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Dualthreatdualdefense
WhyESGisthekeytoeffectivebankcompliance
Asynergisticapproachtosafersustainablebanking
Today,manyfinancialinstitutionstrack
environmental,social,andgovernance(ESG)factorstobetterunderstandtheorganizationstheydo
businesswith.Theydosoforavarietyofreasons—toreduceriskfromissuessuchasclimatechangeandscandal;togaugethepotentialfinancial
performanceofclientorsuppliercompanies;to
guidecustomerslookingforsustainablefinanceorresponsibleinvestments;tomanagetheirowncarbonfootprint;andtocomplywithincreasing
ESG-relatedregulatoryrequirements.Atthesametime,institutionsputagreatdealofeffortinto
financialcrimecompliance(FCC),andmeetingthestandardsandregulationsestablishedbytheU.STreasuryDepartment’sFinancialCrimeEnforcementNetwork(FinCEN)andother
governmentalbodies.TheseFCCoperationsaimtoreducemoneylaunderingandprotectthefinancialsystemfromtheflowofillicitfunds.
There’saconsensusthatESG
considerationsshouldbeincorporatedintotheclientprospectevaluation
stage.Thisensuresthatreputationalriskisaddressedupfront,priorto
onboardingandKYCprocesses.
BusinessExecutive,majorUKbank
BothESGandFCCscreeningareimportantforall
financialinstitutions.Thesetwocriticalactivities
havetraditionallyoperatedasseparatedomains,
eachinitsownsilopursuingitsownmission.But
thereisanuntappedpotentialtoleverageESG
considerationsinFCC,usingtechnologytocombinethestrengthsofbothdomains.Bydoingso,
institutionscansignificantlyenhancetheireffortstoproactivelyuncoverandcombatillicitactivitiesandreducetheirownriskofbeingassociatedwithcrimeandrunningafoulofregulators.
2Dualthreat,dualdefense
ThelinkbetweenESGandFCC
IntheirFCCoperations,financialinstitutions
focusonKnowYourCustomer(KYC)effortsthataimtounderstandthecustomer’sbusinessand
anyassociatedcriminalrisks.KYClookslargely
atfinancialtransactions,moneyflows,and
periodicnegativescreeningstoidentifypotentialproblems.Ontheotherhand,ESGscreeninglooksatarangeofnewsreportsandpubliclyavailableinformationtodevelopinsightsintoacorporationoritsassociatedparties’commitmenttoethical
behaviorandresponsiblepractices.
Althoughtheyfocusondifferentdomains,theseareasarecloselyrelatedsincebadESGbehavior
caninvolvepredicatecrimesthatleadtomoney
launderingchargesfortheresponsibleparties.Forexample,companiesusingillegalminingorloggingpracticesthatleadtoenvironmentalharmwill
wanttohidethemoneyearnedintheiroperations.Sotoowillthoseinvolvedinunethicalsocial
behaviors,suchashumantraffickingortheuseofchildlabor.Inaddition,companieswithweakgovernancestructuresaremoresusceptibleto
briberyandcorruption,whichareassociatedwithembezzlementandfraud.
ESGrisksareoftennotfactoredinto
theriskratingduringonboardingand
KYCprocesses.However,somebanks
incorporateESGchecksthroughadversemediasearchesduringacustomer
refresh.PolicyupdatesmaybenecessarytoformalizetheinclusionofESG
considerationsinriskassessments.
ComplianceExecutive,globalbank
3Dualthreat,dualdefense
TheimpactofESG-relatedfinancialcrimesis
profound.Indeed,environmentalcrimeandhuman
traffickingaretheworld’sthirdandfourthmost-
profitablecriminalactivities,behinddrugtraffickingandthesaleofcounterfeitgoods.TheFinancial
ActionTaskForceestimatesthatenvironmental
crimealone—includingforestry-relatedcrime,illegalmining,andwastetrafficking—generates$110billionto$281billioninillicitfundsayear.1Transparency
Internationalestimatestheglobalcostofcorruption,includingbribery,tobeatleast$2.6trillionperyear,or5%oftheglobalgrossdomesticproduct.2
AlthoughFCCandESGmonitoringtraditionallyfocusondifferentareas,itisbecomingincreasinglyclearthattheycancomplementeachothertosupport
thefightagainstfinancialcrime.ESGmonitoring
broadensthescopeofscrutinybeyondthestandardKYCpracticesbyevaluatingawiderrangeof
information,suchasnegativereportsonacompany’sactivities,ESGdisclosures,andthird-partyESG
ratings.Thisapproachcanenhanceduediligence,particularlyforcompaniesinsensitivesectorslikelogging,landclearing,forestry,mining,andwastetrafficking,whicharealreadysubjectedtomorerigorousassessmentsbyfinancialinstitutions.
