resilience and responsibility: watchwords for finance …
TRANSCRIPT
RESILIENCE AND RESPONSIBILITY: WATCHWORDS FOR FINANCE IN 2021Thisyearhasbroughtatorrentofunusuallyinnovativeandhigh-qualityprojectsandreportsfromthebestbrainsinfinance,intheacademicworld,andingovernmentsworldwide,tosupporttheglobalresponsetothecrisesposedbythepandemic.Thiswelcomebrainpowerisalsoprobingwiderpractitionerissuesdrivenbytheomnipresentclimatecrisis,bychallengesandopportunitiesaroundbiodiversity(andtheothersustainabledevelopmentgoals)andtheneedforgreaterresponsibilityallroundinfinance.Onthelatter,moneylaundering(andrelatedcrimesinvolvingterroristfinancingandhumantraffickingandthelike)remainablotonthefinanciallandscape.ArecentreportfromtheCentreforEuropeanPolicyStudies,summarisedfrompage59,pointstowaysinwhichthefinancialsectorcanworkwithregulatorsandenforcementtohelpturnthisviletide.
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//SPACEISNOWTHEFINANCEFRONTIER//
Onthefollowingpage,wewelcomeanew£10mgreenfinancecentreatOxfordUniversity–theCentreforGreeningFinance&Investment(CGFI)–withwhichtheCISIisdelightedtobeinvolved.Thisisanationalcentretoacceleratetheadoptionanduseofclimateandenvironmentaldataandanalyticsbyfinancialinstitutionsinternationally.
TheultimatevisionofCGFIisforfinancialinstitutionstobeabletoaccessanduse“consistent,timely,andappropriateclimateandenvironmentaldataandanalytics”foranypointonplanetEarthhistorically,inthepresent,andprojectedintothefuture,foreverymajorsector,andforthecompletespectrumofmaterialclimateandenvironmentalfactors.
Specifically,theprojectaimstodeliver“quality-assured,relevant,well-described,scientificallyrobust,andopenlyaccessible”climateandenvironmentaldataandanalyticstoallfinancialinstitutions,suitableforawiderangeofusecases.Ithasplansfor“open,interoperabledata,andinformatione-infrastructure”thatwillprovideaneasy-to-useplatformforpractitionerstoaccess,buildoffandintegrateclimateandenvironmentaldataandanalytics,fromCGFIandothers,andcombinewiththeirproprietarydataandanalytics.Impressiveambitions,andtheclouttoachievethat.
TheprojectisledbyDrBenCaldecott(pictured),oneoftheworld’sleadingthinkersinthisfield,andwell-knowninfinancialcircles,aidedbydeputydirectorDrNicolaRanger(pictured),headofclimateandenvironmentalriskresearchattheOxfordSustainableFinanceProgrammeoftheSmithSchoolofEnterpriseandthe
Environment,UniversityofOxford.SheisalsoaseniorconsultantfortheWorldBank.
Underthisclassteam,thecentrewillco-developflagshipusecaseswithfinancialinstitutionsthatdemonstratethebenefitsofintegratingclimateandenvironmentalanalyticsandproduceopenriskframeworks,indicators,andanalytics,underpinnedbythebestavailablescienceandrobusttranslationalresearch.ItwillcreateafocalpointforUKandinternationaloutreachandforstakeholderstoengageandaccessCGFIservices,training,data,and
capabilities.Andexcitingly,itaimstomainstream‘spatialfinance’–theintegrationof
geospatialdataandanalysisintofinancialtheoryandpractice–whichwillbeoneofthekeyprioritiesforCGFI.Aswesawinarecent(May2021)programmeonCISITV,(seecisi.org/space),spaceisnowthefinancefrontier.Watchthesepages.
Meanwhile,hereonEarth,theAssociationforFinancialMarketsEurope(AFME)hasproducedatimelyandfascinatingreportontheEuropeanregulatorylandscapeforsustainablefinancedisclosures,aswellasthevoluntaryframeworks,tohelpthesectornavigateitsinterrelatedcomponentsbyanalysingthemthroughdifferentlenses.Wewillbebringingup-to-the-minuteanalysesofwhatmattersheretoCISImembersthroughourdedicatedTVchannel.Akeyfoundationofunderstandingdirectionoftravelinthisfieldisunderstandingtherecenthistoryandthuslikelytrajectory.TheAFMEchartonpages66–67isanimportantroadmapforourTVseriesontheUS$100tn-pluschallengefacingthosestartingtheircareersinfinancenow–andfortherestofus.George Littlejohn MCSI Senior adviser, CISI Editor, Review of Financial Markets [email protected]
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TheCISIisparticipatinginanew£10mnationalgreenfinanceresearchcentrethatwilladviselenders,investors,andinsurers,enablingthemtomakeenvironmentallysustainabledecisions,andtosupportagreenerglobaleconomy.Accesstoscientificallyrobustdataandanalyticsiscurrentlypatchyandunreliable.Armedwithbetterinformation,underpinnedbyinnovativeUKscience,financialinstitutionsgloballywillbemuchbetterplacedtomakedecisionsthatcontributetoamoresustainableplanet.
TheUKCentreforGreeningFinanceandInvestment(CGFI),launchedinFebruary2021,willtransformthefinancesector’sabilitytoinvestdifferentlytopromoteclimateandenvironmentalaction.ItdemonstrateshowUKscienceandfinancecanworktogethertohelptheglobaleconomytransitiontonetzerocarbon.InnovationhubsinLeedsandLondon,withexpertsinOxford,BristolandReadingwillcommercialisenewproductsbasedoninputfromthefinancialsector.
Thiswillhelpfinancialinstitutionsshiftmoneyawayfromriskyactivitiesthatharmtheenvironment,suchascoal-firedpoweranddeforestation,andtowardsactivitiesthatarelessharmful,suchasrenewablepowerandsustainableagriculture.TheCGFIisfundedbyUKResearchandInnovation(UKRI)andledbytheUniversityofOxford,andwiththedirectengagementoffourleadingprofessionalbodies,spanningthebankingandinvestmentspectrum–theCISI,CharteredBankerInstitute,CFAInstitute,andtheInstituteandFacultyofActuaries.
NewphysicalhubsinLeedsandLondonwillsupportcompaniesandstart-upstocommercialiseproductsthatcangreenglobalfinance,includingtoolsthatmeasurestormandfloodrisktoproperties,orthepollutioncreatedbycompaniesandtheliabilitiesthatresult.TheCGFIwillworkwithfinanceprofessionals,suchasCISImembers,toensurethateveryprofessionalfinancialdecisiontakesclimatechangeintoaccount.
Otherinstitutionswillformpartofthecentre,includingtheuniversitiesofBristol,
Leeds,Reading,andImperialCollege,aswellasTheAlanTuringInstitute,theSatelliteApplicationsCatapult,andtheScienceandTechnologyFacilitiesCouncil.Insummer2021,afullrangeoffinancialinstitutionandcorporatepartnershipswillbeannounced.
WorkbeganinApril,aheadofthisyear’sCOP26UNclimatesummitinGlasgow.TheCGFIwilldeliveroncommitmentsmadeintheUKgovernment’s2019GreenFinanceStrategy,andtheannouncementsignalstheUK’scommitmenttousingitsglobalfinancesectortosupportthetransitiontoanetzerocarbonandnaturepositivefuture.
