G20 Rome: Environmental crime, corruption and illicit financial flows
When the G20 leaders met in Rome at the end of October it was the first time they had been together face-to-face since the COVID-19
outbreak. The summit was an opportunity for them to address three crises at once: the pandemic, the economic crisis it created, and
the threat of catastrophic climate change. These three topics certainly dominated summit discussions, but the G20 made relatively little substantive progress with them. It did, however, make some progress on issues such as environmental crime, corruption and illicit financial flows.
The absence of key leaders
Efforts were hampered by the absence of key G20 leaders, Chinese President Xi Jinping and Russian President Vladimir Putin chief
among them. Russia and China were represented by diplomatic delegations, but the absence of their leaders sent a strong signal
that their interest in governance by way of multilateral engagement is on the wane. The added value of leaders’ summits is that they
provide an opportunity for leaders to meet free from many of the usual constraints that encumber their interactions.
It is on the margins of the meetings that leaders are most free to speak frankly and directly to one another, momentarily away from the gaze and pressures of bureaucracies, interests groups, domestic rivals, and the media. It is here that the most difficult stumbling blocks to negotiation can be overcome, but this can only happen if leaders attend in person. Summits via Zoom will not do — there are, after all, no quiet corners for private chats in cyber space.
This could affect how sanctions are applied between the United States and China on the one hand, and the United States and Russia
on the other. These countries have demanding economic and trade sanctions regimes, under which they have designated numerous
persons and companies — sometimes in a retaliatory manner, such as when they are used to condemn human rights violations, cyber
attacks, and perceived violation of international law and state sovereignty.
The physical presence of leaders at summits also has benefits for the diplomats and ministers who do the bulk of the preparatory work
for a G20 summit. The attendance of a leader incentivizes successful negotiations, particularly on the most important issues, be it the pandemic, the economy, or the climate. Leaders cannot walk away from a summit empty-handed; they need new initiatives and commitments to announce at the summit’s conclusion so as to justify its undertaking in the first place. Unless the stakes are raised,
there is little need for senior diplomats and ministers to burn the midnight oil and negotiate a communiqué that makes substantive,
specific commitments to address the world’s most pressing challenges.
Taken together, it is perhaps no surprise that the most significant commitments in this year’s G20 communiqué were initiatives
developed by the G7, one of the most notable of which was an agreement on a global minimum tax rate of 15% for multinational
corporations, which may lead to a rise in tax evasion. Unlike the G7, however, the G20 failed to acknowledge growing geopolitical
tensions and events in countries such as Afghanistan, Ethiopia, Myanmar, Sudan, Hong Kong and Iran, let alone articulate a plan to
address climate change in the lead-up to COP26. It did, however, make commitments in the area of environmental crime.
Environmental crime
Environmental crime featured twice in the G20 communiqué. Leaders pledged to end illegal, unreported and unregulated (IUU) fishing as well as over-fishing, and to fight illegal logging, illegal mining, illegal wildlife trade and illegal movement and disposal of waste and hazardous substances. This is a giant step toward supporting the environmental sustainability initiatives that have dominated public policy this year and are being discussed at COP26. Leaders linked the fight against financial crime to protection of natural resources, which are often found in conflict zones but must also be sourced and used in a sustainable manner and disposed of properly.
The G20 shed light on the synergies that exist in financial flows for climate, biodiversity and ecosystems, and it should be noted that
these same synergies exist for illicit financial flows. As a nod to COP26, the leaders requested that countries act on the Financial Action Task Force’s (FATF) recent report, “Money Laundering from Environmental Crime”.
Lastly, leaders welcomed the continuing work on nature-related financial disclosure which, when finalised, will provide data that firms can use to assess their commitments to the environment and also to identify instances of greenwashing — the provision of false or misleading information on sustainability. Where the greenwashing leads to financial investment or movement of funds, firms may unwittingly launder the criminal proceeds generated.
There has been significant work in the area of environmental crime, with countries in Europe and around the world designating
environmental crime as a predicate offence for money laundering. To manage risks more effectively, firms should incorporate environmental crime into their business-wide risk assessments and identify countries, categories of customers, industries, products and
delivery channels more at risk of being used to facilitate environmental crime. Firms should consider investing in additional training for persons working in trade finance, infrastructure finance and financing of companies in the extractives sector to help them identify red flags and typologies.
Additional sources such as adverse press and import/export data should also be consulted to identify potential suspicions, and enhanced due diligence checks could include obtaining copies of environmental risk assessments, licences, attestations made by companies and review of sustainability statements.
Anti-corruption
Leaders expressed zero tolerance for corruption and committed to combating transnational corruption. They adopted an ambitious
Anti-Corruption Action Plan 2022-2024 and pledged to enforce the criminalisation of foreign bribery, in line with the Organisation for
Economic Cooperation and Development (OECD) Anti-Bribery Convention and the United Nations Convention Against Corruption
(UNCAC). This includes updating laws and regulations to criminalise bribery of public officials, to deny safe haven to stolen state assets and corrupt actors, and to target domestic and foreign bribery more effectively.
In what appear to be efforts to promote transparency and accountability, the G20 indicated countries would share information on progress and welcomed the Compendium of Good Practices on Measurement of Corruption, which set out to improve measures of corruption. Leaders also endorsed work carried out in the areas of fighting corruption in organised crime, sport and emergencies.
