Global environmental crime—the third largest illicit activity in the world, according to a report by the FATF—is estimated to generate hundreds of billions in illicit proceeds annually.  This criminal activity harms human health, the climate, and natural resources.  To help address the threat presented by environmental crimes, the Financial Crimes Enforcement Network (FinCEN) issued an environmental crimes and associated illicit financial activity notice (Notice) on November 18, 2021.  The FinCEN Notice states that environmental crime and related illicit financial activity are associated strongly with corruption and transnational criminal organizations, both of which FinCEN has identified as national anti-money laundering and countering the financing of terrorism (AML/CFT) priorities for financial institutions to detect and report.

We have blogged with increasing frequency (see here, here, here and here) on the nexus between environmental crime and illicit financial flows, and how these money laundering risks are often overlooked and are especially difficult for financial institutions to monitor.  Environmental offenses are also receiving more attention in the U.S., in part because of the growing interest by investors, companies and regulators in ESG (Environmental, Social and Governance) concerns.

The Notice includes an appendix that describes five categories of environmental crimes and the illicit financial activity related to them: wildlife trafficking, illegal logging, illegal fishing, illegal mining, and waste and hazardous substances trafficking.  The Notice also includes new suspicious activity report (SAR) filing instructions in order to enhance analysis and reporting of illicit financial flows related to environmental crime.
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Meaningful Overlap or Superficial Similarities?

On October 3, the release of the Pandora Papers flooded the global media, as millions of documents detailed incidents of wealthy and powerful people allegedly using so-called offshore accounts and other structures to shield wealth from taxation and other asset reporting. Data gathered by the International Consortium of Investigative Journalists, the architect of the Pandora Papers release, suggests that governments collectively lose $427 billion each year to tax evasion and tax avoidance. These figures and the identification of high-profile politicians and oligarchs involved in the scandal (Tony Blair, Vladimir Putin, and King Abdullah II of Jordan, to name a few) have grabbed headlines and spurred conversations about fairness in the international financial system – particularly as COVID-19 has highlighted and exacerbated economic disparities.

Much of the conduct revealed by the Pandora Papers appears to involve entirely legal structures used by the wealthy to – not surprisingly – maintain or enhance wealth.  Thus, the core debate implicated by the Pandora Papers is arguably one of social equity and related reputational risk for financial institutions (“FIs”), rather than “just” crime and anti-money laundering (“AML”). Media treatment of the Pandora Papers often blurs the distinction between AML and social concerns – and traditionally, there has been a distinction.

This focus on social concerns made us consider the current interest by the U.S. government, corporations and investors in ESG, and how ESG might begin to inform – perhaps only implicitly – aspects of AML compliance and examination.  ESG, which stands for Environmental, Social, and Governance, are criteria that set the foundation for socially-conscious investing that attempts to identify related business risks.  At first blush, the two are separate fields.  But as we discuss, there are ESG-related issues that link concretely to discrete AML issues: for example, transaction monitoring by FIs of potential environmental crime by customers for the purposes of filing a Suspicious Activity Report, or SAR, under the Bank Secrecy Act (“BSA”).  Moreover, there is a bigger picture consideration regarding BSA/AML relating to ESG:  will regulators and examiners of FIs covered by the BSA now consider – consciously or unconsciously – whether FIs are providing financial services to customers that are not necessarily breaking the law or engaging in suspicious activity, but whose conduct is inconsistent with ESG principles?

If so, then ESG concerns may fuel the phenomenon of de-risking, which is when FIs limit, restrict or close the accounts of clients perceived as being a high risk for money laundering or terrorist financing.  Arguably, and as we discuss, there also would be a historical and controversial analog – Operation Chokepoint, which involved a push by the government (not investors) for FIs to de-risk certain types of customers.  Regardless, interest in ESG means that FIs have to be even more aware of potential reputational risk with certain clients.  Even if the money in the accounts is perfectly legal, the next data breach can mean unwanted publicity for servicing certain clients.

These concepts are slippery, involve emerging trends that have yet to play out fully, and the similarities between AML and ESG can be overstated.  Nonetheless, it is possible that these two fields, both of which are subject to increasing global interest, may converge in important respects.  A preliminary discussion seems merited, however caveated or subject to debate.
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