DrBenCaldecott,directorandprincipalinvestigatoroftheCGFIandtheLombardOdierAssociateProfessorofSustainableFinanceattheUniversityofOxford,saysoftheproject:“CGFIwillallowfinancialinstitutionstoaccessscientificallyrobustclimateandenvironmentaldataforanypointonplanetEarthnowandprojectedintothefuture,andforeverymajorsectoroftheglobaleconomy.Doingsowillcreatepublicgoodsandunlock
UK LAUNCHES NEW £10M RESEARCH CENTRE TO SPUR A GREENER GLOBAL FINANCIAL SYSTEMBRINGING FINANCE, POLICY, SCIENCE, AND TECHNOLOGY TOGETHER IN THE GREAT CHALLENGE OF THE 2020s
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innovation.TheUKisperfectlyplacedtotransformtheavailabilityofclimateandenvironmentaldatainfinance.Wehaveworld-leadingcapabilitiesinallthevariousareasthatneedtocometogethertosolvetheproblem.
“ThemarketforESGdata,ofwhichclimateandenvironmentaldataisalargepart,isexpectedtoreachUS$1bnin2021andgrowannuallyby20%.Itisourviewthatthisisasignificantunderestimateoffuturegrowthpotential.TheCGFIwillsupportenterprisesprovidingclimateandenvironmentalanalyticsandrealisetheopportunityforUKplcofbeingaworldleaderincommercialisingproductsthatcangreenglobalfinance.”
ABOUTTHECGFIFundingfortheCGFIwasallocatedthroughtheClimateandEnvironmental
ofpartnerinstitutionsreflectitsstrategytobringtogetherdiverseexpertise,acrossclimateandenvironmentalrisks,disciplines,financialinstitutions,andgeographies,requiredbothtomeettheneedsoffinancialinstitutionsnowandtocreatethestrong,broadfoundationnecessarytoscale-uptheenvisionedworld-leadingnationalcentreforthelongterm.
Thisbroadbaseofexpertiseincludesclimate,earthsystemsandenvironmentalscience,geography,computing,datascience,mathematics,water,engineering,systemsscience,statistics,economics,business,innovation,decisionscience,andfinance.
ABOUTUKRIUKResearchandInnovationworksinpartnershipwithuniversities,researchorganisations,businesses,charities,andgovernmenttocreatethebestpossibleenvironmentforresearchandinnovationtoflourish.Itaimstomaximisethecontributionofeachofitscomponentparts,workingindividuallyandcollectively.
NowtheUKhaslefttheEU,UKRIcontinuestosupporttheresearchandinnovationcommunitieswithinformationandupdatesonaccesstograntsandmobility.UKRIoperatesacrossthewholeoftheUKwithacombinedbudgetofmorethan£8bn,bringingtogetherthesevenresearchcouncils,InnovateUK,andResearchEngland.
ABOUTTHEUNIVERSITYOFOXFORDOxfordUniversityhasbeenplacednumberoneintheTimesHigherEducationWorldUniversityRankingsforthefifthyearrunning,andattheheartofthissuccessisitsground-breakingresearchandinnovation.Oxfordisworld-famousforresearchexcellenceandhometosomeofthemosttalentedpeopleglobally.Itsworkhelpsthelivesofmillions,solvingreal-worldproblemsthroughahugenetworkofpartnershipsandcollaborations.Thebreadthandinterdisciplinarynatureofitsresearchsparksimaginativeandinventiveinsightsandsolutions.
To learn more about the CISI’s work with this project, or to get involved, please email [email protected]
RiskAnalyticsforResilientFinanceprogrammelaunchedbytheNaturalEnvironmentResearchCouncilandInnovateUKinFebruary2020.TheCGFIistheUKnationalcentreestablishedtoacceleratetheadoptionanduseofclimateandenvironmentaldataandanalyticsbyfinancialinstitutions.ItwillunlockopportunitiesfortheUKtoleadinternationallyingreeningfinanceandfinancinggreen.
Toachievethisvision,theCGFIconsortiumbringstogetheraworld-leading,multidisciplinaryteam.Theseniorleadershipteamareallgloballyrecognisedexpertsintheirrespectivefieldswithatrackrecordofdeliveringhigh-impactresearch,tools,analytics,andinformationrelevanttoarangeoffinancialinstitutionneeds.FivemajorUKuniversitiesplusarange
Head-huntingI’m sitting at my desk one day, sorting CV’s into random order,when the phone rings and a man’s voice says I’m a head-hunter, can you talk?I say, that’s odd, I’m a head-hunter too.I know, the voice says, actually I’m a head-hunter’s head-hunter.Oh, I say.And I’m working for a client who’s also a head-hunter and who wants to recruit an experienced head-hunter.That’s interesting, I say, who is your client?I can’t tell you that, the voice says, it’s confidential.Ah, I say.So I’m wondering if you might be interested.That’s hard to say, I say, can you tell me why your client wants to recruit an experienced head-hunter, or is that confidential too?No, the voice says, that’s not confidential, my client wants to recruit an experienced head-hunter to replace a head-hunter who has gone to work for a different head-hunter.I see, I say.So are you interested? I’m not sure, I say.Because if not, I was wondering if you knew any other experienced head-hunters who might be interested.Let me see if I’ve got this clear, I say, are you, a head-hunter’s head-hunter, asking me, a head-hunter, whether I know an experienced head-hunter who might be interested in leaving their current head-hunter to work for your confidential client head-hunter where they will replace a head-hunter who has gone to work for a different head-hunter?Yes, he says.
No, I say.
NigelPantling,CharteredFCSI,isourPoetinResidence.Heisaformersoldierandseniorcivilservantturnedseniormerchantbanker–seenigelpantling.com–andtheauthorofanumberofpoetryvolumes,mostrecentlyIt’s not personal,publishedbySmith/Doorstopandavailablefrompoetrybusiness.co.uk.
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Moneylaunderinghasbecomeaseriousconcernamongfinancialinstitutions.Althoughactiontocombatithasbeentakingplaceforabout30years,itisonlymorerecently,andpartlyasaresultofsomehigh-profilecases,thatithasbecomeatoppriority.Anti-moneylaundering(AML)shouldbepartofbasicriskmanagementinallgovernmentsandfinancialinstitutions.Itshouldbereflectedinthegovernancestructurewithintegrated,proactive,aggressiveandinteroperabledefences,aswellasexternally,inthesupervisorystructure.Inpractice,recentcasesdemonstratethatthereareseriousfaultlinesincompliance.
FAULT LINES IN EUROPEAN ANTI-MONEY LAUNDERING NEED URGENT FIXINGKAREL LANNOO AND RICHARD PARLOUR ASSESS HOW EUROPE’S FINANCIAL SECTOR IS RESPONDING TO THE URGENT CHALLENGES POSED BY MAJOR FINANCIAL CRIME
After30yearsofhardfightingagainstmoneylaundering,itremainsrampant,alongwithitsvariouspartnersincrime,suchasterroristfinancingandhumantrafficking.AJanuary2021report,Anti-money laundering in the EU: time to get serious,bytheCentreforEuropeanPolicyStudies(CEPS),oneoftheworld’sleading
thinktanks,andtheEuropeanCreditResearchInstitute(ECRI),basedonaninquirychairedbyEeroHeinäluoma,MemberoftheEuropeanParliamentandformerFinnishMinisterofFinance,shoneabrightlightonsomeofthekeyfailings,inbothgovernmentandfinance.RapporteurKarelLannoo,CEOofCEPS,andhisco-rapporteur,RichardParlourofFinancialMarketsLawInternational,aregularcontributortoCISIonfinancialcrime,inthisworkdrawnfromthemainreport,addresssomeofthekeychallengesfacingoursector.
