Common AML Schemes: ESG

Money laundering and financial crimes pose large risks to financial firms, both from a reputational and regulatory perspective. However, these schemes can take many forms making it difficult for firms to do their due diligence to protect themselves and their investors.

We’ve put together a series of the most common forms of money laundering and financial crimes and what firms can do to combat each one.

ESG

Environmental, social, and governance (ESG) refers to the three sustainability pillars used to evaluate the performance of a company or organization. ESG criteria can be relevant to the prevention of money laundering in a number of ways.

For example, companies with strong ESG practices are more likely to have robust compliance systems in place, which can help prevent money laundering and other financial crimes. Companies that have weak ESG practices, on the other hand, may be more susceptible to financial crimes, as they may have less robust compliance systems or may be more willing to engage in unethical practices.

Firms with strong ESG practices are also more likely to be transparent and accountable, making it more difficult for criminals to use anonymous shell companies to conceal their activities and assets.

Overall, ESG criteria can be an important tool in the prevention of money laundering, as they generally have strong compliance systems and ethical practices. However, there are still some vulnerabilities that can be exploited by money launderers.

ESG and money laundering trends

• Complex financial structures: Money launderers may use complex financial structures, such as trusts or shell companies, to conceal the true ownership of ESG assets or the source of funds. These structures may be difficult for financial institutions and law enforcement agencies to detect and may require specialized expertise to unravel.
• Increasing regulation: Financial institutions, including those involved in ESG investing, are subject to increasing regulation in the anti-money laundering (AML) space, including new requirements for customer due diligence (CDD) and suspicious activity reporting (SAR). Financial institutions must ensure that they have the necessary systems and controls in place to comply with these requirements and avoid regulatory penalties.
• International aspects: Money laundering may have international aspects, as launderers may attempt to transfer funds or assets across borders in an effort to conceal their illicit origin. This can make it more challenging for financial institutions and law enforcement agencies to detect and prevent money laundering and may require the cooperation of agencies in multiple jurisdictions.
• Misuse of ESG investment products: Money launderers may attempt to misuse environmentally and socially responsible (ESG) investment products as a way to launder the proceeds of their illicit activities. For example, they may invest in legitimate ESG projects, but use the proceeds of the investment to finance illegal activities or to conceal the true ownership of assets.
• Increased regulation: There is an increasing focus on the role of financial institutions in combating money laundering and the financing of terrorism, and this includes ESG investments. Financial institutions and other investors may be subject to increased regulatory scrutiny in this area.
• Reputational risk: Money launderers may seek to use ESG investments to improve their public image or to legitimize their activities. This can pose a risk to the reputation of legitimate ESG investors if the true nature of the investments is later revealed.
• Cybercrime: Money launderers may use cybercrime techniques, such as phishing scams or malware attacks, to gain access to financial accounts or to facilitate the transfer of funds between accounts. This can include the misuse of ESG investment products and pose a risk to legitimate investors.

Read about other common AML schemes

• Account takeover
• Business email compromise

How we help

ACA’s AML and Financial Crimes practice offers advisory services and solutions to assist financial services firms in addressing threats and regulatory obligations associated with financial crime. We work with investment advisers and broker-dealers, among others, to assess risk, develop policies and procedures, and perform independent tests and gap analyses. Our support can incorporate our ComplianceAlpha^® regulatory technology and managed services to help your firm meet its data screening, ongoing monitoring, remediation and reporting needs.

Reach out to your ACA consultant, or contact us to find out how ACA can help you meet your AML requirements. 

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