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How COVID-19 is Affecting International Corruption and Financial Crime

How COVID-19 is Affecting International Corruption and Financial Crime Background Decorative Image

By Ephraim (Fry) Wernick and Peter Thomas

The coronavirus pandemic continues to upend the global economy and is increasing compliance risks for businesses in the process. We have previously reported how COVID-19 is increasing risks relating to insider trading1 and price gouging,2 and will likely lead to an enforcement surge related to the CARES Act in the coming months.3 The global scope of the COVID-19 pandemic is also increasing risks relating to international corruption and financial crime. Growing awareness of these trends will likely lead to heightened scrutiny from enforcement authorities in the coming months. Companies and financial institutions should account for the increased compliance risks created by the pandemic, as well as the uptick in enforcement that will accompany the global recovery.

COVID-19 is Increasing International Corruption Risks

As the coronavirus pandemic continues to drag down the economy and countries begin drawing up plans to restart their economies, there is a growing awareness of the foreign bribery risks created by the pandemic.4  Recently, the Organisation for Economic Co-operation and Development (“OECD”) Working Group on Bribery launched a study into the effects of the COVID-19 crisis on foreign bribery to help countries adapt their anti-corruption systems to the risks.5 Meanwhile, the Council of Europe’s Group of States against Corruption (“GRECO”) has issued guidelines to its 50 member states highlighting particular corruption risk areas implicated by the pandemic.6 Concerns have been raised about corruption’s impact on international pandemic relief, as well.  The World Bank, for example, has provided debt relief to poor countries struggling to cope with the pandemic.7 The president of the World Bank stated that governments’ use of the funds freed up by the debt relief would be subject to scrutiny,8 which is especially important given that many of the countries that will receive relief are among the most high-risk jurisdictions for corruption.9 The IMF’s Managing Director similarly recommended that the $8 trillion in fiscal measures undertaken to respond to the pandemic worldwide should be subject to safeguards and recordkeeping requirements.10

The rising corruption risk stems in part from the economic measures governments have taken to prop up national economies in response to the pandemic. As a general matter, corruption risks are heightened when businesses depend on government policy to turn profits, government institutions are weakened, and affairs are unstable due to transition.11 The pandemic is contributing to instability and uncertainty across the world.12 National governments have instituted orders locking down their countries to varying degrees,13 in many cases forcing businesses to shut down.  The ongoing crisis has prompted governments to consolidate power and inject stimulus money into their economies,14 leading to increased government involvement in national economies.

The impact of corruption on the healthcare industry is particularly pronounced in the middle of a pandemic. Even before the infection rate skyrocketed, there was a global shortage of the personal protective equipment needed to reduce the chance that the virus would infect front-line healthcare workers.15 Corruption in the healthcare supply chain can diminish the quality of medical products available and lead to unequal access to those products.16 The increased demand for medical equipment that is already in short supply, coupled with the immediacy of that need, can create the need for healthcare providers to simplify their procurement procedures.17 The simplification of compliance protocol to quickly acquire such sorely needed products increases liability risk for companies under anti-corruption statutes such as the Foreign Corrupt Practices Act.

The heightened coronavirus-related corruption risk, and the attention being brought to it, means that companies participating in the international economy, especially those in the healthcare sector, should prepare for increased scrutiny from enforcement authorities when the pandemic subsides.

COVID-19 is Spurring Other Forms of International Financial Crime As Well

In addition to the corruption risks posed by COVID-19, the pandemic has led to a reported spike in cybercrime, counterfeiting, and other frauds relating to the virus.18 Further, the crisis has increased money laundering risks for financial institutions as criminals seek to take advantage of the upheaval.19 The surge in risk has prompted calls for an internationally coordinated response involving public authorities and financial institutions.20 

International authorities are already beginning to respond to coronavirus-related financial crimes. For example, Interpol recently coordinated an international law enforcement operation to thwart a scheme to defraud German authorities in transactions to purchase face masks.21 Criminals used compromised email addresses from a company in Spain to engage German authorities for the potential sale of 10 million masks before referring the buyers through a broker in Ireland to a fraudulent supplier in the Netherlands.22 The Dutch supplier demanded a €1.5 million advance payment, then, claiming to have not received the funds, requested an additional €880,000 payment to secure the shipment.23 Interpol, authorities across Europe, and several financial institutions coordinated to freeze the funds, a portion of which was being routed through the United Kingdom to Nigeria, and to identify the parties involved in the scheme.24 This case is just one example of the evolving criminal typologies that are increasing risks for financial institutions, as well as for companies and public entities doing business with unfamiliar third parties.

What this Means for You

The COVID-19 pandemic has created a number of challenges for companies and financial institutions, the risks associated with international corruption and financial crime not being the least among them. The reduced economic activity and the need to keep employees safe while operating in jurisdictions subject to varying levels of lockdown orders have strained resources.

