‘Green’ KYC - What does the future of KYC hold in light of ESG?
The financial services sector has drawn more attention to how financial services and products incorporate ESG considerations in relation to emerging regulations, from EU SFDR to UK SDR, and TCFD. Regulators, managers, and advisers are redefining their operations to enable investments to be directed towards ESG.
As these regulations continue to be enhanced and clearer harmonised definitions are created, there is another stream of financial services that will also be a key element in the protection of the environment and social impact - KYC.
Know Your Customer (“KYC”) and related provisions, such as Know Your Business (“KYB”) and Know Your Transaction (“KYT”), have been known to focus on understanding customers and business partners of financial services and products in terms of their identify, Politically Exposed Person (“PEP”) exposure, business activities, and source and origin of funds. Within this landscape, we see environmental crime risk as a component of KYC assessments emerging.
Environmental crime is one of the most profitable proceeds-generating crimes in the world. Every year, around 110 to 281 billion dollars in criminal gains are generated, which includes a wide range of activities such as:
- illegal extraction
- trade of forestry and minerals
- illegal land clearance and waste trafficking
Participants involved in these crimes vary from large, organised crime groups to multinational companies and individuals. Such participants rely on the financial and non-financial sector to launder the proceeds of environmental crime. Specific vulnerabilities are being noted in trade-based transactions with shell and front companies being used to disguise the proceeds of environmental crime. Environmental crime feeds into other crimes such as corruption, human security, drug trafficking and human rights violations.
Suspicious Transaction Reporting - Wildlife Crime
To effectively monitor and enforce sanctions against environmental crime risk, identifying and raising reports on suspicious activities will be key. The Monetary Authority of Singapore (MAS) recently examined the level and number of Suspicious Transaction Reports (“STRs”) in respect of illegal wildlife crime, as Financial Institutions and other relevant business entities such as traders or agents are required by law to report suspicious transactions related to illegal wildlife trafficking.
It is unclear if other jurisdictions or other financial institutions have enhanced their STR processes to ensure that environmental crime risks are also built into training and reporting within existing STR processes.
‘Look in and Look Through’
As ESG has focussed on “looking through” investments and underlying portfolios, so too will the ‘look in’ become a critical component- i.e., the origin of the wealth and funds that flow into an ESG product are derived from.
Apex ‘Green KYC’ Solutions
Apex Compliance Solutions has developed technology backed AML solutions drawing upon FATF Environmental Crime considerations and KYB solutions and has also reviewed supply chain considerations as part of AML and KYB responsibilities to integrate environmental issues at the outset and throughout the lifecycle of financial transactions.
The related environmental crime enhancements that will need to be considered:
- AML business risk assessments
- Transaction Due Diligence
- AML controls and related policies and procedures
- Suspicious Transaction Reporting practices
- Senior Management Risk Appetite on Environmental Crime
AML will also need to consider the source and origin of wealth, funds and products that feed into financial crime considerations and incorporate these into initial and ongoing CDD controls.
Apex ESG Solutions
To further support the industry, Apex ESG has bespoke tools to help investors monitor alignment with regulation, industry recognised frameworks and best in class standards. The end-to-end service provided by Apex ESG helps clients collect and independently verify their portfolio data and then generate reports to satisfy various stakeholder requirements including regulatory alignment. Apex ESG can also provide a more focused service in the areas of carbon footprinting, EU Taxonomy, DEI assessment and sustainability linked loans.