As regulators tighten scrutiny, ESG failures are no longer soft risks but potential financial crime. AML models must evolve to capture greenwashing, governance gaps and reputational shocks hidden in sustainability narratives. In Part 1 of two articles on ESG-AML integration, we looked at the convergence of these two areas in terms of regulatory and compliance risk, reputation and brand risk, and governance and ethical risk. But the risk canvas is much wider than that.

Money laundering scandals are no longer only about shell companies and tax havens, they may now hide in supply chains, labour practices or climate disruption. In the UK and EU, ESG failures are bleeding into financial crime, demanding that AML models evolve. This article, part 2 of a two-part focus, looks deeper into three under-examined domains, social, supply chain and climate risk, offering fresh lenses and practical steps to help firms upgrade their risk architecture.

Social and Human Capital Risk

Human capital failures, such as labour rights violations, unsafe workplaces or public diversity scandals, aren’t just HR headaches. They can also mirror classic financial-crime red flags, such as  sudden unrest, spikes in litigation or dramatic staff churn, suggesting underlying integrity stress.

In the EU, the Corporate Sustainability Due Diligence Directive (CSDDD) now mandates that large firms identify and remedy adverse human rights impacts across operations and value chains. Meanwhile in the UK, the Modern Slavery Act (and its transparency reporting) compels eligible businesses with a turnover of £36 million or more to disclose steps taken to prevent modern slavery in operations and supply chains. A strong and purposeful step forward, however enforcement gaps and weak statements remain a concern.

To integrate social risk into AML models, firms should treat indicators like surges in workplace complaints, unionisation surges, whistleblower flows or unusually high staff turnover as “suspicious activity” triggers akin to anomalous transactions. For example, a factory suffering mass resignations or an emerging litigation class-action over health and safety may warrant enhanced due diligence or transaction tracing on connected entities.

Consider the tech sector… Imagine a firm publicly touting a strong diversity policy, yet internal audits later reveal systemic discrimination. Regulators could view such misstatements as a form of integrity fraud, “laundering reputation” under an ESG cloak. In such cases, layering of capital or intercompany flows may conceal recourse to off-balance-sheet entities, requiring AML systems to flag divergent narrative-data mismatches.

By blending workplace metrics into financial crime screening, compliance teams gain early warning of ESG stress crossing into AML terrain and can begin to close the gap between human risk and money-laundering detection.

Supply Chain and Human Rights Risk

Global supply chains are the new “money-laundering networks”, often opaque, sprawling and fertile for misdirection. When parts and raw materials weave through multiple tiers of suppliers, it becomes far easier to hide illicit flows or mask wrongdoing under layers of “normal commerce.”

Under the EU’s emerging CSDDD, firms may be held liable for human rights abuses in suppliers many steps upstream, not just within their direct operations. In the UK, pressure is growing to strengthen post-Brexit supply chain due diligence, particularly in tackling modern slavery. A recent joint committee report warned that goods made with forced labour are still entering UK markets and called for tougher import controls.

To bring this into AML frameworks, compliance teams can fuse supplier audit data, ESG disclosures and customs manifest insights with transaction monitoring. For instance, if a supplier based in a jurisdiction with poor rights oversight suddenly secures large advance payments, that could flag a “layering through shell supplier” scenario worth investigating.

Emerging technologies offer fresh tools. In the cobalt sector, critical for EV batteries, blockchain traceability pilots (notably the Re|Source initiative) are being used to map provenance from mine to final product, helping identify suspicious sourcing arrangements.

By feeding this provenance data into AML score engines, firms can flag procurement flows that diverge from expected ESG narratives.

Real-world shocks underscore the risk. Apparel firms have come under scrutiny for links to forced labour in Xinjiang’s cotton industry, and retailers in the UK may face liability under the Proceeds of Crime Act when goods tied to forced labour cross borders.

In short, dirty supply chains are increasingly hiding “dirty money.” Integrating granular supplier data and traceability tech into AML systems lets firms pierce the veil and treat supply chain abuse as a credible indicator of financial integrity risk.

Climate and Environmental Risk

Climate shocks, including floods that swallow factories, wildfires that raze timberlands, droughts that decimate crop yields, do more than destroy physical assets. By disrupting supply chains, triggering insurer losses and depressing asset values, they distort cash flows and create opacity. This is fertile ground for money laundering schemes seeking cover in the chaos.

In the EU and UK, the pressure to embed climate risk into corporate reporting is mounting under the European Green Deal and the UK’s legally binding path to net-zero. Large firms are increasingly required to disclose climate-related financial risk, and lenders must integrate climate stress testing into credit decisions. That regulatory push means that misreporting or concealing climate exposure is itself a red flag.

From an AML perspective, three risk channels stand out:

Physical-impact masking

Suppose a coastal real-estate developer experiences a severe flood, leading to an abrupt write-down. A criminal enterprise might exploit that event to inject illicit capital disguised as “restoration funding” or contingency loans. Likewise, insurance payouts or failures of insurers to honour claims may hide suspicious inflows or outflows. The “noise” of shock events can help launderers slip through the net.

Stranded-asset disguise

As coal, oil or gas reserves become stranded by policy shifts, some holders might seek to monetise these assets before their value collapses. They could sell carbon credits or tokenised fossil-fuel derivatives, then move proceeds offshore under pretext of “carbon transition investments.” Those flows deserve added scrutiny if counterparties are opaque.

Phantom offsets and carbon markets

The voluntary carbon market has become a transactional frontier for laundering. Many offset projects issue “phantom credits”; credits that correspond to no actual emissions reduction. As the Phillips & Cohen whistleblower review notes, over half of rainforest offset projects show signs of fraud. Regulators are already treating certain carbon trades as enforcement targets. Criminals can layer illicit funds across a web of registries and tokenised credit instruments to obscure origins.

A cautionary real-world example: in the so-called “green crypto” space, a number of token projects marketed themselves as sustainability champions, only to collapse amid fraud accusations. While the Terra/Luna collapse is better known for broader crypto failures, it illustrates how environmental or “impact” branding can cloak risk. 

 Equally, earlier green Ponzi schemes such as the Mantria Corporation combined property, “carbon negative” claims and renewable energy investments in a complex façade, yet were revealed as sham operations.

To guard against this, AML programs must evolve. Integrate climate-modelling tools, such as satellite imagery to detect land-use change, insurance-claim databases to flag suspicious payouts, or emissions data to validate offset legitimacy. Link that with transactional monitoring,  e.g. unusually large carbon-credit trades from entities without a prior footprint. In short, build your red-flag library to anticipate not just money laundering, but “greenwashing laundering” too.

Dirty Money Often Wears Green

Conventional AML models must no longer remain blind to ESG risks,  especially across social, supply-chain and climate domains. In the EU and UK, regulators are making ESG integrity inseparable from financial integrity, pushing firms to strengthen transparency and controls. The next frontier of AML is not just tracing money, but tracing people, supply chains and climate impacts, because in today’s economy dirty money often wears green.

And what about you…?   

  • To what extent do you have visibility into the ESG integrity of your suppliers and counterparties, and how confident are you that your due diligence extends beyond first-tier relationships?
  • Are you actively adapting your compliance practices to meet emerging EU and UK expectations that integrate ESG factors into financial crime frameworks?