Furthermore,financialinstitutionsarealso
implementingproactivemeasuresintheKYCspacetoaddresspotentialESG-relatedrisks.Theseincludeaddressingthemisuseofshellandfrontcompaniesthatcamouflageunlawfulactivities,incorporating
newkeywordsandcriteriaintoadversemedia
searches,andre-ratingcustomerriskprofilesto
accountforillicitESGactivities.Byintegratingthesepractices,financialinstitutionscanbetterdetectand
preventfinancialcrimeslinkedtoenvironmentalandsocialmisconduct,enhancingbothcomplianceeffortsandoverallsustainabilityobjectives.
ByutilizingtechnologiessuchasgenerativeAI,
screeningcanextendbeyondaspecificcompany
toincludethebehaviorandactionsofitspartners,
suppliers,customers,andotherassociatedparties.
Withthehelpofnaturallanguageprocessing,itcanassessunstructureddatafromsourcessuchasglobalandregionalnews,litigations,socialmedia,proxy
voting,shareholderproposals,publicrecordsanddocuments,andinvestigativearticlesinthemedia.
Ourbankhasrejectedthe
onboardingofclientsbasedonthebehavioroftheirboardofdirectorsthatdoesnotalignwithESGconsiderations
GlobalLead,KYCOnboarding,internationalbank
FCCoperations,ontheotherhand,focuslargely
onfinancialtransactions.Institutionswillscrutinize
notonlyacompany’stransactionswithimmediatecustomers,suppliers,andlenders,butalso
thetransactionsthatthosepartieshavewith
theirpartnersthroughseveraltiersofbusiness
relationships.Thisenablesinstitutionstomonitoranextensivenetworkoftransactionstoidentify
suspiciouspatternsinthemovementofmoney.Tofindflowsofillicitfunds,FCCwillattimesincludesome
negativescreeningofnewsreportssimilartoESG,buttypicallyonlyfortheprimaryentity.
Today’stechnologyenablesinstitutionstoexpand
theuseofESGdataandincorporateabroader
scopeofinformationintotheirefforts,creatinga
morecomprehensivepictureofpotentialcriminal
activity.3ESGdataprovidesinsightintotheactivitiesofcompaniesandtheirassociatesthatgenerateillicitfunds,whileFCCinformationrevealshowthosefundsaremovedandconcealed.
Suchinsightsnotonlystrengthenaninstitution’s
abilitytouncoverfinancialcrimes,theyalsomakeit
possibletodosoearlier.TroublingESGbehavioris
typicallythepredicatecrimetomoneylaunderingandotherfinancialcrimes.Thus,theintegrationofESG
principlesintoFCCenablesinstitutionstoanticipatecrimes.Inshort,ESGfactorscanserveasvaluable
earlyindicatorsoffinancialwrongdoingamonganinstitution’scustomers,makingitpossibletopredictrisksandactquicklytostrengthentheirdefenses
againstillicitactivity.
4Dualthreat,dualdefense
GenerativeAIallowsfinancialinstitutionstoscreencompaniesanditsassociatedpartiesatadetailedlevelagainstanextensive
catalogueofpotentialproblemssuchashumantrafficking,childlabor,environmentalviolations,deforestation,andbribery.Thiscanprovide
anin-depthunderstandingofacompany’sshortcomingsacrossESGfactors.
ESGandFCC
Connectingthedots
Tocontendwiththeintersection
ofESG-relatedproblems
andfinancialcrime,financial
institutionsneedtobeon
thelookoutforcriminalswho
areoftensophisticatedand
innovative.Hereareseveral
recentreal-worldexamplesthatmadeheadlinesinthemedia.
InMadagascar,criminalswereillegallyloggingrosewood,aprotectedspecies.In76casesreferredtothecourts,authoritiescitedillegalfinancialflowsof$160millionfromthis
activity,runningfrom2009to2020.Criminalsoftenlaunderedthosefundsthroughthecountry’svanillaindustry,ahighlycash-intensivebusiness.Theywoulddosobybuyinglargeamountsofdomesticvanillatomanipulatepricestohidetheintegrationofillicitfundsintothevanillabusiness.4
In2023,ItalianandGermanauthoritiesannouncedthattheyhadarrested14peopleandseized€90millioninassetsinacaseinvolvinganillicitwaste-traffickingscheme.Officialssaidthatthecriminalgroupillegallyacquiredscrapironthroughanetworkofcompaniesinseveralcountries,andthensolditonthelegalmarketassteelimportedfrom
Germany—withoutproperrecyclingorcleaning.Cashwastransferredthroughseveralfictitiouscompaniesinothercountries,withsomeprofitseventuallybeinglaundered
throughlegitimatebusinessactivities,includingthepurchaseofafootballteaminItaly.5
In2021,theU.S.DepartmentofJusticeannouncedtheindictmentof24peoplefor
humansmugglingandlabortraffickingthatillegallyimportedMexicanandCentral
AmericanworkerstoworkonfarmsinsouthernGeorgia.Prosecutorssaidthatthegroupforcedthevictimstoworkforlittleornopay,“housingthemincrowded,unsanitary,anddegradinglivingconditions,andbythreateningthemwithdeportationandviolence.”
