Insight

3 major talking points from 2021 for the compliance industry

Written by Jon Prentice on Tuesday December 21, 2021


With 2021 quickly drawing to a close – a year full of interesting developments and thought-provoking incidents within the world of financial crime and compliance – now seems an apposite time to reflect on the last 12 months and recap three major topics and talking points that have stood out this year.

COVID-19’s impact on fraud

3 talking points from 2021 in compliance

How could we possibly recap the year without discussing what is still one of the major global talking points? With hopes of leaving COVID-19 behind us dashed, the pandemic has continued to dominate headlines throughout 2021. Whilst COVID-19 has shaped many topics of conversation, one worth focusing on is its impact on fraud.

The pandemic has provided a perfect storm for an increase in both new and traditional frauds. The combination of health and financial threats has made individuals and companies more vulnerable, creating more opportunities for fraudsters to operate. Criminals have exploited and adapted to the uncertainty, with a rise in online data harvesting and a fall in cheque and contactless card fraud. UK Finance has revealed how throughout the pandemic, fraudsters have been turning to phishing emails, smishing text messages and impersonating trusted organisations in order to obtain personal details on a more frequent basis.

With individuals across the globe being forced to work from home or made redundant, and companies or government agencies often understaffed or unprepared, fraudsters took the opportunity to ramp up their efforts through a range of schemes, both new and old, including:

  • targeted email scams
  • bank loan scams
  • vaccine fraud schemes
  • fake tech support scams
  • remote working scams
  • fake or non-existent Personal Protective Equipment (PPE) or respiratory masks schemes
  • social media scams requesting donations for illegitimate or non-existent charitable organisations
  • online romance scams, and
  • furlough scheme or stimulus cheque fraud.

Fraud statistics from the past 12–18 months support the assertion that fraudsters are thriving in the current climate. In July 2021, it was reported that ‘estimates from the Crime Survey for England and Wales showed that there were 4.6 million fraud offences in the year ending March 2021, a 24% increase compared with the year before’[1] with the UK National Cyber Security Centre also reporting 30 ‘significant attacks’ per month on the UK’s pandemic response infrastructure. These included attempted breaches on the NHS, vaccine producers and vaccine supply chains during the height of the pandemic. In September 2021, further reports revealed how more than £4 million on average was stolen by fraudsters per day in the UK in the first half of the year, with a total of £754 million stolen, an increase of 30% on the same period in 2020. Frauds involving individuals handing over their personal details and authorised push payment (APP) both also rose 71% during the period.[2]

The UK was not the only country affected. In the US the Department of Justice claimed law enforcement was on ‘high alert to investigate reports of individuals and businesses engaging in a wide range of fraudulent and criminal behavior’.[3] The United Arab Emirates Central Bank, meanwhile, reported ‘increased risks of illicit financial flows emerging from the COVID-19 pandemic’,[4] which included money laundering and terrorist financing in addition to ‘fraud risks linked to the pandemic such as companies or individuals submitting false claims to qualify for government stimulus support measures’.

Why not consider studying the ICA Certificate or Diploma in Financial Crime Prevention to learn more about this subject area?

The ongoing evolution of cryptoassets

3 talking points from 2021 in compliance

The growth and development of cryptocurrencies and cryptoassets has been fascinating to follow over the past 12 months. The price of Bitcoin, the most well-known cryptocurrency, has risen from approximately £21,500 at the beginning of 2021 to over £42,000 at the time of writing, with hundreds of new cryptocurrencies being released every month. According to CoinMarketCap, the number of cryptocurrencies increased from 10,115 in May 2021 to 13,785 in November 2021.[5] The year has also seen a number of high-profile athletes announce that they will receive part or all of their salary via cryptocurrencies, propelling crypto even further into the mainstream. These included NFL megastars Aaron Rodgers, Odell Beckham Jr, Saquon Barkley and Trevor Lawrence.

With the crypto space expanding, it comes as no surprise to see enhanced scrutiny and further regulatory developments, some of which we will look at in more detail below.

