KPMG’s Andrés Jiménez on How Banks can Break the Chain of Environmental Crime

There are innumerable steps that can be taken at a local, regional and international level to mitigate and even halt the effects of climate change, reduce pollution and ensure a safe, clean planet for future generations. Consequently, it can seem overwhelming for corporations to identify the best approach to making a difference. But, for financial institutions in particular, a key part of this is taking ownership of their own impact on the chain of environmental crime.

In this age of readily available information, some people claim that there are less excuses for the lack of awareness or avoidance of the issues. On the other hand, having an excess of information doesn’t allow companies to provide quick answers to keep up with the pace of the economy and their clients. How can they find the correct balance?

It is well documented that practices such as illegal mining and logging can cause serious environmental damage, as well as harm people and economies, and cause devastating effects to the planet, its population and its ecosystems. However, these practices will struggle to survive if doing the right thing is easier than doing business as usual with the already known negative consequences for the environment. I believe banks can play a key role in this matter.

Usually, gold is mined in jurisdictions such as Latin America and Africa and is later exported to the US, Europe and/or the Middle East. As with any other export operation, companies that acquire the gold have to use the international financial system to pay for the goods they’ve received.

The challenge arises when companies that must pay for the gold and banks that have to process the transactions on their behalf are conducting due diligence.

Are they asking the right questions?

Generally, somebody conducting due diligence would want to ensure the payment they’re processing isn’t from an entity with links to terrorist organizations or one that’s included on a restrictive list, and that no economic sanctions are being violated.

Additional risks and tasks to banks have been emphasized in the last couple of years as the fight against corruption and tax evasion were brought to the top of the international agenda. Regulators sent strong messages to international financial institutions in this regard. According to regulators, banks weren’t doing enough and, in some cases, that message was delivered by way of heavy monetary penalties.

Nowadays, at the top of the international agenda of governments, corporations and regulators is the achievement of the ESG agenda. Financial institutions must also react and adapt to it.

Under the ESG agenda, companies need to assess the level of impact of their operations and the integrity of their supply chains. Also, they need to be able to track and trace their products to ethical and sustainable standards.

In the gold mining industry, this means that companies have to ensure that their product isn’t coming from an illegal source and they’re not financing any illegal activities.

So, what’s the role of banks in all of this and how can they navigate this growing complexity? Is it enough that they conduct the same level of due diligence to any other import/export transaction? In my opinion, the answer is no. This poses a greater risk and should be dealt with differently.

Certain industries are riskier than others. Depending on the level of risk, banks ask questions about the practices, people and organizations along value chains.

But it’s important to ask the right questions to uncover the risks and the  skeletons in the closet. Companies must dig deep to ensure they’re not trading in commodities that have been illegally mined or extracted, and to be certain they’re not funding environmental crimes, even inadvertently.

That’s not always easy. KPMG’s Forensic services professionals not only know which questions to ask, but where to direct the questions. We can advise on the next steps your organization should take for positive change.

It can seem like an impossible task to identify every potentially damaging transaction, but with the help of KPMG professionals, the process can be less onerous. This process relies on a risk-based approach. The first steps should include knowing which activities and markets are riskier than others and identifying riskier clients. When these assessments are made, by asking the right questions at the right time, it can be easier to minimize exposure.

For example, in Latin America, many Colombian companies are heavily exposed to the mining industry. Strategic forensic work can help detect whether a banking client could be involved in unethical transactions. This is where KPMG’s regional expertise and relationships come into play. Our in-depth knowledge about the industries and regional laws can help your organization navigate these issues.

The desire from the top to make a difference and root out the issues should feed into a culture of environmental responsibility throughout a business. Banks can use their power to help change behavior.

Awareness of potential consequences within certain industries can help make an impact. KPMG professionals work with C-suite executives so they understand not just the importance of caring about the future of the planet, but how they can work with their teams to make positive changes and avoid serious consequences.

I believe technology has an ever-increasing role to play in helping banks to be part of the solution. Artificial intelligence (AI) can be a great investment for performing due diligence at scale. When used in conjunction with KPMG professionals, AI technology can detect suspected unlawful financing by seeking out information on the profiles of individuals and corporations and using the data to track and link suspicious transactions.