Global Bank Review: Boost virtue, banish vice – will ESG and financial crime agendas converge?

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This article is part of our World Bank Review 2021 – ESG: Creating a future that makes sense, an annual publication from our Global Banks industry group that brings together our people who live and breathe banking.

“The broader scope of ESG conjures up images of new investment horizons and dominant corporate strategy, while combating money laundering and financial crime are seen as narrower areas of experts. and compliance procedures. “

In theory, they are a world apart. Anti-Money Laundering (AML) and Financial Crime teams help their banks guard against a subset of ESG risks – particularly that of the bank used to support criminal activity linked to terrorist organizations, corrupt officials, drug traffickers, illicit arms dealers and other forms of crime.

In comparison, the broader scope of ESG conjures up images of new investment horizons and dominant corporate strategy, while AML and financial crime are seen as narrower areas of expert and procedural law enforcement. compliance. Will this always be the case? Will the bank of the future see ESG and financial crime in these separate terms, or are there opportunities to reassess how we view these two areas?

Looking ahead allows us to explore and plan for different scenarios and forces that could shape the growing links between financial crime compliance and the broader ESG agenda in the banking of the future. This piece explores three possible scenarios.

A criminalized ESG future?

One possibility could be a future where lawmakers proactively drive the convergence of ESG standards and financial crime by increasingly regulating who companies should – and should not – do business with. Sanctions laws already provide a framework for prohibiting relations with rogue political regimes and terrorist groups, and we are seeing increased attention in sanctions and trade regulations on human rights issues, particularly forced labor and labor. modern slavery. In short, lawmakers are already leveraging anti-money laundering sanctions and requirements to address ESG issues.

In this context, lawmakers have tools to regulate and potentially criminalize relationships with people or entities that flout social or environmental factors within ESG. Indeed, as climate issues are increasingly viewed from a human rights perspective, it is not a big step to see sanctions regimes rolled out to prohibit transactions with the most serious environmental offenders. more glaring. Those wondering if an increasingly criminalized world will materialize need only look at recent initiatives to recognize ecocide, categorized as illegal or indiscriminate acts threatening serious environmental destruction, as a crime. international.

A world where such concerns are increasingly pursued through criminal sanctions and trade regulations would significantly shift the ESG conversation even further from its roots in ethical investing, to new areas of scrutiny of how criminal law could combat socially undesirable corporate behavior. It would also double existing expectations of financial institutions to help control corporate criminal conduct.

A future regulated patchwork

“Those wondering if an increasingly criminalized world will materialize need only look at recent steps to recognize ecocide, categorized as illegal or indiscriminate acts threatening serious environmental destruction, such as international crime. “

Another possibility could be a future where AML, sanctions and trade regulators take root even further into the ESG space in a way that places even more regulation on businesses, banks and financial institutions, without any of the benefits of convergence.

In this world, the multiplicity of regulators in different sectors and jurisdictions would create demands that sometimes overlap and sometimes silos. The strong scope of AML enforcement – which can often impose significant fines – may focus disproportionate attention on the ESG areas that are at the center of these agencies, rather than reflecting a rational assessment of where the attention should be directed in terms of policy. This scenario is also likely to be seen as the prerogative of compliance or second-line functions, remaining siled, without significant buy-in from front-line activities.

In addition, there is the potential for direct conflict, rather than mere divergence, between national sanctions regimes and trade regulations. To the extent that trade sanctions and restrictions motivated by ESG concerns may be perceived as “political” or as motivated by economic rather than environmental and social concerns, such measures can provoke “blocking statuses” and counter responses. -sanctions, further complicating the compliance situation for multinationals. companies.

This scenario is a reminder that companies must ask themselves how to prioritize ESG considerations and guard against the natural tendency for priorities to be simply dictated by the most aggressive regulatory oversight bodies.

Triumphant data

A third scenario involves the triumph of technology, data, and systems to leverage anti-money laundering and financial crime processes in ESG risk assessment. Banks and AML-regulated institutions have invested heavily in customer and know-your-customer due diligence processes and, more recently, in the fight against investor and supplier due diligence. Many banks also incorporate a layer of reputational risk as part of decision making in various parts of their business.

This scenario sees banks capitalizing on these strengths and trends, finding synergies in streamlining the systems, data, and practices developed for AML processes to facilitate data collection and analysis for broader ESG purposes.

Of course, expertise in all ESG areas will need to be brought together – understanding climate considerations and human rights impacts involves different skills for investigating suspicious activity and policy making in financial crime.

This technological utopia raises a challenge as to how financial institutions might respond to current developments in ESG, AML and financial crime – not only to explore whether there are more synergies in the systems that can be exploited. now, but to understand the limits of what data and systems should support, and the role that human evaluation will need to continue to play.

So where does that leave our planning for ESG and financial crime? Exploring these possible future scenarios highlights a common theme: the desirability – if not the imperative – for ESG considerations to be even more integrated and fully integrated into the way banks approach a range of issues, including the financial crime. In doing so, banks will best ensure the sustainability of their activities to everything that happens on the ESG and financial crime horizons.


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