El Salvador adopts Bitcoin as legal tender

In September 2021, El Salvador made history by becoming the first country to adopt a cryptocurrency as legal tender. Bitcoin will now operate alongside the US dollar as a means of paying for goods and services within the country, in addition to the cryptocurrency being accepted as a method of payment for tax contributions. At the time of the announcement, the government released a new digital wallet app, gave away $30 in Bitcoin to each of its citizens, and more than 200 new cash machines were installed across the country. More recently, in November 2021, the government announced that it would be building a Bitcoin mining city at the base of a volcano in the south-eastern region of La Unión, with the work being funded via the cryptocurrency.[6]

The news raised some concerns and criticism, such as the consequences of such a volatile form of currency for both merchants and consumers, and the increased risk posed through money laundering, the financing of terrorism and financial crime. Whilst the government has promised to introduce the necessary safeguards to mitigate these risks, it will be interesting to see how the situation develops over 2022.

Cryptoasset mining bans

Throughout the year, several countries made the decision to either ban, or begin the process of banning, crypto-related activity including cryptocurrency transactions and cryptoasset mining, with China and Iran leading the way.

In May, China banned financial institutions and payment companies from providing any service that related to transactions involving cryptocurrencies. The move comes amid concerns that highly volatile digital cryptocurrencies could undermine the existing financial and monetary systems in place within the country. China also made the decision to ban cryptoasset mining.[7] The reason given was the electricity consumption required to conduct the practice.

More recently, Swedish regulators have also called for a ban, citing concerns surrounding the environmental impact of the process. Despite being an essential element of the cryptoasset process, mining is an extremely energy intensive practice:

Between April and August this year, the energy consumption of Bitcoin mining in the Nordic country rose "several hundred per cent," and now consumes the equivalent electricity of 200,000 households.[8]

Only time will tell whether other countries impose similar restrictions in the months and years to come.

The rise of the NFT

3 talking points from 2021 in compliance

NFTs, or 'non-fungible tokens’, have taken the world by storm over the past 12 months, with the popularity and value of NFTs soaring. An NFT is a unique digital token that is used to represent an asset, and they have two primary uses:

  1. The first is for the token to act as verification for the authenticity of a non-fungible item, utilising the decentralised ledger technology of the Ethereum blockchain. This would allow for collectable items, such as sports memorabilia or artwork, to be sold with a verifiable audit trail.

 

  1. The second and more controversial type of NFT is where the token is a representation of the underlying item, but does not confer exclusive ownership, or often any ownership rights. A good example of this is the ‘NBA Top Shot’ market, where the NBA has created a market for NFTs representing clips from basketball games, which can then be traded with other users but do not confer any ownership rights over the clip itself. This market is not dissimilar to collectable physical sports cards, just with clips rather than static images, and are traded purely for their collectable value, with some tokens trading for as much as USD 280,000.[9]

NFTs, once acquired, can be held by their owners as memorabilia or investments; traded with other NFT dealers or collectors; or sold for cryptocurrency or real-world fiat currency. The most expensive NFT ever sold was in March 2021 at Christie’s – for $69 million. The surge in popularity of NFTs could however exacerbate existing money laundering and financial crime concerns.

First, NFTs are often purchased via cryptocurrencies, and it has been well documented the money laundering risks that crypto poses. Criminals will often exploit cryptocurrencies in order to obscure the source of proceeds of crime, and, like the exploitation of real-world assets, criminals will buy and sell NFTs so that they can add additional layers to the money laundering process. In addition, NFTs are also the target of forgers and hackers. Similar to a physical piece of art, fraudsters may create of forgery of an NFT and sell it off as an original. Or, using sophisticated techniques, criminals could hack the accounts on NFT marketplaces and transfer the assets to their own account before selling them on.

With NFTs being a relatively new phenomenon, they are currently not specifically regulated in most jurisdictions, however many activities surrounding cryptoassets (which may include an NFT depending on its features) could fall within existing regulatory frameworks.[10]


Why not learn more about the world of crypto by studying our ICA Learning short course Demystifying Cryptocurrencies?


The importance of ESG

3 major talking points from 2021 for the compliance industry

Over the last few years, in particular the past 12 months, we have seen a novel, increased importance and corporate focus placed on environmental, social and governance (ESG) factors. Shifting demographic changes, public awareness and social consciousness has accelerated the need to embrace ESG responsibilities. Policy makers are now implored to factor in ESG components into their decision-making process.

