Experts take on FinCrime
In this series of blogs, we talk to financial crime experts about the complexities of tackling the scourge of money laundering and its impacts on society.
In this blog we talk to Che Sidanius, Global Head of Financial Crime and Industry Affairs at Refinitiv an LSEG business. Che has worked across the financial crime ecosystem, cutting his teeth at the Federal Reserve Bank of New York. Che later moved to the Bank of England on secondment as a senior advisor. From there he became a consultant, working for two of the big four consultancies: PWC and KPMG. Now at Refinitiv, Che manages regulatory and industry affairs strategy for the Customer and Third Party Risk business, specialising in financial crime risk.
What is Green Crime?
Defining green crime
Green crime is a term Refinitiv launched at Davos in 2020 to emphasise the interplay between the green and financial crime agendas. Also known as environmental crime, green crime encompasses illegal activities that harm our environment, such as illegal logging, fishing, and mining, as well as wildlife trafficking. Estimated to be worth $258 billion a year, with wildlife trafficking alone being one of the top five most lucrative illicit activities after illegal drugs, human and weapons trafficking.
A multi-faceted issue
This is a multi-faceted issue: green crime has a huge environmental cost, but the criminals and illegal proceeds are often involved in corruption, human trafficking and tax fraud, too. When it comes to disrupting the scourge of green crime, compliance is at the heart of how we can achieve a more sustainable future.
What are the biggest consequences of green crime?
The impact of green crime on biodiversity
Green crime has a devastating impact on biodiversity. 83% of wild mammals and 50% of plants are already lost, and criminal damage to the environment is further accelerating the problem.
Green crime poses a big risk to global financial markets
Green crime doesn’t just threaten our environment. It also jeopardizes the safety and soundness of our financial markets. According to the World Economic Forum (WEF), $44 trillion - around half the world’s GDP - is moderately or highly dependent on nature. Law enforcement responses can help us to gauge the scale of the risk. Tellingly, INTERPOL now features environmental crime among its top crime risks. Elsewhere, the Financial Action Task Force (FATF) released a report in July 2021, detailing the need to raise awareness about the convergence of environmental crime and money laundering.
Weak regulation leads to fraud
Fraud is a third important impact, because criminals are exploiting the weak laws and regulations around green crime with lucrative results. The carbon trading market, for example, has a real challenge in this area. Set up to create an incentive for companies to reduce their greenhouse gases, it became the world’s fastest growing commodities market - valued by Refinitiv at $200 billion, a 23% increase according to traded volume and carbon prices. However, INTERPOL identified it as fraught with misleading valuations, money laundering, tax fraud and market manipulation.
In a painfully ironic twist, weak regulation has transformed this market, designed to prevent a climate catastrophe, into fertile ground for environmental crime and exploitation. This is just one example though, and collectively, not enough attention has been given to green crime. This needs to change.
How does the current framework for AML create challenges for financial institutions tackling green crime?
A lack of incentives
The biggest problem with the current AML framework is the lack of incentives that exist for financial institutions to take action on green crime. A 2020 Refinitiv survey found that 65% of financial institutions know or suspect that their third party supplier may be involved in activities that are harmful to the environment, but there are no incentives for them to do anything about it.
We need to find a solution, perhaps in the form of financial incentives. The introduction of punishing sanctions would be one way to encourage financial institutions to take a proactive approach to identifying and reporting green crime. Credit rating agencies can also play a role.
Ultimately, green crime is as much of a credit issue as it is an AML issue. If sanctions or press attention are directed at the money lent to companies committing environmental damage, credit exposure is impacted and this should be reflected in the credit rating. Likewise, banks should be rewarded for proactive action on environmental crime with a better rating; it works both ways.
Misunderstanding of the data
Conventional wisdom points to a lack of data on green crime as a crucial point of weakness in the current AML framework. Nevertheless, while there is less open-source data relating to green crime than to money laundering in use right now, both the data and the tools required to analyse it already exist.
Refinitiv, like many other risk-intelligence data companies, specifically targets environmental crime as a category for firms to screen against. This misapprehension of a lack of data and tools ultimately speaks to a wider problem: that there is very low awareness of green crime.
Green crime isn’t a priority
This final challenge is one of capacity. Regulators, sanctions authorities, and law enforcement agencies typically place green crime lower down on their list of priorities. The sad fact is that, in many cases, they simply lack the capacity to enforce. This shortage of resources, combined with inefficient legacy technology and a lack of awareness, presents real challenges across the AML industry.
How can regulated firms more effectively address green crime?
Regulated firms need to take the lead
If we are to collectively fight green crime, regulated firms need to step forward and take on a leadership role. This should involve adjusting risk management frameworks and decision making to prioritise addressing green crime. To start with, this would include conducting proper background checks and due diligence on the companies they lend money to, and on whose behalf they trade securities.
Adopt technological innovations
Regulated institutions must also begin to make proper use of the available information on green crime. Partnerships between private and public entities will be crucial in facilitating the effective communication channels needed to help firms understand their data. Tools already exist within AML functions to allow organisations to search for risk specific categories like environmental crime or human trafficking. The next step is to encourage firms to partner with data and technology companies to increase their efficiency and effectiveness at flagging suspicious transactions.
Listen to the younger generation
Firms need to balance the needs of shareholders with those of other stakeholders. The younger generation expects green responsibility, and with an enormous generational wealth transfer right around the corner, firms will find it prudent to position themselves as leaders in tackling green crime in order to preserve the long-term future value of their brands.
What does the future of AML look like?
AML needs to change
If the establishment of FATF is taken as a benchmark, the current AML regime has remained relatively unchanged for over thirty years. The recently leaked Pandora Papers are just another link in a chain of scandals that expose the ineffectiveness of AML - obviously something needs to change.
The future looks bright
Currently we are seeing a paradigm shift, with policy changing to promote public and private sector collaboration on Green matters. This includes higher standards of transparency as well as the promotion of greater interoperability of public registers. For instance, in 2018, EUROPOL, the World Economic Forum, and Refinitiv founded the Global Coalition to Fight Financial Crime. This body was established to facilitate communication between a rich assortment of organisations and sectors all committed to fighting financial crime. The network has now grown to include INTERPOL, the Institute of International Finance, the Future of Financial Intelligence Sharing, the Royal United Services Institute, the European Banking Federation, and the Freedom Seal, amongst others.
We clearly have lots to do, and a great need to innovate. However, I am optimistic about the prospects for a more collaborative future.