Richard Parlour: [email protected]
//¤200bnPASSEDTHROUGHDANSKEBANK’SNON-RESIDENTPORTFOLIOINTHEESTONIANBRANCHBETWEEN2007AND2015//
Europeanauthoritieshaverecentlysteppeduptheiractionsagainstmoneylaundering,withthemostwell-knowncasesinvolvingNordicbanks,indealingsthroughentitiesintheBalticswithRussia.USauthoritieshavebeenactiveforalongertime,usingasomewhatdifferentfocus,withanenormousfineleviedagainsttheFrenchbankBNPParibasin2014,forexample.
Thewaybanksrespondtothesecasesdifferssignificantlyfromorganisationtoorganisation.ItisonlyrecentlythatpublicreactionhasledtopressureonbankstobecomemoreproactiveinpublicisingtheirAMLpolicies.Thismaybeagoodsteptowardsfindingtherightapproachinpolicymaking,butnotifitrevealsanorganisation’sdefencestothecriminalfraternity.Atthesametime,itshouldbenotedthatthepublicfurorehasfocusedonthebanks’roleasgatekeepers,andtheimpactonunderlyingcriminalityhasbeenalmostentirelyabsentfrommediacoverage.Asenseofbalance,cooperationbetweenthevariousorganisationsfightingmoneylaundering,betheypublicorprivate,needstoberestored.
Themostwell-knownrecentcaseisundoubtedlyDanskeBank,giventhetotalamountthatpassedthroughthebank’sbooks,about¤200bnintransactionflowsbetween2007and2015.Theschemeconcernedthetransactionsof15,000non-residentclientsoriginatingfromtheEstonianbranchofthebank,whichwasbroughttolightbyawhistleblower.ThisraisedquestionsabouttheroleoftheDanishFinancialSupervisoryAuthority(FSA)andthefunctioningofthesupervisorycollegeofthebankintheNordics.Butthebankistheonlyonethatdisclosedtotalflowsinrelationtonon-residentcustomers,anditisthereforedifficulttocomparethiscasewithothers.Otherbankshave,andonlyinsomeinstances,publishedactualmoneylaunderingortransactionsthat
violatedsanctions,numbersthatarebytheirnaturemuchsmaller.ThechairandCEOultimatelyleftthebank.
Inareportonthecase,theDanishFSAproposedthefollowingasremedies:1)betterandmoreeffectivelinesof
defenceinbanks2)dutytodiscloseandcriminalliability,
aswellasimprovedprotectionofwhistleblowers;and
3)tougherconsequenceswhenbankmanagementfailstoliveuptoitsresponsibilities.
AstotheEuropeandimension,theEuropeanBankingAuthority(EBA)boardexaminedthecase,butitconcludedtherewasnobreachofEUlawbytheDanishFSAinapplyingtheAMLdirectiveandinnotproperlysupervisingthebank.EBAdidsobelievingpartlythatanactionagainsttheregulatorwasnotthecorrectinstrumentinacasethathadhappenedfiveyearsearlier.Thisraisedsomeconcernssincethebank,andindirectlyalsotheDanishFSA,reactedtoolittleandtoolateinresponsetothewhistleblower’scomplaint.TheEUCommissiondidnotaccepttheEBA’sdecisionbuthasnotactedfurtherthusfar.
Theattentionpaidtothecase,however,demonstratesthatthedebatefocusesonthesymptomsratherthanthecauses.Thecriminalgangsconcerned,andtheimpactofthemoneylaunderingschemeonsocietyandcommerce,havelargelybeen
absentfromdiscussion.Itdoesneedtoberecognisedthatbanksandotherobligedentitiescanonlydosomuchagainstlaunderingoperationsas
gatekeepers.Bankstaffarenottrainedinvestigatorsordetectives,andtheyarenotlawenforcementofficers;theyperformavitalfunctionforsocietyin
RichardParlour
KarelLannoo
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//A2019EUROPEANCOMMISSIONREPORTSEESWEAKNESSINAMLLINESOFDEFENCE//
ACONFUSEDAMLRISKMANAGEMENTFRAMEWORKEUrulesrequirecreditinstitutionstohavegovernancearrangementsinplacetoensuresoundandeffectiveriskmanagement.Internalcontrolmechanismsshouldpreventfailures,suchasmoneylaundering,inthecomplianceframework.Butthecaseshighlightedabove,aswellasothers,pointtohugedeficienciesinputtingtheseframeworksintoplace.Thiswasanalysedina2019EuropeanCommissionreport.1Itseesweaknessesinthedifferentlinesofdefencethatabankisrecommendedbyregulatorstohaveinplacetocountermoneylaundering.
Theselinesofdefenceconsistof:1)Thefrontoffice:recognisingor
reportingsuspiciouscustomersandtypesoftransactions.
2)Riskmanagementandcompliance:ensuringthatthefrontoffice,atalllevels,isdulyinformedandclearproceduresareinplace.Unitsareproperlystaffedtorespondandcomplywiththerules.TheyfollowtheprocedureofsubmittingsuspicioustransactionreportstothelocalFIUs.Seniormanagementisinformedandactsincasesoffailure.
oilingthewheelsoftheglobaleconomy.IntheearlydaysofAML,lawenforcementwasbetterresourcedandsupported,politically,financiallyandtechnologically.Itpenetratedcriminalgangsandfollowedthemoneytrail.Thebanksprovidedevidenceofthetransactionsnecessarytoconvict.Newsofthebustingoflargecriminalnetworkswasmadepublic.
Morerecently,governments’strategyseemstohavechangedfromoneofrequiringbanksandotherobligedentitiestosifttheelectronicandotherrecordsforevidenceofcriminality,tobeingheldtoblamewhenmoneylaunderingoperationsareuncovered.Thischangeinstrategyisunhelpful.Thereislittleornoimpactonunderlyingcriminality,saveforencouragingitsgrowth.Thecostsavingsforgovernmentsintermsofreductionofthesizeoffinancialcrimepoliceunitsismorethanoutweighedbythemassiveincreasesincompliancecostsforthefinancialsector,reducingaccesstofinancialmarketsforhonestborrowers(witnesstheriseofalternativefinancingmethodsasareactiontomorecautiousbanklending),andtheeconomiesofmemberstatesloseoutinbalanceandinthelongterm.Bankshavebeenforcedtopaymassivefines.Althoughtransparencyisseenaskeyin
fightingcriminalpursuitsthatleadtomoneylaunderingandcorruption,thereisnotransparencyofferedbyregulatorsorgovernmentsastohowtherevenuegeneratedbyfineshasbeenused.Curiously,allgovernmentssimultaneouslyclaimthereisnomoneyavailabletosupportfinanciallawenforcement.Thisstrategymustchange,notonlytoprotectthepopulaceagainstterroristbombings,cybercriminals,drugoverdosesandthelike,butalsotosupportactionagainstenvironmentalcrimes,aswellasforthesakeofenhancingeconomicgrowth.
Thetableabovedemonstratesthelargedifferencesamongindividualcases,andtheresponsesbythebanks,shareholdersandtheauthorities.Insomecasestherearefines,inothercasessettlementsforundisclosedviolations.Instillothercases,decisionsareyet
awaited.Thispointsagaintothedifficultyofhavingastreamlined,EU-wide(letaloneglobal)approach,inthe
faceofverydifferentlegalsystems.Thecasesmentioned,butalsoothersgivenlessattention,haveledtoaseachangeinAMLriskmanagementwithinthebanksconcerned,whichisanalysedinthefollowingsection.
