Corporates add ESG to financial crime risk screens, bribery and corruption risk seen in carbon offset schemes

Corporates have added environmental, social and governance (ESG) factors to their financial crime and anti-bribery and corruption (ABC) risk rating systems used to vet clients, suppliers, and third-party introducers. Those with more advanced ESG programmes have realised the vulnerability to bribery and corruption risks posed by some sustainability or climate change mitigation efforts, such as carbon offset schemes.

“ESG is also about green crime, human trafficking which is linked with money laundering and with bribery and corruption. They all come into the same circle,” said Gabriel Cozma, head of financial and fintech at the Lysis Group, a financial crime specialist in London.

A few banks too now risk-rate their client base and third-party relationships according to some ESG criteria alongside ABC and money laundering risk screening. Some will not onboard them at clients or third parties who do not meet those criteria, Cozma said.

“They want to take a different dimension to the risk rating of a supplier, a client, or a third-party introducer. Do we want to do business with this entity based on this criteria including ESG? There is an underlying link between ESG and various deals in various countries, which have the ESG dimension, but at the end of the day it is business as usual. It’s about money and it’s about corruption. Or it’s about money laundering, or both,” Cozma said.

Banks’ reputational risk committees would be considering ABC and greenwashing risks when vetting new clients and transactions, said Andrew Procter, a partner at Herbert Smith Freehills in London.

“What [reputational risk committees] try to deal with is the risk that a line may be crossed. They try to identify flags that might indicate a concern. They look at things like the jurisdiction in which they’re dealing; does it have a bad reputation for corruption? By the sector in which they’re dealing, the nature of the transaction. Is it unnecessarily convoluted or complex? If there’s a greenwashing angle to it, that might also be a concern,” he said.

Making the ABC ESG link

Many financial services firms, corporates, and law firms, however, lack complete appreciation of the link between corruption and ESG, said Liam Naidoo, a partner at Hogan Lovells’ investigations, white collar and fraud practice in London.

“Corruption is an ESG issue in its own right because conducting your business ethically, not being corrupt and good governance — that is absolutely a social issue. It’s also an issue of good governance because by its very nature preventing corruption in your company requires you to have good governance policies and procedures,” Naidoo said.

Kroll’s 2022 Anti-Bribery and Corruption Benchmarking Report, surveying 700 corporate executives, found that while corporates recognised the importance of incorporating ESG into ABC programmes, those based in the North America and the Middle East were lagging in these efforts.

Only 43% and 38% of those respondents, respectively, said ESG metrics were part of their anti-bribery and corruption and compliance. In comparison, 57% of corporates in Asia Pacific and 52% in Europe and Latin America had incorporated ESG metrics into ABC compliance.

Corporates looked at risk factors such as air and water pollution, labour rights, human trafficking, human rights, and modern slavery as part of combined ESG and ABC screening, Kroll said.

Carbon offset schemes pose ABC risks

Carbon offsetting programmes and nature-based climate mitigation solutions are vulnerable to corruption. They can even fuel corruption by channelling cash to jurisdictions with weak governance and few controls, the Basel Institute on Governance said.

“Doing sustainable business, i.e., your electricity resources or setting up carbon credit farms in Indonesia or wherever it might be, often requires corrupt conduct. Well-run corporates have got good [ABC] procedures and have spent a lot of money on it. And what they need to start doing quickly is understanding how that risk is changing because of the demands of ESG,” Naidoo said.

Simply put, getting a carbon sequestration scheme up and running may require a bribe to be paid to government officials. Even intergovernmental organization-sponsored carbon offset schemes or development funds earmarked for low-carbon development or renewable energy could be abused by corrupt officials, consultants warn.

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

Sustainable financial products carry risk

Sustainable loans to international agribusinesses have been flagged for ESG and corruption risk. These loans can fund deforestation and lead to human rights abuses. In some cases, local companies set up by agri-businesses have opaque structures to enable government officials to take a stake in that business in return for land or mineral rights.

“Massive private investment fuels the production of key agri-commodities such as rubber, palm oil, cattle products, soy, pulp and paper, and timber, yet little to no due diligence is conducted on those supply chains, clients or transactions even though we know that those industries are extremely vulnerable to deforestation and human rights abuses. This opens the door to laundering the co-mingled illicit profits made by businesses in those sectors,” said Alexandria Reid, senior policy adviser for deforestation and finance at Global Witness in London.

About the author

Rachel Wolcott is a London-based senior editor at Thomson Reuters Regulatory Intelligence covering risk management, technology and regulatory implementation.

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