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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]

56 THEREVIEWJUNE2021

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.



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

CISI.ORG/REVIEW 59


//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



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



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.

CISI.ORG/REVIEW 63


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



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)

CISI.ORG/REVIEW 65


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



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

CISI.ORG/REVIEW 67
