COVID-19 and Illicit Financial Activity

With the COVID-19 pandemic occurring throughout the U.S., federal agencies, (e.g., Federal Trade Commission (FTC), Food and Drug Administration (FDA), the Department of Justice (DOJ) and financial services regulators, the U.S. Securities and Exchange Commission (SEC) and U.S. Financial Crimes Enforcement Network (FinCEN), are advising financial institutions (FIs) of the potential increase in fraud cases, requiring the filing of a suspicious activity report arising from the COVID-19 epidemic.

Several news releases and guidance documents from these agencies and regulators have been issued since the beginning of the outbreak internationally, with the DOJ highlighting its first enforcement action on March 22, 2020, related to a COVID-19 fraud.1

COVID-19 Related Fraud

Specifically for FIs, the SEC and FinCEN each released their COVID-19 fraud guidance documents on Feb. 4, 2020, and March 16, 2020, respectively.2,3 The potential fraud scams noted by the regulators in these referenced documents are examples of which Bank Secrecy Act (BSA) / Anti-Money Laundering Law (AML) and fraud compliance units need to be aware and should be monitoring for the following:

  • Imposter Scams – An individual or email requests donations, steals personal information or distributes malware by impersonating a U.S. government or international agency (e.g., Center for Disease Control (CDC), World Health Organization (WHO), respectively). The FTC in their release of March 19, 2020, displayed a recent WHO fraud scam.4
  • Product Scams – Companies, typically small firms, selling unapproved or misbranded products making untrue health claims to either prevent, detect, treat or cure COVID-19. Marketing fraud schemes have also occurred regarding COVID-19 medical supplies. The FTC and FDA are already warning seven companies of their unapproved and misbranded products.5
  • Investment Scams – Unknown promotors making false internet claims of products or services related to COVID-19 medications that may be sold either by publicly traded firms or by a new start-up company selling unregistered stock. The SEC notes specifically microcap stocks,6 though any company’s stock could be used, where the promotors use a pump-and-dump scheme as one method to defraud investors.
  • Insider Trading – Typically management or other individuals who have access to or received company specific inside information that is not available to the general public. The person will trade (buy or sell) on this information before it is made public. For example, in the case of COVID-19, this could involve the development and approval of a new medical treatment or cure, the failure of a potential new treatment or cure and/or unexpected increased sales of medical products or services related to the COVID-19 pandemic.

FinCEN, in its March 16, 2020, release, also reminded FIs of other potential fraud scams during any type of disaster, now including COVID-19, by referencing its Advisory of Oct. 31, 2017,7 on fraud during disasters. Those fraud schemes include:

  • Charities Fraud – Illegitimate contribution solicitations either by door-to-door, telephone calls, U.S. mail, email, social media and fake websites.
  • Cyber-Related Fraud – Related to phishing campaigns, malicious websites and related malware.
  • Benefits Fraud – Individuals applying for emergency assistance benefits that the individual is not entitled to or provides misleading/untruthful information to obtain the benefit.
  • Sources

    1. Justice Department Files Its First Enforcement Action Against COVID-19 Fraud, US Department of Justice, 3/22/2020
    2. Look Out for Coronavirus-Related Investment Scams – Investor Alert; Securities and Exchange Commission, Office of Investor Education and Advocacy, 2/4/2020
    3. The Financial Crimes Enforcement Network (FinCEN) Encourages Financial Institutions to Communicate Concerns Related to the Coronavirus Disease 2019 (COVID-19) and to Remain Alert to Related Illicit Financial Activity, Financial Crimes Enforcement Network, Release of 3/16/2020
    4. FTC: Coronavirus scams, Part 2, by Colleen Tressler, Federal Trade Commission, 3/19/2020
    5. FTC & FDA: Warnings sent to Sellers of Scam Coronavirus Treatments, by Colleen Tressler, Federal Trade Commission, 3/9/2020
    6. Defined as “companies with a market capitalization of less than $250 or $300 million”. Microcap Stock: A Guide for Investors, Securities and Exchange Commission, 9/18/13
    7. Advisory to Financial Institutions Regarding Disaster-Related Fraud, FIN-2017-A007, Financial Crimes Enforcement Network, 10/31/17