Officialsestimatedthatthegrouphadearnedmorethan$200millionfromthescheme,withthefundsbeinglaundered“throughcashpurchasesofland,homes,vehicles,andbusinesses;throughcashpurchasesofcashier’schecks;andbyfunnelingmillionsof
dollarsthroughacasino.”6
sDualthreat,dualdefense
UnleashingthefullpotentialofESGandFCCdata
WhileagrowingnumberoffinancialinstitutionsandregulatorsseevalueincombiningtheperspectivesofbothESGandFCC,manyarestillintheearlystagesofdoingso—andoften,theyarelookingforwaystoproceed.Formostfinancialinstitutions,integratingESGfactorsintoFCCmonitoringwillberelativelyinexpensivebecauseitinvolvesthemodificationoftwoexistingcapabilities,ratherthanimplementinganentirelynewplatform.ButthereareseveralkeyguidelinesthatareimportanttotheeffectiveexpansionofFCC:
AlignESGandFCC:ExpandFCCnegativescreeningbyintegratingESGfactorsintoframeworksusedforcustomerduediligenceandextendedduediligence,whichisusedforpotentiallyhigh-riskcustomers.ESGattributescan
betailoredtocreateaunifiedsearchtaxonomythatfocusesonuncoveringfinancialcrimeandsupportingFCC,ratherthanbroaderESGissues.Forexample,pollutingariveriswrong,butitisunlikelytoleadtorevenuethat
Despitethegrowing
importanceofESG
considerations,policy
clarityandintegration
ofESGfactorsintoKYCprocessesarestillintheearlystagesacrossmanyinstitutions.There’sa
needforclearerguidanceandstandardized
approaches.
ComplianceOfficermajorEuropeanbank
needstobehiddenandlaundered.
BroadenriskscoresbyfullyconvergingESGandFCC:IncorporateESGinsights,basedonthescreeningofmultiplelevelsofcompanyrelationships,intoperiodicongoingcustomerreviewsandcase
investigations.Inaddition,institutionsshoulddevelopESG
scorecardsforcompaniesandtheirnetworksofrelatedcompaniesforuseincreatingcustomerriskscores.
LeverageGenAItoconductongoingmonitoringwithareductionoffalsealerts:UseofgenerativeAIforexpandedmonitoring
allowsmorefactorsatmorelevelsofrelationships.Thus,itwill
naturallyincreasethenumberofalertsflaggingpotentialcriminalactivities,whichcanbeoverwhelming.GenerativeAIcanhelp
institutionseliminatenoiseintheirmonitoringeffortsandfocusontherightproblemswithminimaleffort.
ExpandtheuseofmachinelearningtoenhanceFCCmonitoring:
Thiscanhelpfinancialinstitutionsstayaheadbycontinuouslyrefiningdetectionmodels,identifyingnewpatterns,extendingscreeningacrossallrelationshipsratherthanjusttheprimaryentity,andadaptingtoemergingthreatsinreal-time.
EnhancingcurrentFCCframeworksandproceduresto
includeESGconcernscanmakeFCCmoreeffectivewhileeliminatingredundantprocessesandreducingtheoverallsupervisoryburden.That’sakeypoint,giventhehighcostsofcompliance,especiallyforinstitutionsoperatingacrossdifferentjurisdictions.Buttherealbenefitsgofarbeyondgreaterefficiency.
ByintegratingESGinsightsintotheirFCCefforts,financialinstitutionscandevelopacomprehensiveviewoftheirriskexposure,enhancetheirabilitytodetectcriminalactivities,andstrengthentheiroverallcompliancemeasures.An
importantlinkbetweenESGandFCCarisesinthearea
ofsanctions,wheresanctionslawsandregulationshelp
institutionsavoiddealingswithrogueregimesandterroristgroupswhilepromotinghumanrightsbytargetingissueslikeforcedlaborandhumantrafficking.ToaddressESG-
relatedrisks,sanctionsscreeninglists,keywords,andlogicareoftenupdatedtomoreeasilyidentifybadactors.
