The Rapidly Evolving Role of ESG in AML

And the reality is that businesses are increasingly expecting their anti-money laundering (AML) teams to get their head around environmental, social, and corporate governance (ESG). 

There are even calls for the AML profession to re-evaluate their duties through the lens of ESG risk.

With that said, let's dive into the top things AML teams need to understand in the rapidly changing AML and ESG risk environment.

1. Understand What ESG Is and the Investment Landscape

The first thing that all AML professionals should do is thoroughly understand what ESG is and the context in which it functions in investments today. 

In layperson's terms, ESG investing is all about selecting companies to invest in that are committed to environmental, social, and governance practices. In a nutshell, you are putting money into businesses striving to improve the world. 

In this article, we aren't going to jump down the political rabbit holes that the topic presents. 

But it is essential to know this: ESG courts controversy. According to this report from Fortune Magazine, many people are against it. A Forbes magazine article also describes the ESG investor backlash.

Again - we aren't going to go into the politics. It's just important to understand that ESG is a divisive topic because not everyone agrees on its significance, priorities, or the best approaches to address its core principles.

The bottom line is that the company you work for (or perhaps one in the future) as an AML professional may be committed to ESG policies for ethical and financial reasons - so it should be an area you are familiar with. 

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2. Grasp the Relationship Between Financial Crime and ESG

Is financial crime and ESG related? Absolutely. To illustrate this, we can examine a scenario. Let's look at the environmental side. Here are some common crimes:

• Illegal logging
• Wildlife trafficking
• Illegal fishing
  

According to the Financial Action Task Force (FATF), the intergovernmental organization tasked with fighting money laundering globally, environmental crime generates up to $281 billion of criminal gains annually. 

If it were a company, it would easily be one of the world's largest.

And let's now look at the governance side of ESG. For example, according to the World Economic Forum, corruption costs the global economy around $3-4 trillion annually.

These are just a few examples. But it's enough to understand this: Vast proceeds from crimes such as illegal logging and politicians stealing from state coffers need to be laundered.

The legitimate global financial system is awash with dirty money slipping through the three stages of money laundering. 

And what does all this mean? It means companies and organizations worldwide are exposed (at various risk levels) to ill-gotten cash earned through criminal methods such as environmental crime and corruption.

As an AML officer, your role in supporting your employer's ESG policies that help prevent such illegal acts can be significant. Another critical facet is mitigating reputational risk. After all, no company wants its name associated with acts such as the illegal wildlife trade and how the profits were laundered.

3. Integrating ESG Risk Into AML Processes Is Paramount

All organizations are unique and are exposed to different levels of ESG risk. But the following is increasingly true as AML and ESG converge: 

Integrating ESG risk into your company's AML risk management framework is a no-brainer in 2023.

It's a complex task. Also, this article cannot provide a silver bullet specific to your business. But here are standard ESG best practices that all AML teams should follow:

• Identify what ESG risks specific to business activities and locations exist
• Assimilate ESG risks into AML programs and activities
• Identify customer segments that represent increased ESG risk
• Perform Enhanced Due Diligence (EDD) on high ESG risk customers and business partners
• Use technology to streamline ESG and AML processes 
• Keep informed with the latest ESG regulations and trends
  

The key takeaway is this: If your AML team has yet to integrate ESG risk into its processes - if you don't start now, you may find your organization ill-prepared to navigate the rapidly evolving ESG landscape.

4. AML Data Can Support ESG and Wider Goals of a Company

In the previous section, we briefly alluded to the use of technology to streamline ESG risk and AML processes. For example, this could include sanctions screening - a fundamental facet of AML compliance. 

If you'd like to understand how sanctions.io, a best-in-class and cost-effective sanctions screening provider, can support your organization's AML goals, you are welcome to contact us.

But beyond screening customers and business partners, here is another vital area in which regulation technology (RegTech) assists your company with its ESG objectives:

The data from the technology also demonstrates the organization's commitment to ESG principles to investors and stakeholders. 

As they say, talk is cheap. Having actual data from AML software, such as sanctions.io, showcases how your organization integrates and upholds ESG principles.

And who knows, that could make all the difference when investors, with an ESG compass guiding them, choose to put millions in your company bank account - or your competitors. 

Final Thoughts

Here is why ESG risk and AML processes will continue to converge at an accelerated pace:

First, the growth of ESG investing is astounding - meaning companies will increasingly expect AML teams to address ESG risk. And second, illegal acts, such as environmental crime and corruption, are also globally on the rise. For example, environmental crime is growing annually three times faster than the world's GDP, according to the Financial Action Task Force (FATF).

And what does all this mean?

It means understanding ESG risk will become an essential skill for AML officers seeking to show value to their employers.

sanctions.io Can Help Mitigate ESG Risk and Boost AML Compliance

sanctions.io is a highly reliable and cost-effective solution for sanction checking. AI-powered and with an enterprise-grade API with 99.99% uptime are reasons why customers globally trust us with their sanctions screening needs. 

To learn more about how our sanctions, PEP, and criminal watchlist screening service can mitigate ESG risk and support your organization's AML compliance program:

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