How important is environmental crime in developing effective AML risk indicators and controls
We don’t really care about the environment in the financial crime industry!
No, that comment is too harsh. Ethically and morally as individuals we care, of course. But is the environment sufficiently prioritized from a professional perspective?
Context is key
The private sector of the financial crime industry, including any company and professional working under the scope of the Sixth Anti-Money Laundering Directive (6AMLD), understands that environmental crimes are an important part of the money laundering process. Illicit money must be earned for it to be laundered. However, it also naturally prioritizes a risk-based perspective in its work to mitigate the risks of products and services being used to launder money. The general work of understanding and preventing predicate crimes and criminal threats is left to law enforcement. This is an oversimplification of our general anti-money laundering work, but let’s keep it simple to begin this much needed conversation.
This approach, of each side prioritizing and focusing on their respective areas of expertise, and lacking any consistent collaboration and information exchange, has created siloed work environments resulting in an oversimplified understanding of financial crime. This is evidenced in the general reporting of risks and typologies. Law enforcement and regulatory entities produce publications, such as National Risk Assessments (NRAs) and crime area reports, written in general detail focusing on predicate crimes, threats, and some geographical considerations.
The private sector, on the other hand, looks for specific information of how these threats can impact their products, services, and customers. In other words, they look for specific risks and typologies explaining how criminals can use them to launder money. In operating this way, both sides lack consideration and understanding of the other, ultimately ‘speaking different languages’ of the financial crime domain and missing out on the key element that each side is trying to provide the other: context.
2D Circle vs. 3D Sphere
The initial, harsh statement refers to the large part of the financial crime industry that is lacking context in their reporting and understanding of financial crime. It is a critical statement of the industry, and while it takes time and commitment to gain this contextual knowledge corporately, why settle for being able to draw a 2D circle when you can learn to draw a 3D sphere?
What does the 2D circle perspective look like in comparison with the 3D sphere? From the predicate crimes and threat experts producing typology reports, it is generic statements and risk classifications without relevant connections for financial entities, such as cash is a high-risk product. Adding contextual, detailed information to this statement that is relevant to types of high-risk customers, transaction patterns, or geographic areas would provide financial entities with specific, targeted risk areas to consider and assess. Similarly, for financial entities, the development of risk indicators for their customers, products, and services, without contextual knowledge and understanding of predicate crimes often results in the creation of ineffective controls limited in scope.
How much should a bank know about plastic recycling?
In 2017, China, the world’s largest importer of plastic waste, decided to abruptly ban the importation of plastic waste. This was an industry shifting change that had a global impact. At the time, assuming a bank had a plastic recycling company as a customer, it most likely would have noticed some changes in the customer’s behaviour, such as exporting its plastic waste to another country, changed business partners, and changes in transaction patterns. If the bank lacked contextual knowledge, a 2D circle perspective, the bank may have missed the opportunity to conduct any further assessment of the customer’s developing business. However, with some contextual knowledge, a 3D sphere perspective, the bank could have assessed the situation and learned that the reason China banned the importation of plastic waste was because much of the plastic was contaminated and too bad of a quality to recycle, and ultimately classified as ‘illegal shipments of waste’.
Consequently, the bank would have launched a know-your-customer (KYC) review and assessed its risk exposure to waste trafficking crimes. Even if the customer was able to find new business partners to recycle the plastic waste, additional questions should be raised, such as is the new country of operation a risk for other predicate crimes to consider, i.e., corruption or forced labour issues? Are there any other social issues to be concerned about, such as extreme poverty or pollution, two key indicators of the United Nations (UN) Sustainable Development Goals? The bank does not have to be an expert on plastic waste recycling, but these additional considerations create a wide-ranging scope that enhances money-laundering checks and controls.
Technology can be a tool for development and exploitation
Technology continues to develop at an incredible pace, providing individuals with increasing comforts at their fingertips and playing a developmental role in society. An example of this is the use of mobile apps to help coordinate the disposal or reduction of waste. Just by tapping a few buttons and taking some pictures, you can coordinate for somebody to come to your home and take your old stereo to the recycling facility, or for their own personal use. As added security, some of the better apps even provide the opportunity for the individual who picks up the waste to take a picture and time stamp when they have delivered it to the recycling facility. As a private company investing in this new app, or a bank handling them as a customer, would the knowledge and understanding of the threats linked to the illicit disposal of waste change the risks related to your financial products?
Criminal organizations often commit various crimes simultaneously to support each other. It is feasible for a vulnerable person to be exploited for their labor to pick up your waste and dispose of it illegally. Such a company could operate as a small and medium-sized enterprise (SME) using relevant financial products, such as a business account. Furthermore, such operations could include the use of a separate shell company that is used as a funnel account to receive illicit funds and redistribute them to additional accounts. These are scenarios that could be created and worked on theoretically by knowledgeable financial crime professionals, however, the search for contextual knowledge should be incorporated systematically, rather than relying on the spinning wheel of recruitment. The more contextual information you have, the better decisions you can make.
Cash is king
For law enforcement and regulatory agencies, the knowledge and understanding of products, customers, services, and general operations of financial entities can aid in the development of more detailed and relevant indicators. One of the most common threats and risks found in almost every NRA is the use of cash. The anonymity and portability of cash makes it a high risk, and NRAs will normally explain the additional crimes that can be facilitated by using cash, as well as go into detail on cash smuggling and how it can be committed.
However, would it not be more effective to collaborate more consistently with the private sector to release publications that state specific, detailed typologies? Rather than generally classifying cash as a high risk for its attributes, since banks cannot flag every cash transaction anyways, a risk indicator such as “a large cash deposit into an account belonging to a customer who is employed at an environmental or wildlife supervisory authority” provides more specific context that could indicate bribery, corruption, and illicit wildlife trafficking.
Did you know that the month of March has various United Nations (UN) designated days for celebrating the environment? The 3rd is World Wildlife Day, the 21st is International Day of Forests, and the 22nd is World Water Day, just to name a few. Earth Hour, a worldwide movement organized by the World Wide Fund for Nature (WWF) to turn off non-essential electric lights for one hour as a symbol of commitment to the planet, is also held in March.
So, while we take the time to reflect on the environment this month, let’s also use this opportunity to reflect on how we can improve our collective knowledge and understanding of environmental crime and the role it plays in adding context to financial crime. A little context can make a world of difference.