At least one enforcement agency has suggested that it will be somewhat forgiving on compliance cutbacks attributed to the virus – the Office of Foreign Assets Control (“OFAC”) announced that if a company, “as part of its risk-based approach to sanctions compliance, to account for [COVID-related] challenges by temporarily reallocating sanctions compliance resources consistent with that approach, OFAC will evaluate this as a factor in determining the appropriate administrative response to an apparent violation that occurs during this period.”25

However, it is not clear that other enforcement authorities, especially those outside the United States, will be as flexible, and company executives and compliance personnel can hardly rely upon the mercy of law enforcement when overseeing their compliance functions. As enforcement scrutiny is likely to increase after the pandemic, and the current environment poses heightened risks for corruption and financial crime, companies and financial institutions, especially businesses in the healthcare sector, should remain vigilant in building out and maintaining their compliance programs while managing the unique social, health and financial challenges posed by the virus.

Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.

1 Jennifer S. Freel & Lincoln Wesley, Regulators Watch for Insider Trading in Chaotic COVID-19 Market, The V&E Report (Apr. 8, 2020), available at https://www.velaw.com/insights/regulators-watch-for-insider-trading-in-chaotic-covid-19-market/.

2  Jessica S. Heim & Morgan A. Kelley, Cracking Down on COVID-19 Price Gouging: Avoid Liability with Strong Corporate Compliance, The V&E Report (Apr. 7, 2020), available at https://www.velaw.com/insights/cracking-down-on-covid-19-price-gouging-avoid-liability-with-strong-corporate-compliance/.

3 Ephraim (Fry) Wernick, Branden Stein, & Michael C. Hoosier, How COVID-19 Is Affecting the Enforcement of White Collar Crime, The V&E Report (Apr. 9, 2020), available at https://www.velaw.com/insights/how-covid-19-is-affecting-the-enforcement-of-white-collar-crime/.

4 See OECD Working Group on Bribery, The global response to the coronavirus pandemic must not be undermined by bribery, OECD (Apr. 22, 2020), available at https://www.oecd.org/corruption/the-global-response-to-the-coronavirus-pandemic-must-not-be-undermined-by-bribery.htm [“OECD Statement”]; Marin Mrčela, Corruption Risks and Useful Legal References in the context of COVID-19, GRECO (Apr. 15, 2020), available at https://rm.coe.int/corruption-risks-and-useful-legal-references-in-the-context-of-covid-1/16809e33e1 [“GRECO Guidelines”].

5 See OECD Statement.

6 See GRECO Guidelines.

7 Robert Thomason, Covid-19 debt-relief programs should be monitored for transparent government spending on social needs, World Bank president says, MLex (Apr. 17, 2020), available at https://www.mlex.com/GlobalAdvisory/DetailView.aspx?cid=1179958&siteid=234&rdir=1.

8 Id.

9 Id.

10 Robert Thomason, Transparency shouldn’t ‘take a back seat’ during Covid-19 stimulus period, IMF managing director says, MLex (Apr. 15, 2020), available at https://www.mlex.com/GlobalAdvisory/DetailView.aspx?cid=1179275&siteid=234&rdir=1.

11 The World Bank Group, Corruption and Economic Development, in Helping Countries Combat Corruption: The Role of the World Bank (Sept. 1997), available at http://www1.worldbank.org/publicsector/anticorrupt/corruptn/cor02.htm.

12 Economic Chaos Fuels Hunger and Strongmen, The New York Times (Apr. 22, 2020), available at https://www.nytimes.com/2020/04/22/world/coronavirus-cases-world.html (collecting reporting on instability created or amplified by the COVID-19 crisis).

13 Juliana Kaplan, Lauren Frias, & Morgan McFall-Johnsen, A third of the global population is on coronavirus lockdown — here’s our constantly updated list of countries locking down and opening up, Business Insider (Apr. 27, 2020), available at https://www.businessinsider.com/countries-on-lockdown-coronavirus-italy-2020-3?op=1.

14 GRECO Guidelines at 1.

15  Joshua Berlinger, WHO warns of global medical equipment shortage as world braces for coronavirus spread, CNN (Mar. 4, 2020), available at https://www.cnn.com/2020/03/04/asia/novel-coronavirus-covid-19-intl-hnk/index.html.

16 OECD Statement; see also GRECO Guidelines at 1-2.

17 GRECO Guidelines at 1-2.

18 Matthew L. Ekberg, Financial crime risk management and the COVID-19 Pandemic: Issues for closer international cooperation and coordination, Institute of International Finance at 3 (Apr. 21, 2020), available at https://www.iif.com/Portals/0/Files/content/32370132_iif_covid_amlcft_staff_paper_april_2020_final.pdf.

19 Id.

20 See, e.g., id. at 6-9.

21 Unmasked: International COVID-19 fraud exposed, Interpol (Apr. 14, 2020), available at https://www.interpol.int/News-and-Events/News/2020/Unmasked-International-COVID-19-fraud-exposed.

22 Id.

23 Id.

24 Id.

25 The Office of Foreign Assets Control (OFAC) Encourages Persons to Communicate OFAC Compliance Concerns Related to the Coronavirus Disease 2019 (COVID-19), U.S. Dep’t of the Treasury (Apr. 20, 2020), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20200420.aspx.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.