We have seen a clear shift in investors’ behaviour recently, with a company’s ESG performance and strategy being key contributors to investment decision making. ESG funds are, it seems, more popular than ever:

In the first quarter of 2021, inflows into European “sustainable” funds totalled €120 billion, 18% more than the first quarter of 2020, according to Morningstar, and that comprised slightly more than half of all fund inflows for the first time.[11]

Firms taking a conscientious ESG approach provide many obvious benefits to the environment and society; however it can be overlooked that firms themselves can also benefit greatly from implementing strong ESG strategies. These benefits include, but are not limited to:

  • improved reputation and enhanced public perception
  • increased appeal to investors
  • long-term sustainability
  • ability to attract and retain employees
  • increased employee happiness
  • more revenue opportunities
  • bettering the environment and society, and
  • reduced regulatory risk.

One of the main questions surrounding ESG, in particular within financial institutions or regulated settings, is who should be responsible for implementing and governing the process. Some believe it is the responsibility of the board or HR, others that an organisation’s compliance department is better suited given the compliance department is already well-equipped to perform many of the necessary ESG functions, such as overseeing policies and procedures, managing risk, testing, measurement and surveillance.

To read more about the links between ESG and the role of the compliance department, why not have a look at our ICA Insight article ESG and compliance: No time to waste?

What the future holds

3 major talking points from 2021 for the compliance industry

Reviewing the last twelve months, it is easy to forget just how fast-paced and ever-evolving the world of financial crime and compliance can be. Compliance professionals need to be agile and adaptable to change, as you never know when the next pandemic will hit, or the  nature of the latest technological advancement. Whilst this article has only provided a snapshot of some of the topics from throughout 2021 – and there were many more that could have been discussed – we look forward to what 2022 has in store, and the potential novelties we could be reviewing this time next year.


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References:

[1] Dan Simmons and Matt Quinton, ‘Covid fraud : £34.5m stolen in pandemic scams’, BBC News, 24 March 2021: https://www.bbc.co.uk/news/technology-56499886 – accessed December 2021

[2] Kevin Peachy, ‘Fraudsters steal £4m a day as crime surges’, BBC News, 22 September 2021: https://www.bbc.co.uk/news/business-58649698?at_medium=RSS&at_campaign=KARANGA – accessed December 2021

[3] US Department of Justice, ‘Combatting Covid-19 Fraud’: https://www.justice.gov/coronavirus/combattingfraud – accessed December 2021

[4] Voice of America, ‘UAE Central Bank Sees COVID-19 Increasing Money-laundering Risks’, 19 September 2021: https://www.voanews.com/a/uae-central-bank-sees-covid-19-increasing-money-laundering-risks/6235388.html – accessed December 2021

[5] Oliver Barsby, ‘New Cryptocurrency Releases 2021: What New Crypto Coins Are Coming Out in 2021?’, Planet Crypto, 7 December 2021: https://www.gfinityesports.com/cryptocurrency/new-cryptocurrency-releases-upcoming-crypto-coins-upgrades-updates-ico/ – accessed December 2021

[6] BBC News, ‘El Salvador Bitcoin city planned at base of Conchagua volcano’, 21 November 2021: https://www.bbc.co.uk/news/world-latin-america-59368483 – accessed December 2021

[7] Alun John, Samuel Shen and Tom Wilson, ‘China’s top regulators ban crypto trading and mining, sending bitcoin stumbling’, Reuters, 24 September 2021: https://www.reuters.com/world/china/china-central-bank-vows-crackdown-cryptocurrency-trading-2021-09-24/ – accessed December 2021

[8] Tom Batemen, ‘Europe must ban bitcoin mining to hit the 1.5c Paris climate goal, say Swedish regulators’, Euronews, 12 November 2021: https://www.euronews.com/next/2021/11/12/europe-must-ban-bitcoin-mining-to-hit-the-1-5c-paris-climate-goal-say-swedish-regulators – accessed December 2021

[9] Laven, ‘9 Regulatory Developments in the Crypto Space in 2021’, 16 June 2021: https://www.lavenpartners.com/thought-leadership/cryptocurrency-regulation-2021/ – accessed December 2021

[10] Clifford Chance, Non-Fungible Tokens: The Global Legal Impact, June 2021: https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/06/non-fungible-tokens-the-global-legal-impact.pdf – accessed December 2021

[11] Harvard Law School Forum on Corporate Governance, ‘ESG in 2021 So Far: An Update’, 18 September 2021: https://corpgov.law.harvard.edu/2021/09/18/esg-in-2021-so-far-an-update/ – accessed December 2021


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