1 https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX:52019DC0373
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TABLE1:RECENTHIGH-PROFILECASESINAMLINTHEEUBANKINGSECTOR
Year Case Impact Fines Sources*
Swedbank 2020 FailuretoapplyAMLproceduresinBalticsubsidiariesonabout¤37bnoftransactionsbetween2014and2019
NewCEOandmanagementteam
¤360mfinebySwedishFSAforfailuretoapplyAMLrules
Reportanddetailedexplanationoncompany’swebsite
ING 2018 FailuretoapplyAMLprocedures(totalamountnotdisclosed)
Nodischargeofboardmembersfor2018accounts.CFOstepsdown.
Settlementof¤775mwithDutchauthorities
ABLVLatvia 2018 Unclear:involvedinmorethan¤1bnincriminalmoneylaundering
EuropeanCentralBankwithdrawslicence;bankliquidated
Unclearwhethercaseledtolawsuits
AMLpolicyoncompany’swebsite
DanskeBank 2018 FailuretoapplyAMLproceduresonabout¤200bnintransactionsthroughitsnon-residentaccountsfrom2007to2015intheEstonianbranch
CEO,chairandseveralmanagersandemployeesleftthebank.Estoniaoperationswereterminated.Improvedprocedures.
Ongoing,preliminarychargebyDanishauthorities;lawsuitsbyprivateinvestorsaswell
ReportbyDanishFSAandreportbythebank.Detailedexplanationoncompany’swebsite
BNPParibas 2014 TransactionswithcountriesblacklistedbyUS
USauthoritiesrequiredcertainseniorstafftostepdown
SettlementwithUSauthoritiesof¤9bn
ReportbytheFrenchAssembléeNationale
Source: Anti-money laundering in the EU: Time to get serious* Links to all reports and websites are included in the original report, available at cisi.org/rofmJun21
//FURTHERHARMONISATIONOFEUBODIESISREQUIREDTOPREVENTMORECASESOFMONEYLAUNDERING//
3)Internalriskaudit:aunitthatcontrols(1)and(2)independentlyfrommanagement,withadirectreportinglinetotheauditcommitteeandexecutives.Theinternalauditshouldallowfortheraisingofacasebyawhistleblower,whoshouldbeprotectedinsodoing.
Forlargebankinggroups,whicharethoughttobetheprimarytargetsformoneylaundering,thoughnoproperresearchhasbeenconductedonthis,thechallengeistohavethesepoliciesconsistentlyappliedatcorporatelevel,intheEUandthirdcountries,inbranchesandsubsidiaries,andincorrespondentbankingrelationships.Thevarietyoforganisationalmodelsofbanks,thedegreeofintegrationofcontrolsystemsinoftenmergedcross-borderentities,anddiverseadministrativerequirementsandlanguagesmakethisproblematicforcompliancedepartmentstomonitor.Largebanksareoftencollectionsofsmallerentitiesthathavebeenboughtoutormerged,withlittleattempttocreateatrulysingleidentityorculture,andoftenwithaplethoraoflegacysystems.
Toimprovetheorganisationalstrengthofsuchentities,regulatorsneedtobemoreassiduousinensuringthereisaplan,resourcesandthewilltoconsummatebankmergerssothattheycanoperatemoreefficientlyandprotectthemselvesbetteragainstfinancialcrime.Sadly,thisneedisusuallyoverlooked.Suchpoliciesoftenclashwithcommercialandcustomeronboardingobjectives,orcreateconflictamongbankstaff.InthecaseofDanskeBank,forexample,thelaunderinghappenedattheEstonianbranch,whereemployeesactivelycoveredupviolations,whichwereinsufficientlyheldincheckbyheadquarters.Theinformationtechnologysystemofthebranchwasnotintegratedwiththerestofthegroup.ThebranchfellunderthewatchoftheDanishFSAforprudentialmatters,butundertheEstonianauthoritiesforAML.Itseemsthatthelessonsfromearlieregregiouscollapsesresultingfromunrestrainednefariousandspeculativeactivity,theBCCIand
passtheseontolawenforcementforaction.
3)Taxauthoritiescanacttopursuetaxevasionandcountertaxavoidance.
4)Lawenforcementauthoritiesarechargedwithassimilatingtheintelligence,assemblingevidenceandprosecutingcases.
EachoftheselinesisorganiseddifferentlyacrosstheEU,letaloneintherestoftheworld,whichmakesconsistentapplicationofAML/CFT(counteringterroristfinancing)challenging.Cross-bordercasesdemandstrongcooperationamongtheseentities,whichistime-consuming,butnoAMLsupervisorappearsuntilrecentlyinchargeofsupervisinggroups(althoughitisexplicitlymentionedintheFourthAMLDirective,andnowthetaskofEBA).Certaininternationalnetworks,suchastheEgmontGroupandMoneyval,havecometosupporttheseneedstosomedegree,butthishasyettotranslateintoanysignificantimpactonunderlyingcriminality.
TheEuropeanCommissiondetecteduneaseamongprudentialsupervisionauthoritiesinusingtheirfar-reachingpowersagainstmoneylaundering,“astheprudentialframeworkonlyexceptionallyrefersexplicitlytosuchconcerns”(EC2019report,p.112).TheSingleSupervisoryMechanism(SSM)isseenasanadditionallayerforcoordination,butnotconsideredanAML/CFTauthority,accordingtorecital28oftheSSMregulation.ThefirstheadoftheSSMexecutiveboard,DanielleNouy,oftenreiteratedthatAML/CFTsupervisionisnottheSSM’sbusiness.
Anadditionalproblemisthathome-countrycontrol,thebasisofprudentialsupervisionintheEU,doesnotapplyinrelationtoAML,wherethehostcountryisincharge,aswasclearintheDanskeBankcase.AMLissueswerenotconsistentlyfactoredintothereviewofthecreditinstitutions’prudentialframework,itappears,whiletheymayhavefar-reachingconsequences.Thisalsoappliesatcorporateheadquarters,whereAML/CFTissuesarenotprominent,accordingtotheEUCommission’s2019report.The
BaringsBankcasesofthe1990s,wereforgotten.
TheroleofexternalauditorsandgovernmentauthoritiesAnexternalauditmustensurethataccountsreflectafairandproperviewofthecompany.Auditorsneedtocheckthatinternalcontrolsaretakingplace,i.e.thattheKYCrulesareapplied,andthatthebusinessisagoingconcern.Irregularitiesneedtobereportedtotheauthorities.Thecomplexitiesdescribedabove,withdifferentlegalframeworksandresponsibleauthorities,renderthe
taskofauditorsmoredifficult.EUlawharmonisedtheconditionsforstatutoryaudit(regulationEU537/2014)butleftmanyoptionstothememberstates,suchasfortheprovisionof
non-auditservicesbyauditors.TheregulationcreatedathinstructureforEU-widecooperation,theCommitteeofEuropeanAuditingOversightBodies(CEAOB),whichismanagedbytheEuropeanCommission.Thisconfusingpicturehasreceivedscantattention,butfurtherharmonisationwillberequiredtohelppreventmorecasesofmoneylaundering.
Atthenextstage,thereistheroleofthegovernmentauthorities:thesupervisoryandlawenforcementauthorities,andtheFinancialIntelligenceUnits(FIUs)andtaxauthorities.1)Prudentialandconductsupervisory
authorities:AMLsupervisionisataskforprudentialauthoritiesinmostmemberstates,asitispartofthecoreriskmanagementtasksofafinancialinstitution.Moreover,itcanhavefinancialstabilityimplications.Somecountrieshaveaspeciallydedicatedentity.ThenewlyformedEBAAMLStandingCommitteebringstogetherthesedifferentbodies,57intotal,includingthoseoftheEEAcountries.
