ESG Investing Focus: Big Banks’ Money Laundering Problem | Stock Market News


Environmental, social and governance investing, or ESG investing, has been a growing movement over the last decade. Investor demand for stocks and funds that consider more than just the bottom line is booming.

ESG investing is often associated with excluding energy stocks and sin stocks, but new reporting suggests that perhaps big banks might be larger ESG offenders than the investing public tends to believe.

Recent news reports highlight some startling issues that raise questions about the role of some big banks in global money laundering activities, with suspicious activity reports, or SARs, filed by banks with the U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCEN.

The files indicated that some of the world’s biggest banks kept moving money for suspected criminals even after previous prosecutions or fines for misconduct. The troubling client list runs the gamut from alleged narco-traffickers to suspected Ponzi scheme operators, terrorist financiers, plunderers of sovereign wealth funds, money launderers, Russian mob figures and companies skirting sanctions.

The Social Aspect of ESG

This raises questions about whether more big banks are involved or complicit with money laundering – and not just money laundering, but on a massive scale, repeatedly, with criminal clients.

That said, there are qualifications to FinCEN investigations that investors should understand, says Megan Prendergast Millard, senior managing director of financial and regulatory compliance services at Guidepost Solutions.

“Once a SAR is filed, that is not a final determination by the bank that there is criminal activity – that decision is ultimately the responsibility of law enforcement after a thorough investigation of the allegations included in the SAR. Most banks are not intentionally repeatedly doing business with criminal enterprises,” Millard says.

Unfortunately, the government has been largely ineffective in reviewing these SARs, with a shrinking number of staff and more files to review, experts say. The fact that some banks routinely file SAR after SAR without dropping their shady clients paints a troubling picture of how some of the biggest players in the global financial system are conducting business.

“Suspected criminals continue to use the world’s largest banks to help store and move their financial assets, even in some instances in which those institutions have faced penalties and fines for misconduct in the past,” says Eric Chaffee, business and securities law expert and distinguished university professor at the University of Toledo College of Law. “This reality helps bad actors to continue their criminal activities and reap the rewards of their bad behavior. To the extent that this has been criminalized, these financial institutions deserve to be pursued and prosecuted to the fullest extent of the law,” Chaffee says.

Whether these revelations will result in crackdowns at the hands of the government remains to be seen. But it is where ESG investing can play a role. Even if there aren’t sufficient government consequences for wide-scale money laundering, that doesn’t mean offending banks will necessarily get a free pass from the markets.

Revelations Into ESG Investing

“Since ESG investing is focused on only supporting companies who operate legally and ethically, there should be more scrutiny of large financial institutions who repeatedly enable criminals and terrorists,” says Mark Allen, senior vice president of New Ventures at Access Softek.

“If necessary, there should be removal from consideration to qualify for relevant funds going forward. The large (exchange-traded fund), pension and sovereign wealth players can play a significant role in rewarding those that play by the rules and punishing those that don’t,” Allen says.

“On an investing level, the greatest impact would be through large ESG funds removing money laundering offenders from their funds, since individuals typically do not make large enough investments in a single company to make a significant impact,” Allen says.

While institutional money may be the fastest way to move the needle in terms of immediate market impact, grassroots efforts to think more carefully about how individuals allocate their resources can foster real change over time. After all, the most powerful, proven weapon that ESG-conscious consumers and investors have at their disposal is their wallet.

Consumer demand for organic foods led to the rise of Whole Foods and forced grocers and supermarkets like Walmart (WMT) to stock different products as consumers voted with their checkbooks. The meteoric rise of Beyond Meat (BYND) is a prime recent example; Walmart recently tripled the number of locations that would offer the Beyond Burger from 800 to 2,400.

In the automotive industry, surging demand for electric vehicles has made Tesla (TSLA) the most valuable automaker in the world, compelling the rest of the major automakers to accelerate investments in their own lines of electric vehicles.

ESG investors and conscious consumers can drive change in much the same way in the banking industry, choosing to invest in and bank with institutions that reflect their own values.

“As a consumer, researching the banks they choose to trust with their money is a great first step,” Allen says. He points out that community banks and credit unions these days can often offer many of the same services, like mobile banking and access to ATM networks, that big banks do.

At the same time, these organizations may offer “a greater focus on customer service, and local ownership that can be more directly held accountable,” he says.

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