The Pandora Papers once again shed light on how the political elite hide their wealth offshore. The G20 highlighted the important
role played by the media, civil society and academia in bringing such matters to the fore, and committed to strengthen public-private partnerships including more engagement with these actors. It further committed to promoting a “culture of integrity”, particularly when the private sector provides services to the public sector.
Leaders expressed support for the FATF’s consultation and continuing work on enhancing beneficial ownership transparency. They also highlighted the need to provide “adequate, accurate and up-to-date information” on beneficial ownership transparency to relevant authorities.
In a move that also appears to be linked to the Pandora Papers, the G20 went beyond calling for improvements to beneficial ownership
transparency of legal persons and arrangements by singling out real estate and emphasising the need for a better understanding of
transnational flows. This is the first time the G20 has called for beneficial ownership transparency in terms of real estate, which may lead to the creation of foreign ownership of real estate registries.
Firms should review the various anti-corruption documents published by the G20 to identify whether their anti-bribery and corruption and vendor management policies and procedures should be updated, as well as their anti-money laundering (AML) systems and controls.
They should assess their inducements maps and determine whether they are working with agents and introducers into the public
sector. They also need to look at what financing has been received and/or provided as part of responses to national emergencies and
consider carrying out a high-level assessment to identify any potential suspicions of financial flows.
Firms should make employees aware of gift and entertainment policies, and ensure they know where to register gifts received. They
should use staff training to explain the anti-bribery and corruption requirements and any extra-territoriality measures that may apply,
for example, if they are a UK or U.S. person, or acting on behalf of a UK or U.S. person. Firms should also ensure they have a discreet
whistleblower exporting mechanism to allow employees to share suspicions.
On the client side, to protect against money laundering, firms should consider carrying out spot checks on transactions for clients who receive public financing, or who work in the emergency sectors and in high-value sports, to detect potential instances of bribery and
corruption. Staff should be trained on how to identify red flags for corruption and be aware of the additional documentation that may be required for firms operating in those sectors. With regards to beneficial ownership, some jurisdictions require that firms not only identify and verify beneficial ownership but also report discrepancies identified to the corporate registry.
Firms should be aware of these requirements and maintain records of any disclosures. With regards to transnational flows linked to
real estate, firms should ensure that, where ownership of real estate is being transferred with parties in multiple jurisdictions, they are
aware of the various chains of beneficial ownership, particularly where transactions involve luxury residential real estate being sold and/or purchased by a corporate.
AML/CFT
The G20 reaffirmed the importance of the work carried out by the FATF and the FATF-style regional bodies (FSRBs), and the
commitment made to strengthen the work of FSRBs. It further indicated that “effective implementation” of AML/countering the financing of terrorism (CFT) and counter-proliferation financing (CPF) measures is pivotal to confidence in financial markets, a sustainable recovery, and the integrity of the international financial system. The “relevance of the risk-based approach” in international AML/CFT standards was flagged once again as essential, but linked to the ability to ensure legitimate cross-border payments flows and to promote financial inclusion.
This is the first time that a G20 document has included the CPF acronym in the context of AML/CFT/CPF. This signals the importance of the FATF’s work in this area and also the need for obliged entities to fully embed proliferation financing into their AML/CFT frameworks. Albeit a fairly specialised field, firms should carry out a CPF risk assessment and introduce enhanced measures for customers who could be involved in the development and transportation of nuclear weapons. Firms should ensure that their filters are up-to-date to detect the financing of any items on prohibited items lists and also to or from countries subject to UN proliferation sanctions, such as Iran and North Korea.
Firms should continue to adopt the risk-based approach in their operations. This includes reviewing illicit finance risk information and regional or national risk assessments, to ensure more efficient allocation of resources to identified risks and to avoid adopting de-risking practices. Finally, given the emphasis that is increasingly placed on the FSRBs, in addition to reviewing FATF documentation and reports, firms should also ensure they remain aware of, and up-to-date with, documentation issued by relevant FSRBs that cover the jurisdictions in which they operate.
Road ahead
The G20 continues to make progress in specific policy areas such as environmental crime, corruption and illicit financial flows,
but broader geopolitical tensions endure. The absence of the Chinese and Russian leaders from the G20 and from COP26 sends
a worrying signal that international governance may not be a top priority for some of the world’s most powerful countries. These
countries need to be involved in any coordinated solution to transnational threats such as pandemic disease, economic instability and catastrophic climate change, all of which are affected to some extent by criminality. It may also lead to a further use of sanctions between geopolitical rivals.
The G20 was supposed to create a path for agreement at COP26, yet it remains to be seen whether COP26 will endorse the
G20’s work in environmental crime. Moreover, if the Rome G20 sets a precedence for attendance at such summits no longer being
compulsory, the potential for leaders to address the world’s most pressing challenges may be diminished. Those policy advances
the group does manage to make will be overshadowed by increasingly entrenched geopolitical competition. This further raises the importance of groups such as the FATF in terms of maintaining continuity with priority issues such as AML/CFT.
The United States will be hosting the December Summit for Democracy, which will feature anti-corruption issues. Firms should monitor the outcomes of the Summit for Democracy to identify any new anti-corruption initiatives that may emerge.
First published on Thomson Reuters Regulatory Intelligence on 12 November 2021.
