As discussed in our four-part series, the COVID-19 pandemic has accelerated a trend away from using cash and other “touch-based” payment methods. This acceleration has been coupled with an increase in digital and contactless payment methods. The ongoing lockdown measures and stay-at-home orders have directly impacted consumer habits, resulting in consumers conducting their shopping online and away from retail stores, ordering their meals via delivery apps instead of dining in restaurants, and banking online as opposed to stopping by the teller on their commute home from work. 

While the continued shift toward digital and contactless payments has been a driving force behind economic recovery, it is not without its risks for consumers and businesses, potentially creating an online environment ideal for fraudsters and money-launderers. In this insight we examine recent developments in this space in the context of the COVID-19 pandemic.

Canadian trends in money laundering and fraud

Canada’s anti-money laundering (AML) and anti-terrorist financing (ATF) regime is governed by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and administered by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). FINTRAC previously released a special bulletin highlighting trends in money laundering and fraud in Canada just a few months into the pandemic. Although lockdown and physical distancing measures disrupted some traditional money laundering methods, the pandemic created new opportunities for the perpetration of fraud by targeting individuals, businesses and entities with COVID-19-related variants of popular phishing and blackmail scams.

These trends have continued. The Canadian Anti-Fraud Centre (CAFC) reports that between March 6, 2020, and April 30, 2021, there were:

• 19,570 Canadian reports of COVID-19-related fraud;
• 17,717 Canadian victims of COVID-19-related fraud; and
• CA$7.26 million lost to COVID-19-related fraud.

Specifically there has been a rise in reports of non-delivery scams, often for sales of personal protective equipment, fake COVID-19 home test kits, and even pharmaceuticals (and when such products do arrive, they are often far inferior than advertised and could pose significant health risks to consumers). There has also been a rise in fraudulent loan websites and government grant scams, which are targeted at the many Canadians who are experiencing financial hardship during the pandemic. Often victims are directed to click on links or open attachments, which may contain malware or may direct them to fraudulent websites soliciting personal and financial information.

The CAFC further reports that as of April 30, 2021, there were:

• 33,455 Canadian reports of fraud (on track for ~100,000 as compared to 71,023 in 2020);
• 19,610 Canadian victims of fraud (on track for ~59,000 as opposed to 42,130 in 2020); and
• CA$66.7 million lost to fraud (on track for ~CA$200.1 million as opposed to CA$104.4 million in 2020).

Fraudulent behaviour appears to be increasing as the pandemic has progressed. Potential explanations include corporate and consumer vulnerability.

Corporate vulnerability

One explanation for this trend is corporate vulnerability. Fraud tends to proliferate during times of economic instability. This increase is largely a result of increased economic pressure businesses and their employees feel as they struggle to meet the challenges associated with a depressed economy. Many businesses were forced to make difficult decisions as a result of the pandemic, including things like cut backs to their workforce and shifting focus to higher priority areas, such as operations. For entities subject to the PCMLTFA, this shift may have resulted in decreases in anti-fraud resources and staff to carry out Know-Your-Customer and other AML/ATF-related activities. For other businesses, the increased economic pressure may have led them to pursue risky or dubious financial offers. Additionally, as a result of the ongoing lockdown measures and stay-at-home orders, businesses were forced to pivot quickly online, with a high volume of transactions migrating to online payment platforms, which tend to experience higher rates of fraud and higher chargeback rates.

Consumer vulnerability

Another explanation for increased fraudulent behaviour is consumer vulnerability. Historically, fraudsters predominantly targeted older individuals thinking (or hoping) that they are less technologically savvy or less aware of common fraud schemes. Interestingly, and perhaps counterintuitively, there has been a shift toward targeting younger individuals, the so-called “Generation COVID”, as was recently described by the director of economic crime at UK Finance.

Many individuals comprising Generation COVID are struggling to find work, rendering them anxious, desperate and economically vulnerable. Fraudsters will use numerous tactics, including posting fake job advertisements, and impersonating streaming services or financial institutions, in the hopes of gathering personal information. Generally these schemes are implemented via social media platforms, which are predominantly used by younger consumers (more so than ever as a direct result of the amount of time spent online, whether that be due to virtual learning, banking, shopping or socializing).

Those same online platforms are used to recruit “money mules”. These are individuals who transfer money (likely acquired illegally) in person, through a courier service, or electronically, on behalf of others and are typically paid a small portion of said money that has been transferred. Consequentially, over 40% of money mules involved victims aged 21-30. 
Interac recently released a survey that indicated 52% of Canadians worry that increased isolation is making people more susceptible to fraud, largely due to more time spent engaging in online activities. Other key findings also include:

• 57% of Canadians have seen fraud attempts increase this year;
• Generation COVID (52% of Gen Z and 53% of Millennials) reported that they themselves, someone close to them, or both, have fallen victim to fraud this year; and
• 30% of seniors (65+) reported they or someone close to them had fallen victim to fraud this year

What is being done?

As we alluded to earlier, FINTRAC issued a special bulletin citing a variety of observations and scenarios to be aware of. Many other countries, including Australia, the UK and the USA, have issued similar advisory warnings of increased cyber risks associated with the COVID-19 pandemic.

Additionally, oversight agencies are increasing their enforcement activity, with regulators and law enforcement using new tools available to them through updated AML legislation and making efforts to monitor AML compliance. As a result, 28 financial institutions were issued fines for AML related violations in 2020 across 14 different countries. Total penalties for such violations exceeded US$10 billion worldwide in 2020, with the largest AML fine being US$4.8 billion in the US and Malaysia and another penalty of US$900 million in Australia. Over US$200 million in penalties were issued by oversight agencies in the United States alone to corporations in the first two months of 2021.

Concluding thoughts

As the pandemic continues, and the corresponding financial hardship faced by Canadian citizens and businesses, the impact of fraud will likely grow. Consumers, especially those engaged in sustained online activities, should be aware of the increase in fraudulent activity since the onset of the pandemic and should stay vigilant when faced with requests and advertisements while using online platforms. Additionally, it is a good time for businesses to review their AML/ATF policies to determine if the protection they offer is adequate and whether they need to be updated to reflect the economic pressure and hardship associated with the COVID-19 pandemic.

For more information, please contact Tracy Molino.

A special thank you to Natalie Tomaszczyk (articling student) for her assistance with this article.