This article appears as the "Discussion of the month" topic in AML News and Updates Newsletter - September 2023 edition which can be found here.
Imagine a news headline:
“Bank ABC Bank (your organization) Fined $100 Million for Allowing Money Laundering for Criminal Proceeds from Illegal Wildlife Trade” 😯
or this one:
“Bank ABC (your organization) Prevents $1 Billion Money Laundering from Illegal Wildlife Trade” 😊
Which one would you prefer for your company?
The answer is clear. No company wants to be fined for failing to prevent money laundering.
But in today's world, it's not enough to just have a strong Anti-Money Laundering (AML) program. Regulated entities must also consider ESG risks in your AML program to protect your company against reputational damages.
...and a strong AML program can help in combatting environmental and social crime.
What is ESG 🌱
ESG is a framework for evaluating how companies manage their Environmental, Social, and Governance responsibilities.
ESG factors are becoming increasingly important to investors, customers, and other stakeholders, driving more companies to consider it as a way to mitigate risks, attract responsible investors and customers, improve brand reputation, and comply with ESG regulatory obligations.
These factors include:
✅ Environmental Factors: A company's impact on the planet such as climate change considerations, pollution, waste management, and how the company utilizes natural resources.
✅ Social Factors: A company's impact on the society. Labor practices, human rights, community engagement, and the safety of products or services fall under this category.
✅Governance Factors: A company's internal structure and ethics. Transparency, accountability, and ethical behavior are key elements that stakeholders consider.
ESG Risks and AML Compliance
ESG risks can pose a threat to AML compliance. For example, environmental crime, such as illegal logging and wildlife trafficking, can generate large sums of cash that can be used to launder money. 💰
If you wonder how serious things are, read the below statistic:
According to the FATF, “environmental crime is estimated to be among the most profitable proceeds-generating crimes in the world, generating around USD 110 to 281 billion in criminal gains each year.”
Corruption can also be used to facilitate money laundering by corrupt officials who help criminals to move money generated from environmental crime through the financial system.
Here are some specific examples of how ESG risks can be linked to financial crime:
👉 Illegal logging: The illegal logging industry is estimated to be worth $152 billion per year. This industry generates a lot of cash that can be used to launder money. (Source: Money Laundering from Environmental Crime Report – July 2021)
👉 Wildlife trafficking: The illegal wildlife trade is estimated to be worth $23 billion per year. This industry also generates a lot of cash that can be used to launder money. (Source: FATF report on Money Laundering and the Illegal Wildlife Trade – June 2020)
👉 Corruption: Corruption is a major problem in many countries. Corrupt officials can be used to facilitate money laundering by helping criminals to move their money through the financial system.
Are AML Officers affected by ESG goals?
AML officers are affected by ESG risks in a number of ways.
For example, they may need to:
Identify and assess the ESG risks that are relevant to their organization's industry and region.
Develop and implement AML procedures that take ESG risks into account.
Monitor and update AML procedures as ESG risks evolve.
Train staff on how to identify and report suspicious activity that may be linked to ESG risks.
By understanding and addressing ESG risks, AML officers can help to prevent money laundering and protect their organizations from financial crime. 🛡
Some additional steps that AML officers can take are:
➡ Build relationships with other departments, such as compliance and risk management, to share information and coordinate efforts.
➡ Stay up-to-date on the latest ESG regulations and trends.
➡ Use technology to automate and streamline AML processes.
➡ Invest in training and education for staff on ESG risks.
By taking these steps, AML officers can help their organizations to mitigate ESG risks and comply with AML regulations.
The Future Landscape of ESG and Compliance
We expect to see a number of trends in ESG and compliance in the coming years. These include:
📌 Stricter ESG regulations: Governments and regulators will likely introduce more stringent ESG rules. For example, in the European Union, the Corporate Sustainability Reporting Directive (CSRD) requires large companies to report on their ESG performance.
📌 Greater demand for ESG information: Investors will demand more ESG-related data and information, leading to new data standards and a growing ESG data market.
📌 Board of Directors to place emphasis: ESG will gain prominence in boardrooms, influencing decision-making and reporting.
📌 ESG investing growth: ESG-focused investing will continue to gain popularity.
Best practices for AML Professionals 💡
In light of the growing importance of ESG in AML compliance, AML professionals should take the following steps:
☑ Understand the ESG risks that are relevant to their industry and region.
☑ Integrate ESG risks into their AML programs.
☑ Work with other departments, such as compliance and risk management, to address ESG risks.
☑ Stay up-to-date on the latest ESG regulations and trends.
By taking these steps, AML professionals can help their organizations to mitigate ESG risks and comply with AML regulations.
ESG risks are a growing threat to AML compliance. AML professionals need to understand these risks and integrate them into their AML programs. By doing so, they can help their organizations to mitigate ESG risks and comply with AML regulations.