AML and ESG: Achieving compliance across the board

ESG considerations have become a prominent feature of corporate transactions, and their interconnected nature has been noticed by compliance professionals. Companies that can be seen to deliver their ESG promises are set to benefit commercially in a world which is now more socially and environmentally conscious. 

However, adhering to ESG principles provides an extra challenge to businesses already trying to comply with anti-money laundering laws. Although a business deal may be low risk from a financial perspective, it may not come out clean beneath the broader and more scrutinous ESG lens. It is compliance professionals, much like in anti money laundering (AML) considerations, who are tasked with making a judgement.

While there may be, in recent times, temptation at the top level of businesses to lower the benchmarks that are set in order to be more cost efficient, compliance professionals are in place to maintain high standards. It’s here that “Know Your Customer” systems become critical. By understanding the similarities between ESG and AML compliance, substantial and sustainable operational efficiencies can be maintained, while also ensuring a company's social and environmental reputation remains intact. 

ESG as a fundamental deliverable 

In the modern world, ESG is not considered an additional benefit to customers; it is becoming increasingly expected. Regardless, McKinsey published research in 2022 that found it to be a mere correlation of positive financial performance rather than the cause. It condemned it as a ‘woke’ trend that is costly to implement, difficult to measure and ultimately a barrier to revenue creation. 

The lineage of ESG can be traced to the concept of corporate social responsibility (CSR) which emerged in the 2000s. While CSR developed from ‘feel good’ actions such as corporate philanthropy and ethical leadership, ESG provides a more rigorous framework which ensures those who follow it are held accountable to contributing more holistically to a fairer world. It sets out measurable standards to a range of risks and responsibilities. The corporate benefit being that businesses can genuinely make a social impact so that customer values are satisfied, media scandals are avoided, while sustainable financial results continue to be achieved. 

 Our current times have provided a stage where corporations that become tarnished by even the hint of scandal from a supplier or customer have to fight media scrutiny in the public eye to salvage their reputation. Recent ESG scandals have enveloped clothing retailer Boohoo, Tesco and Dyson due to supply chain malpractice, indicating the importance of knowledgeable and efficient compliance professionals.

AML and ESG together 

AML and ESG are interconnected, as proven by HLB, a global network of advisory and accounting firms. The integration of AML and ESG principles presents a complex landscape with numerous challenges, particularly when considering customer risk profile assessments. When recognising the intricate nature of environmental crimes such as illegal logging and waste trafficking— which generate an alarming $281 billion annually—it becomes necessary to delve into cross-border enforcement issues and deceptive practices that step outside traditional AML frameworks. 

To this end, technology – such as machine learning algorithms – can be used for pattern recognition in financial transactions. These algorithms, when combined with environmental, social, and governance parameters, not only flag obscure connections but also foster a more robust and holistic risk mitigation strategy. 

The alignment of such algorithms with evolving regulation demands careful examination, where AML professionals engage in an ongoing conversation with regulators, technology providers, and ethical considerations. Collaboration here becomes key, cultivating an ecosystem where regulatory compliance shifts to a dynamic, ethically conscious framework contributing to a fairer world. The challenge is not merely technical;  technological innovation, regulatory acumen and ethical stewardship must all unite to cultivate compliance.

Therefore, it is imperative for AML/CFT professionals to employ a multifaceted approach, combining these processes to navigate the changing face of compliance. The incorporation of ESG principles into the customer risk profile assessment process allows compliance professionals to proactively safeguard their organisations. Background checks must extend beyond financial due diligence. The task of gaining the information which allows you to “Know Your Customer” must be rigorous and also evaluate how past activity may impact current and future business dealings.

Reducing the time and cost of compliance 

Traditional KYC methodologies, while robust in their foundational design, are increasingly strained under the volume and multifaceted nature of compliance requirements. The research required is often time consuming and this also hampers the capacity for nuanced analysis. 

This is where technological innovation can play a pivotal role. Leveraging artificial intelligence, machine learning and advanced analytics, the KYC process can be transformed from a static, labour-intensive task into a dynamic system. Such a system not only enhances the efficiency of customer verification, risk assessment, and monitoring but also encapsulates environmental, social, and governance metrics; this is how ESG considerations are integrated alongside traditional AML processes.

This can now evolve a step further and upgrade to UYC (Understand Your Customer). By doing this, your understanding of your client base will improve and put you in a better position to make ESG-related decisions. It should come as little surprise that companies with a stronger culture of compliance have more robust ESG goals. It’s essential companies get their AML practices in order first and then invest in ESG strands they truly believe in. If ESG is treated simply as a box ticking exercise, it will not be effective.

Critically, tech can not make the ethical calls of compliance. That’s why it must be used as a tool to support the best compliance professionals, offering them a more detailed overview and more time to make an informed judgement call.

The bottom line

AML and ESG are natural bedfellows. Through their alignment, a business can achieve a strong approach to corporate responsibility. Boards and C-suites who view them as a joint enterprise stand to benefit from the opportunity to build trust, ensure ethical business practices, and keep in line with stakeholders’ evolving demands. 

An aligned AML and ESG strategy promises an increasingly comprehensive risk and ethics management strategy. Well informed compliance professionals must be at the heart of its integration, clear on key legislation and the new technological tools at their disposal. Only then can AML and ESG alignment contribute to a streamlined operation, which will benefit the business on a whole.