On 10 February 2022 over 100 individuals attended the ACAMS Netherlands chapter webinar focusing on the integration of Environment, Social and Governance (ESG) principles into existing anti-money laundering and counter-terrorist financing (AML/CFT) compliance frameworks. KPMG Netherlands Sustainability Partner Marco Frikkee and Integrity & Compliance Consultant Rebecca Kozlowski shared their insights regarding the current and emerging state of European Union (EU) ESG reporting obligations and starting points for integrating ESG into an organization’s existing compliance framework. They were joined by Johan Leupen from the Financial Times who provided a real-life case whereby failed KYC controls resulted in ESG violations and ongoing lawsuits.
The overarching sentiment of the webinar was that organizations must prioritize ESG integration into their reporting mechanisms and AML/CFT compliance frameworks to remain ahead of the fast-paced developments across the EU and prevent potentially significant reputational risks.
Specifically, the case portrayed by Johan Leupen showed that investment decisions that are aimed at having a positive ESG impact can turn into a failure if risks related to this topic are not adequately captured and subsequently monitored in the KYC process.
The introduction of the EU Taxonomy for ESG reporting and developments in other disclosure requirements will expand the reach of reporting obligations across the financial industry in the Netherlands and Western Europe. Key timelines proposed by the EU include*:
AML/CFT compliance standards are also being enhanced across the EU, with the 6th EU Anti-Money Laundering Directive (AMLD) including ESG topics within the updated predicate offenses, such as human trafficking and environmental crime. Ensuring that your organization’s AML/CFT framework is equipped to handle the expansion of these obligations is key in demonstrating commitment to ESG and a high standard of compliance.
However, an effective compliance program is not limited to reporting and controls. The integration of any emerging risk should include an end-to-end approach from governance and culture to monitoring and reporting. Taking stock of existing frameworks and processes and defining risk appetite are the first steps in determining how best to integrate ESG into your organization. Further support can be sought from industry experts to ensure your application of ESG is fit for purpose to meet current and emerging trends. The systematic integrity risk analysis (SIRA) can be used as a starting point to identify and assess ESG risks for the financial institution. The management body of the institution is responsible for setting the risk appetite – including the appetite for ESG risks – in light of the strategic objectives and considering the overall risk landscape of the institution. Relevant ESG metrics should be defined as part of the SIRA process to ensure adequate monitoring and reporting of such risks. Furthermore, ESG risks identified in the institution’s risk analysis can be used as a basis for, amongst others, developing business rules for transaction monitoring, setting up a targeted training and communication program, giving direction to quality assurance and compliance monitoring activities, and how to (re)design the Know Your Customer (KYC) process.
KPMG Netherlands’ Sustainable Finance can support you in addressing your internal and external reporting obligations and integrating ESG into your KPIs. KPMG Integrity & Compliance can also support you in designing, assessing and improving an organization-wide compliance management program and compliance management system, thereby reiterating the value of compliance and fostering an ethical culture.
As part of a trusted organization, KPMG Netherlands employees act as trusted advisors to our clients to provide informed insights for prevention, detection, and response solutions to existing and emerging risks across various industries. KPMG's products, services and operations include processes to ensure that the needs and expectations of stakeholders are met in accordance with global integrity standards and KPMG values.
*NB: timelines have slightly shifted since the date of the webinar.