2)TheFIUsprocesssuspicioustransactionandsuspiciousactivityreports,aswellascashtransactionreportsincertaincountries,and
2 https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX:52019DC0373
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differencesinthesupervisoryarchitectureforprudentialandAMLpurposesrenderscooperationmoredifficult.Thesameapplieswithregardtolawenforcementauthorities.Hence,theEUisfacedwithanAMLgovernancespaghetti,inthecontextofgrowingcross-borderactivityandmorecentralisedprudentialsupervision.
Concerningenforcement,judicialsystemsandpenaltiesdifferwidelyintheEU,asituationthatwillnotchangesoonsincememberstateszealouslyguardthesepowers.
NEWTECHNOLOGIESANDAMLOverthepastfivetotenyearstherehasbeenadrivetocreateuniformityinvendorsystemsdeployedbythefinancialsector,withconsistentstandards,scenarioplanningandfunctions.Inthesameperiod,therehavealsobeensignificantdevelopmentsthroughenhancedcomputerpowerandartificialintelligence,useofblockchainandothertechnologies,whichcreateopportunitiestostreamlineanalysisandreporting,andtargetriskresources,movingawayfromtraditional,rules-basedmonitoringtoidentifyingbehaviours,networkanalysisandclusteringofriskattributes.Assuch,thereisopportunityforEUfinancialinstitutionsandnon-financialfirmstoenhancetheirsurveillancemechanismsandfocusoneffectiveness.
Incertainrespects,technologyhasimprovedboththeidentificationoffinancialcrimeanddeliveryofmoreactionableinformation.3Datacollectionandanalyticaltoolshavebecomemore
3 This section is based upon a contribution of HSBC to the task force and on the response of a task force member.
//AISYSTEMSCOULDLOCKLARGENUMBERSOFINNOCENTPEOPLEOUTOFFINANCIALMARKETS//
RichardParlourtalksaboutkeyrecommendationsfromthereportonCISITV.Watchatcisi.org/amlandgain65minutes’CPD.
powerful,andtechnologyisadvancing.Theapplicationofblockchaintechnologytotransactions,forexample,couldallowforbettercontrolofthem.Thereisaneedforprogressacrossthreekeydimensions,however:
•Data:Theissueisnotsomuchthelackofdata(certaindatabasesforuseinAMLareinbadshape,however)butwhethertherightdataarecollected,theirquality,theprocessingpowerandanalyticalcapability,inordertoassessitanduseitmoreeffectively.Thereisaneedformorein-depthandrelevantdatathatcanbeupdateddynamically.
•Analytics:Withbetterdata,AIandmachinelearningcouldbeusedtodevelopbettermodelsofanalysisthatallowthecarryingoutofmorecompleteriskassessments.Thiswillhavetobeaniterativeprocess,rollingoutthebestanalyticalmodelsthatprovideaviewspanninganumberofdifferentrisksandcombiningandaggregatingdataacrossallsectorsandregions.Therearemanydataanalysistechniques,though,andtheendresultwillonlybeasgoodasthealgorithmconcerned.
•Communication:Thecruxofthematterisunderstandinghowtogettherightinformationinatimelymannertotheappropriatepeopletogetthecorrectdecision,includingprovidinginsight,dataandintelligencetolawenforcement.Thatwouldrequireanoperatingmodelandaframeworkthataremoreagileandcomplexthantheonesinusetoday.Oneoftheproblemswithtechnology
isthatonceagoodsystemisupandrunning,itmayhindereffectivenessorreducetheattractivenessofdevelopingfurtheradvancedtechnologytomanagefinancialcrimerisks.Newtechnologiesmay,forexample,resultinareductioninthenumberofsuspiciousactivityreportsbeingfiled,appearingtopresentadeclineinpotentialsuspiciousactivityandrawdatathatwillneedtobeexplainedtotheauthorities.AIsystemscouldeffectivelylocklargenumbersofinnocentpeopleoutoffinancialmarketsifnotimplementedandexecutedcorrectly.Itcouldalsoactasabrakeoninnovation,notjustoffinancialproductsbutoflawenforcementandsupervisiontechniques.Inthefuture,transactionmonitoringcouldbeintegratedintodynamicriskassessmentandcouldusenew,moreeffectiveandfastertechnologyassupporttoolsfordecision-making.Thisdynamicrisk
assessmentmaybebasedonfourpillars,asoutlinedbelow.Analysisviaeachofthemwill
resultinaprobabilityof‘suspicious’activitytakingplace.Attheheartoftheissue,however,isthatsuspicionisahumanconcept,anditisverydifficulttoteachacomputertobesuspicious,asopposedtohighlightingunusualtransactionsinrelationtosetparameters.HumanintelligencemustnotbeleftoutofanyAMLassessmentsystem,followingfourpillars:
•Subjectmatterexpertise:Considerswhatisalreadyknownaboutsuspiciousactivities.
•Outlierdetection:Considersbehavioursthataredifferentincomparisonwiththeaverageprofileforaspecificsegmentofcustomers.
•Anomalydetection:Looksatsuddenchangesinthebehaviourofcustomersovertime.
•Networkanalysis:Showslinkagesandinterconnectivitybetweendifferentplayersinthesystem.Apolicyenvironmentisneededthatsupports
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thesetechnologies.Thatincludesbetterregulation,particularlyonAI,andknowledgesharingthatencouragesinnovativethinkingandresponse.Itshouldfacilitatethedetectionofsuspicioustransactionsandnewfraudpatternsacrossregions,instrumentsandtechniques.Morecooperationwithintheprivatesectoristhereforeneeded,asmuchasispossible,andbetweenthepublicandprivatesectors,withinthelimitsofnationalconstitutions,theEUTreatyprovisionsandtherespectoffundamentalrights.
Therehasbeenprogressthroughjointprivate-sectorinitiatives,suchasTransactionMonitoringNetherlands(seeboxbelow).Inpublic/privatepartnerships(PPPs),thereistheJointMoneyLaunderingIntelligenceTaskForce(JMLIT)intheUnitedKingdom,theSwedishAnti-MoneyLaunderingIntelligenceInitiative(SAMLIT),andotherinitiativesinDenmark,FinlandandtheNetherlands(AMLC),aswellasevolvingworkbyEuropoltodirectfinancialinstitutionstoidentifyandprovideinformationthatisofusetolawenforcement.Thesamehashappened
//AFRAMEWORKISNEEDEDTOGUARDAGAINSTCOLLUSION//
intheUnitedStates,withtherecentannouncementbytheUSFIUFinancialCrimesEnforcementNetworkthatitwillexamineAMLeffectivenessandoutcomes,inordertorefocusonhigher-valueAMLactivities.Itaimstoincreaseinformationsharingandpublic/privatepartnershipsandtoleveragenewtechnologiesandriskmanagementtechniques–andthusincreasetheefficiencyandeffectivenessoftheUSAMLregime.Theseinitiativescanbeexpectedtocontinuetodevelop,alongwith(i)automatedreportingtosupporttheFIU’sowndatainvestigationand(ii)effortstocutdownonresource-intensivemanualprocessesthatdonotgeneratemeaningfulresultsoractionableintelligence.
