Environmental, Social, and Governance (ESG) principles and Anti-Money Laundering (AML) policies may seem disconnected, often perceived as addressing separate aspects of corporate governance. However, considering ESG factors within AML frameworks is essential for promoting comprehensive financial integrity and ethical business conduct. While governance is a common and obvious link between the two, the ‘E’ and ‘S’ of ESG play crucial roles in a comprehensive AML policy that cannot be overlooked.
Environmental Considerations
Environmental crime, as defined by the UNEP-INTERPOL, as ‘’illegal activities harming the environment and aimed at benefitting individuals or groups or companies from the exploitation of, damage to, trade or theft of natural resources, including serious crimes and transnational organised crime’’. Examples include forestry crime, illegal mining, illegal wildlife trade, waste trafficking, and illegal fishing. These activities generate profits for criminals, fuelling corruption and intersecting with other serious crimes like tax fraud, drug trafficking, and forced labour.
The FATF Report ‘’Money Laundering from Environmental Crime’’ outlines methods used by criminals to launder proceeds from environmental crime and suggests tools for disrupting these activities effectively. It highlights the “low risk, high reward” scenario for criminals due to lenient sanctions and inadequate efforts to trace and seize profits. Recognizing the urgency, the FATF conducted the study to enhance understanding of money laundering threats from environmental crime and strengthen responses across sectors.
To address these issues, AML policies should include robust due diligence measures, transaction monitoring, and reporting mechanisms. Professionals should scrutinize transactions involving high-risk industries, jurisdictions, and conduct enhanced customer due diligence for businesses engaged in environmental activities. PEP screening and PEP concealment should also be considered.
Social Considerations
The incidence of human trafficking and migrant smuggling has surged dramatically, leading to a significant rise in victims and profits generated by these criminal activities. Since the FATF’s 2011 report ‘’ML Risks Arising from Trafficking of Human Beings and Smuggling of Migrants’’, estimated earnings from human trafficking have risen from USD 32 billion to over USD 150 billion as highlighted by an updated report issued by the FATF in 2018, ‘’Financial Flows from Human Trafficking’’.
To combat human trafficking, professionals should implement training programs to educate employees on recognizing signs of human trafficking and smuggling which at times are not very obvious but disguised under different arrangements.
Given that human trafficking can occur anywhere, it’s imperative to assess the jurisdictional risk tied to vulnerability to this crime and its associated money laundering activities.
The 2018 report outlines best practices and red flag indicators. Red flags may include:
- Engaging in unusual donation patterns;
- Financial turnover incommensurate with the commercial turnover;
- Company balance sheet showing assets in cash and profits with no legitimate trade justification; Fictitious loans: loan provided by a shareholder to the related legal person and subsequent transfer back.
Another challenge within the realm of anti-money laundering (AML) linked to ‘S’ of ESG pertains to tax evasion. This is also closely connected to the ‘G’ of ESG. Examining tax reporting from an ESG perspective has the capacity to present a comprehensive and pertinent narrative about a company’s mission, thus fostering trust. Unlike initiatives like committing to net-zero emissions, which could require years to measure and accomplish, stakeholders are currently demanding companies to disclose their tax “footprint” — the amount of taxes paid and to whom they are paid.
Furthermore, detecting tax-related offenses poses a significant challenge for obligated entities, underscoring the critical importance of integrating tax compliance measures into their AML protocols. By doing so, these entities can mitigate the risk of unwittingly serving customers engaged in tax evasion, thereby safeguarding their reputations from potential harm.
In November 2021, the FIAU released a comprehensive factsheet outlining various typologies and red flags associated with tax evasion.
Governance Considerations
The link between AML and the ‘G’ in ESG is by far the strongest, as AML requires ethics, transparency and integrity, which are key characteristics that are synonymous with good governance.
A firm’s Money Laundering Reporting Officer (“MLRO”) reports directly to the Board of Directors, which will only be able to perform its duties effectively if robust governance structures and procedures are in place. Failure to implement sufficient governance controls can put any subject person at reputational risk.
Integrating ESG principles into AML policies offers a holistic approach to promoting financial integrity and responsible corporate behavior. By considering environmental and social factors alongside governance, organizations can identify and mitigate risks associated with financial crime and unethical conduct. Through robust due diligence and adherence to legal standards, professionals contribute to a transparent and sustainable financial ecosystem. As regulatory requirements evolve, the integration of ESG principles into AML policies remains essential for building resilient and ethical business practices.
Disclaimer
While every effort was made to ensure that the contents of this article are accurate and reflect the current position at law and in practice, we do not accept any responsibility for any damage which may result from a change in the law or from a different interpretation or application of the local law by the authorities or the local courts.
The information contained in the article is intended to serve solely as a guidance and expresses the personal views of the authors; hence any contents therein do not constitute or are to be interpreted as advice.
John Debattista
Risk Partner
