Efficient financial criminals will be able to get past it. Often with insider help, it’s worth remembering that 43% of fraud incidents over $100 million in the US last year was accomplished with insider support. If those FIs had used an efficient audit log for their work that number would probably have gone down significantly.
Compliance officers cannot afford to be distracted by the new intake of customers. Freeing their time from administrative tasks is one of the most important and cost-effective decisions an FI can make right now. Compliance officers need to be able to focus on the criminal financial behavior hidden in plain sight. COVID-19 financial crime isn’t limited to fraud. It can also be suspicious purchases of medical equipment, supplies and money movement that’s explained as last-minute travel expenses home.
These are all potential risks and potentially valid explanations. But that’s the investigative work where compliance officers thrive and can save your business from reputational damage and extensive fines. Let compliance tools focus on the volume and velocity of SME loan applications and transaction monitoring, so your compliance officers can focus on doing the valuable human work that no current automated solution ever could.