Afirmisableeffectivelytomanageandidentifyclientorexternalentityriskandexposureonalocal,regionalandglobalscale.Areasofemphasisshouldincludeflexibilityontheapplicationofnon-risk-drivenuniformprocesses,suchascollectionofadversemediaandpoliticallyexposedpersons(PEP)dataanduseoftransactionmonitoringin
businessesorclienttypes.Thisflexibilitymayenableprivate-sectorbodiestofocustheirresourcesonareasofpriorityforthepublicsector.
However,informationsharedwithinPPPsrequiresappropriatelegalprotection,andrespectingacleardivisionofcompetencesbetweenprivateandpublicsectors.Awell-definedsafeharbourshouldbe
providedforinstitutionswhendisclosinginformationinacontrolledmannerandforthebroaderpublicinterestof
preventingfinancialcrime.TheprivatesectorhasnoguaranteeorlegalcertaintythattheywillbeexoneratedofliabilityincaseswherenationalandEUlawhavebeenviolated.Thisiswherebanksecrecy,GDPRandEUcompetitionpolicyconsiderationscomeintoplay.Forthelastofthesethree,exchangeofdataisallowedifitcontributestothepublicgoodandifitisconfinedtothestatedpurpose,butaframeworkisneededtoguardagainstcollusion,whichcanbolsterthelargerplayersinthefield.Itcanalsoraiseconflictofinterestandgovernanceissues.
Ethicalconsiderationsshouldalsobetakenintoaccount.Toretainthetrustofthecustomer,thereisaneedtobetransparent,addressbiasandexplainpubliclywhatistobedone.Careneedstobetakensoasnottostifleinnovation,toavoidinstillinganti-competitivebehaviours,toeschewcreatingmarketaccessbarriersorencouragingfinancialexclusion.Inthiscontext,theworkoftheEuropeanCommissionHigh-LevelExpertGrouponArtificialIntelligenceneedstobeadvanced.AuthoritiesalsomustrecognisethatcriminalorganisationsaredevelopingtheirownAI,toimprovetheirownmoneylaunderingtechniques,andthatneedstobemonitoredandcountered.
For more detailed and updated analysis of the fight against money laundering and terrorist financing, see regular programmes led by Richard Parlour and others on CISI TV, live and on demand. The final version of the main report is available at cisi.org/rofmJun21
TRANSACTIONMONITORINGNETHERLANDS
FiveDutchbanks(ABNAMRO,ING,Rabobank,TriodosBankanddeVolksbank)havedecidedtoestablishTransactionMonitoringNetherlands(TMNL)inthecollectivefightagainstmoneylaunderingandthefinancingofterrorism.TheTMNLinitiativewillbeanadditiontothebanks’individualtransactionmonitoringactivities.TMNLwillfocusonidentifyingunusualpatternsinpaymentstrafficthatindividualbankscannotidentify.ThefivebankshavestudiedwhethercollectivetransactionmonitoringistechnicallyandlegallyfeasibleundertheaegisoftheDutchBankingAssociation,aswellasthequestionofwhetherTMNLcanaddmaterialvalueinthefightagainstmoneylaundering.Researchshowedthatcollectivetransactionmonitoringwillallowforbetterandmoreeffectivedetectionofcriminalmoneyflowsandnetworksin
additiontowhatbankscanachieveindividuallywiththeirowntransactiondata.Italsoshowedthatcombiningtransactiondatawillprovidenew(inter-bank)informationthatwillbeusefulinthefightagainstfinancialcrime.Inadditiontothebanksfulfillingtheirownresponsibilityasgatekeepers,effectivelydealingwithmoneylaunderingandthefinancingofterrorismrequiresanational(linkagetoofficialagenciesandothers)approach.Thebanksarethereforeworkingcloselywithgovernmentpartnerssuchastheministriesoffinance,justiceandsecurity,theFiscalInformationandIntelligenceService(FIOD),thefinancialintelligenceunit(FIU)andthepolice.Theaimistocollectivelysignificantlyincreasethereturnfromidentificationtodetection,prosecutionandconvictionofcriminality.
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HOW TO PAY FOR GOING GREEN: BILL GATES AND THE ‘GREEN PREMIUM’GATES AND THE RACE TO FIND A TECH SOLUTION TO PROVIDING CLEAN AFFORDABLE ELECTRICITY (AND EDUCATION AND HEALTHCARE) TO THE WORLD’S POOREST
WecametothenewlypublishedBillGatesbookonclimatechangewithsomeconcerns,butcameawaydisarmedbyhiscommitmentandopenness.OurbasiccriticismofHow to avoid climate disasterisbestsetoutbytheauthorhimself:“Iownbighousesandflyinprivateplanes,sowhoamItolectureanyoneontheenvironment?”Also,Gates’advocacyofuntriedtechnical
solutions,withperhapsunforeseeableconsequences,suchasdistributingheatreflectingfineparticlesintheupperatmosphere(‘geo-engineering’),issuspect.Buthisheartandmoneyseemtobeintherightplace.Thisbookisagoodprimerforthemainissues.
Gateshasafolksystyle,renderedsomewhatquaintbytheUSuseofFahrenheit,thelong-abandonedQueenAnne1707US‘gallons’andofnon-metricshorttons.MostofthebookisaimedattheUSpublic.ButatleastGatesthebillionaireisengagedandcommittedhereonearth–andunlikehisfellowbillionaireandneighbour,ElonMusk,heisnotinvolvedinpointlessenergy-hungrybitcoinminingorputtingpeopleinhiselectricvehiclesontheDeadPlanetofMars.
Gatesmakesnobonesaboutbeingcommittedtofindingatechsolutionto
providingcleanaffordableelectricity(andeducationandhealthcare)totheworld’spoorest.Thisisanadmirableaspiration,butwillrequirea50%increaseintheworld’selectricitygenerationtoreacheventhecurrentpercapitalevelofconsumptioninChina.ToreachthepercapitaleveloftheUSwouldrequireafourfoldincreaseinworldgenerationcapacity.
Thisisbeforeclimatechangekicksin,andpossessingairconditioningbecomesalife-or-deathmatterratherthanaluxury.AccordingtoGates,by2050,airconditioningworldwidewillconsumeasmuchelectricityasIndiaandChinatogether.Letusprayitisnotgeneratedfromcoal-firedsources.
Gatesaffirmscategoricallythatdecarbonisationby2030isnotnowfeasible.Wemayhoweverstillmakebadbuteasychoices,suchasgoingforgas-firedelectricpowerstations,withloweremissionlevelsthancoal,butlongerrunninglives.Hisaimistogoafterzerocarbonnow.Hiscorollaryissimple:onlynuclearreactorscansupplythecleanenergyweneed.ThislatteroptionisbothfavouredandfundedbyGates’TerraPower.ButafterThreeMileIsland(1979),Chernobyl(1986)andFukushima(2011),anuclearpowerstrategy,herecognises,willbedifficulttosell.
Gates’nuclearresearchsuggeststhatAIcanreducehumanoperatingerrorandimprovesafety.Nuclearwastecanalsobereduced,andtheplantsburiedundergroundagainstattack.Butthisisallincomputersimulations,sincenoGatesplantshaveyetbeenbuilt,thoughaprototypeisindevelopment.Initsfavour,Gatesshowsthatthecarbonfootprintofconstructingnuclearpowerstations(cement,steel,glassetc)islessthanacoal-firedstation,andlowerbyafactoroffiveorsixthanhydroorsolarpower.Decommissioningcostsareofcoursestillhighandunpredictable.Apartfromhisbeingabletobearthecost,itsomehowrequiresrealvisionandaudacityonGates’parttoownanuclearreactor.