6Dualthreat,dualdefense
Thisapproachhighlightsthegrowingimportanceof
ESGincompliancestrategies,wherethepenaltiesfor
non-compliancecanbesevere.Forinstance,in2020,
anAustralianbankagreedtoa$920millionsettlement
withregulatorsafterfailingtoimplementadequate
transactionmonitoringtoidentifytransfersrelatedto
childexploitation.ByaligningESGconsiderationswithFCCframeworks,financialinstitutionsnotonlybolstertheir
defensesagainstfinancialcrimebutalsosupportbroadersocietalgoals,suchashumanrightsandenvironmental
protection.7
Improvedcomplianceandbetterriskmanagementare
clearandimmediatepayoffsofESGandFCCconvergence,butbringingbothdomainstogethercanalsodriveavarietyofbroaderbenefits.Itcan,forexample,helpstrengthen
aninstitution’sbrandandreputation,especiallyamong
customerswhoplaceimportanceonethicalbehaviorandsustainability.Itcanalsoimproveinvestors’confidenceinaninstitution’sabilitytomanagecomplianceandreducerisk,aswellasincreaseaninstitution’sappealtoinvestorslookingforcompaniesthatembraceESGgoals.
Identifyingtherootcausewithastructuredframework
Tokeeppacewithevolvingfinancialcrimes,regulatorssuchastheEuropeanParliamentregularlyissueanti-
moneylaundering(AML)directivesthatmemberstatesmustimplementintotheirdomesticlegislation.The
latestdirectiveidentifies22predicateoffensesoractivitiesthathavethepotentialtogenerateillicitgainsandleadtomoneylaundering.Similarly,FinCENrecentlyoutlinedkeyAMLnationalpriorities,includingcorruption,cybercrime,terroristfinancing,fraud,transnationalcriminalactivities,drugtrafficking,humantrafficking,
andproliferationfinancing.ThisalignmentshowsthatspecificESGconcerns,suchashumantraffickingand
corruption,areincreasinglyrecognizedascriticalprioritieswithinAMLframeworks,underscoringthegrowingregulatoryfocusonintegratingESGconsiderationstomoreeffectivelycombatfinancialcrime.
OverlapbetweenESGfactorsandFCCscreening
Amount
ofoverlap
ESGpillar
Predicateoffenses
Environment
•Environmentalcrimes,suchaspollution,illegalwastedisposal,wildlifetrafficking
•Illicittraffickingofcertainculturalgoods,suchas
endangeredspecies
Duetolimitedoverlap,thereis
asubstantialopportunitywithin
theEnvironmentpillartoextend
traditionalFCCscreeningpractices.
Social
•Terrorismfinancing
•Drugtrafficking
•Armstrafficking
•Organizedcrime
(includingitsinvolvementinsocialissuessuchas
humantrafficking)
•Kidnappingandextortion
•Humantraffickingandsmuggling
•Sexualexploitation
•Counterfeitingof
currencyand/orproducts,whichcanhavesocial
impactsifpoor-quality
productsharmconsumers
Governance
•Taxcrimes
•Fraud
•Corruption
•Bribery
•Cybercrime(dependingonthetarget,cybercrimecandisruptsocialservicesorcauseeconomicdamage)
•Theftandrobbery
•Illicittraffickingofarms
•Counterfeitingofcurrency,whichcanunderminetrustinfinancialsystems
•Mismanagementof
culturalgoods(poor
governancecanleadtoalackofprotectionforculturalartifacts)
7Dualthreat,dualdefense
Dualthreat,dualdefense
TheconnectionbetweenESG-relatedbehaviorandfinancialcrimeisbecomingincreasinglyevident,highlightingthecriticalrolethatESGcanplayinidentifyingandmitigatingsuchrisks.Leveragingthetechnology,data,
expertise,andsystemstraditionallyusedinAMLprocessestoassessESGriskscreatesamorecomprehensiveandrobustriskmanagementstrategy.Conversely,insightsanddisclosuresfromESGassessmentscanenhanceFCC
compliancebyaddingvaluablecontextandidentifyingpotentialriskfactorsthatmightotherwisebeoverlooked.Thisreciprocaluseofinformationnotonlystrengthenstheinstitution’scapacitytocombatfinancialcrimebut
alsopromotesmoreresponsibleandethicalbusinesspracticesacrosstheboard.
Createsacomprehensiveviewwith
leadingindicatorstosignificantlyenhancetheeffectivenessofcomplianceefforts.
Achievesoperationalefficienciesinnegativescreeningbyleveragingaconvergedframework.
Adoptinga
Dualthreat
Dualdefense
approachoffers
bankstwosignificantadvantages
Asfinancialinstitutionsfaceincreasingdemandsfortransparencyandaccountabilityfromstakeholders,the
integrationofESGintoFCCframeworksbecomesnotamatterofif,butwhen.Institutionsthatembracethis
convergencewillnotonlyenhancetheirriskmanagementcapabilitiesbutalsostrengthentheirreputation,appealtosociallyconsciousinvestors,andbuildstronger,moreethicalrelationshipswiththeirclients.Asthefinancial
landscapecontinuestoevolve,theconvergenceofESGandFCCwillbeessentialinshapi
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