Anti-money laundering (AML) and tax compliance capabilities may seem to have little to do with the battle to curb climate change. But, applied well, they have become an important weapon.
The recent COP27 gathering – on the back of a year of record-breaking temperatures, floods, drought and storms – has underscored the need for radical measures to limit global warming. Efforts to combat the threat have been further complicated though by the war in Ukraine.
Russia’s “special military operation” has exacerbated the energy and cost of living crises engulfing so much of the world.
Governments, desperate to safeguard their energy security, are ramping up other fossil fuel sources (including coal) to fill the energy gaps left by the cessation of Russian oil and gas. Cost of living assistance schemes implemented in various countries to offset surging energy bills and inflation also mean there is less government money available to fund the clean energy transition, and help emerging and developing economies adapt to climate change.
Providing Ukraine with military assistance has been a key plank of Western government efforts to halt and reverse the Russian invasion. Economic sanctions are another.
Sanctions enforcement starts with KYC/AML
Since Russia’s invasion began last February, multiple sanctions rounds have targeted numerous individuals and entities. Nearly half of the Russian Central Bank’s estimated US$630 billion in FX and gold reserves, representing approximately 35% of Russian GDP, have been frozen.
How much impact sanctions have depends on their effective enforcement by the different players in the global financial community. That in turn depends on the quality and rigour of firms’ Know Your Customer (KYC) and AML frameworks.
The ideal is a multi-jurisdictional AML infrastructure able to deliver automated, real-time visibility and control at every stage of the customer lifecycle.
Automated risk profiling during customer onboarding enables firms to build a risk-based picture of prospective clients. Identifying the beneficial owner is a particular challenge in many money laundering and sanctions evasion cases, making advanced beneficial owner screening that can handle complex, multi-level ownership structures essential. Source of funds/wealth checks add another important layer of screening protection.
Post-onboarding, ongoing client due diligence requires periodic checks of client profiles and documentation, along with continued screening and risk profiling. Real-time suspicious activity monitoring – a cornerstone of an effective AML programme – will help spot money laundering risks and block suspicious activity/behaviours.
Crypto adds to AML pressures
Cryptocurrencies, an increasingly popular money laundering vehicle, pose an extra AML and tax evasion challenge, since “they make it difficult to keep track of the assets held by those under investigation,” observed the most recent Eurojust Report on Money Laundering.
Russians reportedly have at least $214 billion in crypto, while the country is the third biggest crypto mining location (itself an energy-intense activity with steep environmental costs). North Korea, another sanctions target, has also been accumulating digital currencies through crypto-mining operations powered by its coal reserves. North Korea is actively using cyber crime and cryptocurrency theft as well to generate revenue for the regime, with up to a third of the country’s illicit ballistic missile and nuclear programmes estimated to be funded by its criminal cyber operations.
Iran – which has just seen fresh EU sanctions imposed on those responsible for recent human rights violations – has likewise used crypto to sidestep sanctions by paying bitcoin miners in the cryptocurrency. The bitcoin is then used to buy imports, circumventing the sanctions on payments through financial institutions.
CARF tax reporting proposals target transparency
The OECD’s proposed Crypto-Asset Reporting Framework (CARF), designed to strengthen global tax transparency through the collection and automatic exchange of tax information on transactions in crypto-assets, offers some recourse.
Since crypto transactions take place on a blockchain, the public and permanent record created ties the participants to their illicit funds. Red flags then pop up whenever there is an attempt to convert crypto to a fiat currency. Under the CARF proposals, service providers involved in crypto-to-crypto exchanges and/or crypto-to-fiat currency transactions will be required to identify and screen their customers, and report customers’ exchanges and transfers to their tax authorities.
By shining a light on crypto transactions, the tax reporting obligations will go some way to uncovering evasion attempts by sanctioned entities. Plus clamping down on crypto-based tax evasion attempts, and confiscating the assets, can help bolster nations’ tax coffers – adding much-needed revenues that (hopefully) can be directed in part to support governments’ energy transition and international aid initiatives.
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