JohnAdams,long-timeadviseronChinatotheCISI,andBobColinsreflectonBillGates’viewsonclimatechange.JohnisadirectorofAMCDandofHRChina&Financial,whichspecialisesingreenrecruitmentandtraining,andBobistechnicaladviseratAMCD.
John Adams [email protected]
//ONLYNUCLEARREACTORSCANSUPPLYTHECLEANENERGYWENEED//
Gateshadonetellingfinancialblindspot:anomission,andratheranoddoneforabillionaire.Thereisalmostnodiscussioninhisbookofthepowerofinvestorstochangethetypeofprojectswechoosetofundwithourmoney.Gatesisdismissiveofthisapproach,whichhecategoriesas“theeasystuff–divestingsecurities”.Sustainableandgreenfinancedonotseemtofeatureinhislandscape,thoughcuriouslyhedoesstatethathedivestedhisownholdingsingasandoilcompaniesin2019.
However,divestmentisinfactamajorinternationalthemeatthemomentwithfundmanagers,rangingfromLarryFink’scolossalBlackRocktothemuchsmallerScottishWidowspensionfund,whichhasjustissuedathree-yeardivestmentpolicyforgreenhousegaspolluters.Ratherdisappointingly,Gates’listof‘todothings’forindividualsattheendofhisbookdoesnotincludecheckingwiththemanagerofyourpensionfundtoseeifitmeetsgreenandsustainablecriteria.Thisisprobablythemostpowerfulthingyouasanindividualcando,atleastinfinancialterms.
Nonetheless,partofGates’financialsolutionistomobilisecapitalforresearchtocutwhathecallstheGreenPremium–theextrafuelcoststhatgoinggreenwillbring.FortheaverageUSelectricityconsumer,hecalculatesagreensolutionwouldbeamodestUS$216increaseinpaymentperyear(say£165).Onesuspects,however,that
theproblemfortheUSmaybenotfinancialbutpolitical,giventhatafairnumberofAmericansareindenialover
climatechangeingeneral,andinparticularbelievethatfrozenwindturbinescausedtheTexaspoweroutagesinFebruary2021.(Theyhadinfactswitchedoffautomaticallyastheysensedagridfailure.)
Inthisregard,Gatesisrunningaproject(BreakthroughEnergy)tolinkuplocalUSelectricitynetworksinregional
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grids–lackofwhichseemstohavebeenthemajorcauseoftheoutagesinTexasandothernearbystates.Theproblemagainseemstobepoliticalratherthantechnical–oneofTexasoptingoutoffederalregulations.ThislackofcoordinationintheUSmaycomeasasurprisetointegratednetworkssuchastheEUandChina.Chinahasevensetupanorganisation(GEIDCO)toexaminethepossibilityofaworldelectricitygrid,throughglobalgridintegration.
Giventhesedivergences,theUSmayhaverealtroubleinassertingitsleadershipcredentialsonclimateissues,despitePresidentBidenimmediatelyrejoiningtheUNParisAgreementonnationalclimatechangetargetsafterbeingsworninaspresidentinJanuary.TheUNCOP26meetinginGlasgowinNovember2021couldbeamajortestfortheUS–ifitisnotpostponedagain.
TheproblemofpayingthecostoftheGreenPremiumbecomesevenmoreacutewhenitisappliedtofuelforcargoships–currentlypayingUS$1.29perUSgallon,butrisingtoperhapsahighofUS$9.05forgreenfuel.AnexpensivewaytobringcontainershipsfullofconsumergoodiesfromChina.Thesituationissimilarforaviationfuel:agallonofconventionaljetfuelisUS$2.22,whilebiojetfuelisUS$5.35.ThereisanotherproblemwiththeGreenPremium:asthepriceoffuelfalls,theGreenPremiumcostincreases.Thisraisestheinterestingquestionofwhatwillhappenifoilpricesfallheavilyoverthenextdecade,asvehiclesswitchtoelectricityandoilbecomesa‘strandedasset’(anotherkeyfinancialtermabsentfromthisbook).
//WHERETECHNOLOGISTSLIKEGATESLEAD,BANKERSHOPEFULLYWILLFOLLOW//
//WHATWILLHAPPENIFOILPRICESFALLHEAVILY?//
Inthisregardtherewillbeinternationalbanningofpetrol(‘gas’)anddieselcarsafteracertaindate–2030intheUK,withasimilardateproposedforalloftheEU.IntheUS,onlyCaliforniaproposestodothis,from2035…againastateratherthanafederaldecision,andinstarkcontrasttoChina,whichwillbanallitsoil-fuelled
vehiclesfrom2035.Gatesrealisesthatcutting
theGreenPremiumwillprovealmostimpossibletofundcommercially.Hisanswerisforanapplicationofscale–commissioninglargerfleetsofelectricvehicles(ShenzheninChina,henotes,hasafleetof16,000buses),persuadinggovernmentstofundresearch,andpricingcarbonrealisticallythroughtradingemissionallowances.
ButwearenotevenoutoftheCovid-19woodsyet,andthepromisedspring-backoftheworldeconomyhasyettobesustained.Manycountriesseemtobebeingdrivenbyeconomicconsiderationstopursuea‘businessasusual’carbon-basedgrowthstrategy,andclimatechangemeasuresmayconsequentlybepostponedstillfurther.OnlyathirdoftheParisAgreementsignatorieshadsubmittednewemissiontargetsfortheir‘NationallyDetermined
Contributions’attherequiredend2020deadline.TheUS,ChinaandIndia(together50%oftheworld’stotalgreenhousegases)wereallnotablyabsent.
BillGatesisoftheopinionthattheprocessofadoptingcleanpowerisprimarilyaboutgettingthetechnologicalcapabilitiesandcostreductioninplace–heisclearlynotnaiveinthisregard.Thenandonlythenwillgovernmentsbewillingtoaddinabitoffiscalencouragement,andnon-philanthropicinvestorsvotewiththeirfunding.Thelattercancertainlybeenablersbutarealwaysgoingtobeprimarilyfollowers(ofthemoney)ratherthanleaders.Wheretechnologistslike
Gateslead,bankershopefullywillfollow.GatesisgoodonChina(where28%ofgreenhousegasesoriginate)butinadepressingfashion.China,henotes,hasmanagedtocutthecostofbuildingnewcoal-firedpowerstationsby75%.IfitnowexportsthischeapsolutiontootherAsianstates,oralongtheSilkRoad,itwillbe,asGatesstates,‘adisasterfortheclimate’.Similarly,ChinaisnowproducingasmuchcementeverythreeyearsastheUSconsumedinthewholeofthetwentiethcentury.Chinaisalso
nowtheworld’slargestproducerofsteelandgold,twootherhighlypollutingindustries.
China’sappetiteisnotrestrictedtoconsumptionofindustrialcommodities.Ithas,asGatesnotes,developedatasteformeat,particularlypoultryandpork.Theseanimalsconsumeagriculturalfeedstock(suchassoyaandcorn)ataratioof2–3timesthecalorieswegetfromeatingtheirflesh.Wearecreatinganetfooddeficit,withimportantimplicationsforworldagricultureandnutrition.
Itisalsopatentlyclearthatnoteveryone,particularlyintheUS,shareswhatMarkCarneycalls‘TheTragedyoftheHorizon’–asenseofurgencytoactbeforeitistoolate.Agreementonaddressingairpollutionhasbeeneasy–smogandsmartingeyesareliterallyinyourface,nowandundeniable.Aclimatechangeeventhorizonin2030ismuchlessso.
