How have AML compliance frameworks evolved to align with the surge in ESG-driven investment mandates? Are investors increasingly scrutinising financial crime risks as part of their ‘S’ and ‘G’ criteria?
Absolutely, investors are increasing their due diligence scope to include financial crime risks under the ‘Social’ and ‘Governance’ pillars, as well as the ‘Environmental’ pillar as ESG investing gains momentum. AML frameworks have changed to support this shift by incorporating more risk-based and forward-looking elements, focusing not just on legal compliance but on the larger ethical conduct of companies.
In particular, we can see the revised definition of ‘environmental crime’ in the last Financial Action Task Force (FATF) Recommendations – where FATF cites examples of this type of crime, such as criminal harvesting, extraction or trafficking of protected species of wild fauna and flora, precious metals and stones, other natural resources, or waste.
Investors now see inadequate AML controls as indicators of weak governance structures, lack of accountability, and potential social harm, such as exposure to trafficking, corruption, or environmental crime. This evolution reflects the market’s expectation that financial integrity is inseparable from sustainable, responsible business conduct.
In general, we can now name a number of financial regulators that pay special attention to the link between financial crime risks and ESG, and they, of course, are benchmarks for investors in turn: European Securities and Markets Authority (ESMA), Financial Conduct Authority (FCA), Financial Action Task Force (FATF), Securities and Exchange Commission (SEC), Financial Crimes Enforcement Network (FinCEN), and others.
How are sophisticated investors using AML due diligence as a proxy for assessing the overall integrity and governance culture of a potential investment target? Are there specific red flags or signals that instantly downgrade an ESG score from an AML standpoint?
It is necessary to point out, that for institutional investors, strong AML due diligence is not just regular compliance – it reflects the potential target’s level of integrity, ethical culture and effectiveness of internal controls. A company that demonstrates strong AML policies, effective monitoring systems, and transparency in ownership structures signals sound governance.
At the same time, red flags such as prior AML enforcement actions, unexplained beneficial ownership, extensive dealings in high-risk jurisdictions, reliance on shell companies or false reporting may immediately downgrade a firm’s ESG rating.
If we talk about the approach of leading international ESG rating providers or agencies assessing companies, then AML is a mandatory assessment ‘G’ factor as part of checking the inclusion of necessary aspects like the Code of Ethics, audits of counterparties, information verification, and many more. These are not just technical concerns but reflect deeper cultural and ethical risks that sophisticated investors are keen to avoid.
In your experience advising financial institutions, where do AML blind spots most commonly undermine ESG commitments – and how can GRC teams close that gap?
I would say that one of the most common AML blind spots affecting ESG integrity is inadequate third-party and supply chain due diligence. I found that many establishments overlook the risks surrounded in relationships with vendors, agents, or intermediaries, especially in regions or industries with poor governance standards.
For example, how can a company properly build a legal business by attracting raw materials, including from Africa and South America, where many individuals employed in natural resource extraction are likely to operate outside the formal financial system (e.g. do not use banking services)?
Traditional KYC processes and a limited compliance strategy can result in a lack of clear risk visibility. GRC teams can avoid this by merging ESG and AML risk indicators into a unified due diligence framework, which allows for real-time monitoring of counterparties and keeps internal training and controls aligned with emerging risks. I believe that close collaboration among compliance, sustainability, and legal teams is crucial for addressing these issues.
With growing regulatory pressure around greenwashing and ESG disclosures, do you see AML failures becoming a reputational or regulatory liability that investors are no longer willing to tolerate?
In my opinion, as the focus on ESG continues to grow, the expectation for firms to follow AML regulations has become more critical than ever. Those that fail to comply, risk not only losing access to valuable investment pools but also damaging their reputation and facing potential legal action.
This is especially true in sectors where corruption and environmental challenges are more prevalent, making it essential for companies to prioritise these compliance measures. And the companies that don’t meet these standards could find themselves shut out of ESG investment opportunities, facing public criticism, or even dealing with legal consequences.
Just as ESG-AML principles are very important for investors, we also see many frameworks that include AML principles as part of the principles of responsible finance, whether at the level of banks, institutional funds, and stock exchanges. One such example is the UN Principles for Responsible Banking with over 345 signatory banks representing over half of the global banking industry.
How can financial firms move from reactive AML compliance to a more proactive risk-based approach that supports ESG-aligned investing? Are there innovations or tools you’ve seen gaining traction to bridge AML and ESG frameworks?
I really think that financial firms should move away from just following a checklist for compliance and start focusing on ongoing, intelligence-driven monitoring. This is vital for establishing a proactive AML methodology. It also aligns well with ESG investing, which needs a more dynamic approach to evaluating non-financial risks.
Some of the innovative ideas out there include cross-referencing sanctions and PEP data with ESG controversies, using AI and Machine Learning for risk scoring, and creating integrated dashboards that combine ESG and AML information. I believe, these techniques allow businesses to identify emerging risks before they escalate into serious problems, like underground environmental crimes or unethical sourcing.
As AML becomes increasingly globalised, how can investors evaluate ESG risk in emerging markets where enforcement and transparency standards may be weak? And what role should AML data and intelligence play in de-risking capital flows into these regions?
From my point of view, the availability and reliability of ESG data can be quite limited or inconsistent in many emerging markets. This is where AML intelligence becomes important for assessing risk.
Investors can improve their due diligence efforts to link these transparency gaps, which includes conducting detailed checks on beneficial ownership, geopolitical risks, and the history of local law enforcement. By utilising AML databases and adverse media screening, they can reveal hidden ESG risks, such as connections to sanctioned entities, environmental breaches, or political corruption.
By integrating AML intelligence with ESG analysis, investors can gain a deeper understanding of systemic risks and create effective strategies to mitigate them. This method ensures that we can responsibly invest capital in areas that truly matter, while keeping integrity and accountability.
Svetlana Ryabkova is a legal professional residing in the UAE, with an academic background in law that she earned in Russia. Since her move to Dubai in 2013, she has acquired wide knowledge in corporate and commercial law, focusing on regulatory compliance, risk management, and legal documentation. In 2022, she took on the position of Head of the Legal Department at Finvizier Consultancies DMCC, where she played a central role in developing the firm’s legal and compliance strategy. Motivated by a desire to provide more specialised legal services, Svetlana founded Oryx Legal Consultancies, a law firm registered in the UAE, where she currently holds the title of CEO and Founder. Through her leadership, she has made a notable impact in the legal advisory sector in the UAE, assisting businesses in confidently addressing both local and international legal challenges.
