Cash-strapped Firms Vulnerable to Criminal Infiltration During Pandemic

By Koos Couvée

European banks should bolster their scrutiny of small and medium-sized businesses struggling as a result of the novel coronavirus pandemic to guard against their exploitation by cash-rich crime syndicates seeking to launder illicit gains.

Amid the deepest global recession in decades, criminals may offer hard-hit businesses in several at-risk sectors, including the construction, hospitality, travel and tourism industries, interest-free loans and direct them to repay them to entities overseas, especially in the Middle East and South America, according to a June 5 report by Europol, the EU’s law enforcement agency.

Investigators and prosecutors in Italy, the EU’s third-most populous country, separately warned that troubled firms may be tempted during the pandemic to accept loans or investments from deeply entrenched criminal organizations in exchange for an ownership stake in their companies.

Italian crime syndicates have developed something of a playbook for profiting from crises. In similar situations in the past, they would also typically force owners who partner with them to hire a senior employee of their choosing to steer the firm and its relationships with financial institutions, vendors and distributors in a direction that benefits them.

Figures compiled since the start of the pandemic suggest that criminals have already targeted businesses that frequently transact in cash.

In the two months up to May 22, when Italy was under strict lockdown, 250 hotels, more than 1,000 restaurants and 1,300 property firms have changed hands nationwide, according to Transcrime, a policy center housed at Universita’ Cattolica in Milan.

“If there’s one sector that [also] has the profile of being high-risk now in Italy, it is logistics and transport, especially road transport,” said Michele Riccardi, a senior researcher at Transcrime.

The threat is not confined to Italy. Officials in the Netherlands believe criminals may attempt to take over failing bars, restaurants, nail salons, tattoo shops and other cash-intensive firms to launder proceeds.

More sophisticated crime syndicates, however, may veer towards less obvious routes to launder, such as event planners, online learning institutions and technology firms, while using “cleanskin” intermediaries, said Samantha Sheen, former director of AML for ACAMS in Europe.

They may also use a wide range of financial institutions in various countries to layer their investments, Sheen, now an independent consultant based in London, told ACAMS

“They’ll already have the money in the bank and have a facilitator,” Sheen said. “Desperate firms in need of a capital injection may not know they’re dealing with a strawman, and in any case won’t want to scare any angel investors away with cumbersome due-diligence processes.”

Blind spot

Most financial institutions grasp that legitimate companies pose a tempting target for criminals, and typically mitigate the risk by tracking any changes in the beneficial ownership of their corporate clients.

They are, however, less equipped to spot criminal infiltration when no such changes occur.

The pandemic may give rise to criminal “angel investors” who offer off-the-book loans to struggling businesses in exchange for a measure of control and a means to launder illegal funds or conceal illicit trade, an Amsterdam-based compliance officer said.

Investors who keep their holdings below the 25 percent threshold that triggers the EU’s beneficial-ownership requirements will most likely escape the financial services industry’s detection, the compliance officer told on condition of anonymity.

“Banks from the KYC [know-your-customer] perspective look at factual control and not really at how the company is financed or capitalized,” the compliance officer said. “The money can come from anywhere, and banks are insufficiently equipped to figure that out.”

Infiltrated firms tend to have significantly less debt than their legitimate counterparts because illicit investment renders formal loans from banks unnecessary, according to a report that Riccardi, the Milan-based academic, co-authored in 2018.

Firms sold below market value, receiving unusual injections of funds from a third party or experiencing a sudden change in ownership or increasing the complexity of their corporate structure may also arouse suspicion.

Financial institutions should consider drawing up “models around unexpected recovery,” such as pandemic-hit firms suddenly becoming able to repay state-backed loans issued during the crisis, said Sheen, the London-based consultant. But confirming criminal infiltration may still prove a challenge if the formal ownership of the client remains unchanged, she said.

“You don’t really do deep due diligence on the person that is financing your client,” she said. “It has to be red-flagged in the first place, or you might spot it when your correspondent bank asks for information about the transaction three months later.”

Contact Koos Couvée at

Topics : Anti-money laundering , Counterterrorist Financing
Source: European Union , Italy
Document Date: June 30, 2020