Infinance,westillhaveadecadeortwobeforetheCityofLondon,PudongfinancialcentreinShanghaiandNewYork’sWallStreetareannuallyfloodedbyrisingsealevels.Butastidalrivers,theThames,HuangpuandHudsonwilleventuallyallbackup,breachingtheBundandtheEmbankment,floodingthesubwaysystems.Wecontinuetoliveonexpensiveclimatecredit.Ifwedonotactnow,sureasFateourchildren(BillGates’sonfeaturesinthebook)willinheritnotourfortunesbutourruinousclimatedebts.
How to avoid Climate Disaster byBillGates(AllenLane,2021)
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ESG DISCLOSURES TIMELINE BY ASSOCIATION FOR FINANCIAL MARKETS IN EUROPE
2017 2018 2019 2020
EN
TIT
YL
EV
ELD
ISC
LO
SU
RE
S
June 2017
TCFDguidelinesavailable
17 June 2020
EUpublishesguidelinesonreportingof
climaterelatedinformation
12 July 2020
EUTaxonomyRegulation
entersinforce
1 June 2021
ECtoadoptadelegatedacton
theadditionaltransparency
requirementsforfinancialandnon-financialundertakingsundertheEU
TaxonomyRegulation
1 March 2021
Europeansupervisoryauthoritiesdeliveradviceto
EConArticle8oftheTaxonomyRegulation.
EBAdeliversadvicetoEConKPIsandmethodologyfordisclosureunderNFRDon
howandtowhatextentactivitiesqualifyunderthe
TaxonomyRegulation
2018
Companiesrequiredtoincludenon-financialstatementsintheir
annualreportsundertheNFRD
17 September 2020
EuropeanBanking
Authority(EBA)openssurveyon
Pillar3disclosureson
ESGrisksunderArticle449aCRR
3 November 2020
EBAconsultationonmanagementandsupervisionofESGrisksfor
creditinstitutionsandinvestment
firmsopens
20 February 2020
EClaunchesconsultationonthereviewoftheNFRD
31 December 2020
InternationalFinancialReportingStandards
consultationonsustainable
reportingcloses
3 February 2021
EBAconsultationonmanagement
andsupervisionofESGrisksfor
creditinstitutionsandinvestment
firmscloses
1 March 2021
EBAconsultationondraftITSonPillar3disclosuresonESGrisksunderArticle449aCRR
4 February 2021
SFDRfinallevelIImeasuresdelivered
toEC(Article8productswhich
promoteenvironmentalor
socialcharacteristics,Article9productswithsustainable
investmentastheirobjective)
10 March 2021
SFDRprincipaldisclosure
obligationsapplywithregardsto
(1)websitedisclosures;and
(2)pre-contractualdisclosures
10 March 2021
SFDRprincipalwebsitedisclosureobligationsapplywithregardsto
sustainabilityriskmanagementpolicy;
principaladverseimpacts(PAI);and
remunerationpolicies
23 December 2020
LCBMRlevelIImeasuresin
force
30 April 2020
LCBMRinforce
PR
OD
UC
T/
SE
RV
ICE
LE
VE
LD
ISC
LO
SU
RE
S
FromtheAFMEreport:“Thesustainabilityinitiativesconsideredbythereportinclude:theNon-Financial ReportingDirective(NFRD);guidelinesoftheTaskForceonClimate-relatedFinancialDisclosures(TCFD);Taxonomy
Regulation(Taxonomy);SustainableFinanceDisclosureRegulation(SFDR);LowCarbonBenchmarkRegulation (LCBMR);ECBGuidelinesonclimate-relatedenvironmentalrisksandEuropeanCommissionguidelinesonnon-financial
reportingandclimaterisk;changesproposedtoPillar3disclosuresundertheCapitalRequirementsDirective (CRD),CapitalRequirementsRegulation(CRR),InvestmentFirmsDirective(IFD),andInvestmentFirmsRegulation(IFR).”
Environment(i.e.Eonly) ESG Climateimplementationdeadline
Source: Diagram courtesy of AFME and Latham & Watkins
4 February 2021
SFDRfinaldraftRegulatoryTechnical
Standards(RTS)onindicatorsforadverseimpactsonenvironmentdeliveredtoEC
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2020 2021 2022 2023 2025
Whydoesthistimelinematter?See cisi.org/afmetimetable forthefullstory
1 January 2023
AllEUTaxonomyRegulationdelegated
actsotherthanonclimatechangemitigationand
adaptationtoapply
1 January 2023
EUTaxonomyRegulationfour
remainingenvironmental
objectivestoapply
1 January 2023
EUTaxonomyRegulationfor
remainingenvironmentalobjectivesto
apply
31 December 2021
ECtopublishareportdescribing
provisionsrequiredtoextendthescopeoftheEUTaxonomyRegulationbeyond
environmentallysustainable
economicactivities
Q2 2021
EuropeanCommission(EC)to
adoptaproposalregardingrevised
NFRD
1 June 2021
EBAconsultationondraftImplementingTechnicalStandards
onPillar3disclosuresonESGrisksunderArticle449aCRRcloses
June 2021
EBAreportonmanagementandsupervisionofESG
risksforcreditinstitutionsand
investmentfirmsexpected
November 2021
EBAtoreportonsustainablesecuritisation
framework
2021
EBAtosubmitthefinaldraftITSonPillar3
disclosuresonESGriskstotheEC
26 December 2021
EBAtosubmitreporton
environmental,social,and
governancerisksundertheIFD/IFR
31 December 2021
SFDRfinaldraftRTSonindicatorsforsocialand
employeematters,respectforhuman
rights,anti-corruptionandanti-bribery
matterstobedelivered
2021–2022
EBAguidelinesandstandardsonESGintegrationinriskmanagementand
supervisionexpected
2025
EBAFinalreporton
classificationandprudentialtreatmentofassetsfromasustainabilityperspectiveexpected
2022–2024
EBAdiscussionpapertobepublished,
accompaniedbyaconsultationpaperon
classificationandprudentialtreatment
ofassetsfromasustainabilityperspective
30 December 2022
SFDRdisclosureobligationsapplyin
relationto(1)informationonperformanceofproductsagainst
sustainabilityobjectives;and(2)whetherandhow
aproductconsidersprincipaladverseimpacts
onsustainability
30 June 2021
SFDRPAIsmandatoryfor
largeFMPsapply
1 January 2022
SFDRlevelIImeasuresin
force
1 January 2022
SFDRperiodicreporting
obligationsapply
1 January 2022
SFDRRTSonPAIsofinvestmentdecisions
onsustainabilityfactorsapply
1 January 2022
EUTaxonomyRegulation
delegatedactsonclimate
changemitigation
andadaptationtoapply
FromtheAFMEreport:“Thesustainabilityinitiativesconsideredbythereportinclude:theNon-Financial ReportingDirective(NFRD);guidelinesoftheTaskForceonClimate-relatedFinancialDisclosures(TCFD);Taxonomy
Regulation(Taxonomy);SustainableFinanceDisclosureRegulation(SFDR);LowCarbonBenchmarkRegulation (LCBMR);ECBGuidelinesonclimate-relatedenvironmentalrisksandEuropeanCommissionguidelinesonnon-financial
reportingandclimaterisk;changesproposedtoPillar3disclosuresundertheCapitalRequirementsDirective (CRD),CapitalRequirementsRegulation(CRR),InvestmentFirmsDirective(IFD),andInvestmentFirmsRegulation(IFR).”
Environmentimplementationdeadline
ESGimplementationdeadline
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