Learning from the Past to Avoid Fraud in COVID-19 and its Aftermath
The influx of billions of dollars into the American economy by virtue of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and its economic impact payments and Paycheck Protection Program loans has the potential to stimulate depressed businesses and offer relief to citizens and business owners suffering from the economic downturn brought about by COVID-19. Simultaneously, the risk of fraud, abuse, and misuse of these relief programs exists. Federal and state law enforcement agencies continue to warn consumers to be vigilant regarding scams related to these programs and the pandemic in general. Enforcement efforts against those seeking to profit through fraud already have begun.
In addition to fraud affecting the unwitting consumer and relief payment recipients, history teaches that banks and other financial institutions also will be susceptible to fraud during this pandemic. After the Great Recession of 2008, some sources reported that more than 150 Ponzi schemes came to light in 2008 and 2009. These hidden frauds typically surface when, due to market volatility in the wake of a crisis like COVID-19, investors seek to redeem investments that they otherwise would have left undisturbed. They soon discover, however, that their funds and investments were all a sham. Such was the case involving Bernie L. Madoff Investment Securities LLC, which began to unravel in late 2007 and 2008 with the burst of the housing bubble and subprime mortgage crisis. Thus, banks and financial institutions must continue to deploy strong compliance programs to detect fraud and mitigate risks, even when trying to manage the everyday pressures of doing business in an era of nationwide stay-at-home orders, remote working, social distancing, closure of nonessential businesses and services, and massive unemployment.
Regulators are warning banks about the potential for fraud and will continue to focus on banks’ compliance programs, with particular emphasis on the strength of anti-money laundering programs, fraud detection, and risk recognition and elevation. While many institutions are under enormous pressure to reduce expenses during this economic downturn, any decision to reduce the size of a compliance program is likely to bring with it regulatory scrutiny. Banks, and their service providers, are still expected to maintain compliance management systems that are appropriate for the size, nature, and complexity of their businesses. Having robust and effective compliance programs is always key and can play an important role when prosecutors make charging decisions. Given the heightened likelihood that hidden frauds and Ponzi schemes will come to light during and after the pandemic, banks and financial institutions can and should implement a few key changes to their operations now to mitigate their risks and account for the developing realities of doing business during COVID-19, including:
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making real-time adjustments to monitoring metrics and red flag indicators to account for changes in banking practices coming as a result of the pandemic;
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offering compliance training refreshers to front line associates and employees; and,
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acting diligently when conducting internal investigations, including documenting investigation choices, and where possible, reducing delays related to reporting.
If you wish to discuss your compliance program or would like advice about program enhancements or regulatory, civil, or criminal enforcement during and after the COVID-19 pandemic, please contact one of our Financial Institutions or White Collar and Government Investigations team members.