Companies add ESG to financial crime risk filters as corruption and bribery risk surfaces in carbon offset programs

More and more companies are including ESG factors along with the other risk factors they track as part of a robust financial crime rating system and the fight against bribery and corruption

Companies have added environmental, social and governance (ESG) factors to their financial crime and anti-bribery and corruption (ABC) risk rating systems used to screen customers, suppliers and third-party entities. Companies with more advanced ESG programs have realized the vulnerability to bribery and corruption risks posed by some sustainability or climate change mitigation efforts, such as carbon offset programs.

“ESG is also green crime [and] human trafficking, which is linked to money laundering and bribery and corruption. They all enter the same circle,” says Gabriel Cozma, head of finance and fintech at financial crime specialist Lysis Group in London.

A few banks also now assess the risk of their customers and their relationships with third parties according to certain ESG criteria, alongside ABC and money laundering risk screening. Some won’t accept customers or third parties who don’t meet these criteria, Cozma adds.

“They want to give a different dimension to the risk rating of a supplier, customer or third party introducer. Do we want to do business with this entity based on these criteria, including ESG? There is an underlying link between ESG and various transactions in various countries, which have the ESG dimension, but at the end of the day, it’s business as usual. It is a question of money and corruption. Either it is money laundering, or both,” he says.

Banks’ reputational risk committees should consider ABC and greenwashing risks when vetting new customers and transactions, says Andrew Procter, partner at Herbert Smith Freehills in London. “What [reputational risk committees] trying to manage is the risk of a line being crossed,” says Procter.

“They are trying to identify flags that might indicate a problem. “They look at things like the jurisdiction they’re doing business in; Does it have a bad reputation for corruption? By the sector in which they do business, the nature of the transaction. Is it unnecessarily convoluted or complex? If there is a greenwashing aspect, that could also be an issue,” he notes.

Make the ABC / ESG link

However, many financial services companies, corporations and law firms do not fully appreciate the connection between corruption and ESG, says Liam Naidoo, Hogan’s Investigations, White Collar and Fraud Practice Partner Lovells in London.

“Corruption is an ESG issue in its own right, because conducting your business ethically, not being corrupt and having good governance – it is absolutely a social issue. It is also a matter of good governance because, by By its very nature, preventing corruption in your business requires that you have good governance policies and procedures,” adds Naidoo.

by Kroll 2022 Benchmarking Report on Combating Bribery and Corruptionwhich surveyed 700 business leaders, found that while companies recognized the importance of integrating ESG into ABC programs, companies based in North America and the Middle East lagged behind in these efforts.

Only 43% and 38% of these respondents, respectively, said ESG measures were part of their anti-corruption compliance. In comparison, 57% of companies in the Asia-Pacific region and 52% in Europe and Latin America had incorporated ESG measures into ABC compliance.

The companies have considered risk factors such as air and water pollution, labor rights, human trafficking, human rights and modern slavery as part of a combined ESG and ABC screening, Kroll reported.

Carbon Offset Programs Pose ABC Risks

Carbon offset programs and nature-based climate change mitigation solutions are vulnerable to corruption. They can even fuel corruption by funneling money to jurisdictions with weak governance and few controls, noted the Basel Institute on Governance.

“Doing sustainable business, that’s to say, your electricity resources or setting up carbon credit farms in Indonesia or elsewhere often requires corrupt conduct. Well-managed companies have good [ABC] procedures and spent a lot of money on it. And what they need to start doing quickly is understanding how that risk is changing due to ESG requirements,” says Naidoo of Hogan Lovells.

Simply put, setting up and running a carbon sequestration program may require paying a bribe to government officials. Even carbon offset programs sponsored by intergovernmental organizations or development funds earmarked for low-carbon development or renewable energy could be hijacked by corrupt officials, the consultants warn.

“Corrupt elites have a lot of experience in capturing foreign aid. So when there is a lack of transparency and accountability in the allocation and tracking of climate finance – not to mention allegations of financial mismanagement – ​​corrupt officials find it even easier to game the system,” according Monica Guy, communication and project officer at the Basel Institute on Governance.

Sustainable financial products carry risks

Sustainable lending to international agribusinesses have been reported for ESG and corruption risks. These loans can finance deforestation and lead to human rights violations. In some cases, local companies created by agribusinesses have opaque structures that allow government officials to take a stake in that venture in exchange for land or mining rights.

“Massive private investment fuels the production of key agricultural commodities such as rubber, palm oil, beef products, soybeans, pulp and timber, but little or no due diligence is conducted on these chains. sources, customers or transactions even though we know these industries are extremely vulnerable to deforestation and human rights abuses,” says Alexandria Reid, senior policy adviser for deforestation and finance at Global Witness in London.

“This opens the door to laundering the combined illicit profits made by companies in these sectors,” Reid warns.

Martin E. Berry