Home Business News Three ways to optimise AML controls for ESG concerns, according to Facctum

Three ways to optimise AML controls for ESG concerns, according to Facctum

by LLB Finance Reporter
22nd Aug 23 11:46 am

ESG (Environmental, Social, and Governance) has become a top focus for many organisations as customer and shareholder demands for greater commitment grow, coupled with increasing regulatory expectation.

With ESG now a strategic priority and not just an investment or marketing strategy, organisations are implementing these objectives across all business activities. Adding greater relevance to ESG context in particularly pertinent to anti-financial crime controls as there is a tightly woven relationship between the two:

  • Environmental crimes – according to The Financial Action Task Force (FATF), environmental crimes like illegal logging, mining, land clearing, waste trafficking, forestry crime, and the illicit wildlife trade generate up to $281 billion per year in unlawful gains. The American FinCen asking banks to watch for transactions linked to environmental crime in 2021.
  • Migrant smuggling and human trafficking – human trafficking is one of the most profitable international crimes, generating up to $150 billion every year and affecting almost 50 million people globally and nearly every country in the world.
  • Corruption – this can take many forms, such as bribery, embezzlement, or kickbacks, and leads to a souring of an organisation’s governance and could prevent complete compliance with an AML framework.

As such, risktech company, Facctum has outlined three ways organisations can improve the effectiveness of ESG frameworks by optimising AML controls:

  1. Ensure the right financial crimes controls are in place, especially in high risk industries

Perpetrators in illegal business practices, such as those outlined above, hide illicit funds via money laundering. As such having stringent and strong AML controls and technology in place is vital to ‘following the money’ and putting an end to such activity. For industries closest to these crimes, such as logging, mining, waste trafficking, and forestry, such stringent controls are vital.

Alongside ensuring an organisation has the right policies and processes in place, subject matter knowledge must be continuously updated, with teams keeping on top of the different crimes that can impact ESG, especially within their industry. Additionally, technology will be key to keeping up with this evolving landscape, with the cloud having already proven to be a key partner in AML tools and AI becoming a potential technology to be leveraged when appropriate.

  1. Build a positive AML culture

Regulators such as FinCen and the FCA have highlighted the importance of a positive AML culture, with it being a key element in ensuring a commitment from top to bottom of an organisation in tackling money laundering and terrorism financing as well as see a strong implementation of controls to meet compliance objectives.

To build a positive AML culture, organisations can:

  • Re-examine their corporate governance, building ESG and other compliance requirements into its a code of conduct and other policies.
  • Provide training for staff on money laundering and financing terrorism, specifically highlighting any compliance obligations around ESG.
  • Identify and understand risks – no matter the size. All risks facing a company should be identified and mitigated, and done so regularly, with AML frameworks updated in line with ongoing global guidance and legislation focusing on ESG.
  1. Due diligence internally and externally

Know Your Customer practices are well-known within AML practices, but it’s important to consider suppliers and other organisations leveraged across the supply chain as these can often play a large role in ESG activity. Curating a more sustainable and ethical supply chain can be challenging with money laundering often perpetuated through the supply chain, but by taking a KYC approach to suppliers, a more ESG-compliant supply chain can be built.

For this, organisations need to create a thorough due diligence process. This encompasses accessing and verifying companies’ extended ownership structures to highlight the person running the business, regularly. These assessments require a lot of data, from both traditional and alternative sources such as news headlines, social media, and company registries. When building the supply chain due diligence process, and collecting this data, those who are prioritising ESG can build in checks for alignment across their organisations’ values and activities, such as including a check for an anti-slavery policy.

Chrisol Correia, Head of Strategy at Facctum said, “AML practices have long helped companies to detect and address financial crime, but they also have a critical role to play in uncovering increasingly sophisticated environmental criminals too. The benefits to this approach are twofold, rewarding those who play by the rules, but also fighting to protect the environment and the degradation of ecosystems by denying the means of those who break the rules to profit from their crimes.”

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