Sustainable Finance and Financial Crime

Public administrations are increasingly called upon to become protagonists of the transition to sustainable development. In this perspective, it is necessary to think of financial models capable of catalyzing public and private resources, intentionally orienting them toward the implementation of policies and projects functional to the transition. To implement public sustainability policies in an optimal way, the simple reference to the Sustainable Development Goals (SDGs), which are also a useful and recognized reference, is not enough. It is important to define strategies that also define the methods of public–private partnership and those of financing the selected environmental and social impact projects. This article proposes a mapping of sustainable finance experiences in the sphere of social justice, classifying them according to the SDGs, with special focus to SDG 16 Peace, Justice, and Strong Institutions.

Environmental, social, and governance (ESG) risks have particular relevance to financial institutions, especially banks, concerning their role as financial intermediaries. Financial institutions are significant catalysts in promoting sustainable development. This role needs to include promoting sustainable business practices. The chapter discusses the role of financial institutions in fostering corporate sustainability. Special attention has been paid to the influence of financial institutions on sustainable value creation in companies’ business models. The link between financial institutions’ business models and companies’ business models in sustainable value creation has been considered. Companies’ motives and attitudes toward cooperation with financial institutions have been discussed. Statistical data for the survey were taken from surveys on business models carried out among 120 enterprises located in Poland. Multidimensional correspondence analysis was used to detect the impact of financial institutions on sustainable value creation in companies’ business models. As a research result, five typological groups of enterprises were obtained. The most significant influence of financial institutions on sustainable value and the sustainable business model was noted in the case of companies from the manufacturing sector and large companies, the lowest in the case of microenterprises.

After a short overview about the history of sustainable banking, the chapter discusses the business case of sustainability and the sustainability case of business in the banking sector. Based on this distinction, we introduce sustainable banking products and services, such as green mortgages and green and sustainability linked bonds. The chapter then provides an overview about the literature on the connection between sustainability performance and corporate financial performance (CFP). Finally, the chapter provides some closing remarks about the evolution of the concept of sustainable banking from the origins to the future challenges.

International informal capital flows (IICFs) have a significant impact on the United Nations sustainability goals by undermining economic/monetary, political and social stability, reducing public resources available for development and increasing levels of poverty and inequality. There is an initial conceptual problem in defining and measuring IICFs which has been influenced by competing perspectives of national regulators and academic commentators. A case study on China is valuable in showing how various methods of money laundering are utilised to facilitate the illegal export of trillions of dollars of capital. However, China may be different from other developing countries because of the significant capital inflows into China, through a process of ‘round-tripping’. China has dealt with the global challenge of financial crime through its Anti-Money Laundering Regulation which implements the FATF International Standards and by its foreign exchange control regulatory regime which is designed to maintain financial stability and facilitate long-term positive economic development. It is argued that China’s search for sustainable finance can only be effective if there are increased levels of transparency and an expansion of international co-operation.

We examine whether environmental performance is related to the probability of occurrence of corporate environmental events. We find that a firm’s aggregate environmental performance is negatively related to the probability of a negative environmental event. When we distinguish between environmental strengths and concerns, we find that strengths (concerns) are strongly related to positive (negative) events, consistent with stakeholder theory. However, strengths (concerns) are also significantly linked to negative (positive) environmental events, which is consistent with the presence of a compensation effect, whereby firms can compensate their environmental concerns with corporate social responsibility (CSR) practice that increase their environmental strengths.

The first part of the chapter will contextualize sustainable development and disentangle it from environmental, social, and governance (ESG). The second part will locate the leadership qualities needed which synthesizes sustainable development and ESG reporting, while the third part will put it in context of sustainable finance. As advocated by BlackRock (Sustainability goes mainstream. 2020 Global Sustainable Investing Survey. https://www.blackrock.com/corporate/literature/publication/blackrock-sustainability-survey.pdf, 2020), sustainability is here to stay, and over time investors have demonstrated their interest in addressing ESG considerations. ESG includes human rights; environmental pollution; healthcare; social problems; elimination of poverty; equal rights in the workplace; stronger compliance with local, state, federal, and international laws; diversity; etc. The European Commission (sustainable finance and EU taxonomy: commission takes further steps to channel money towards sustainable activities https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1804, 2021a; What is sustainable finance. A new sustainable finance strategy and implementation of the action plan on financing sustainable growth. https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_en, 2021b) added transparency to ESG, especially in cases of risks regarding the financial and worldwide economy. Is it possible to have a sustainable business and sustainable finance without ethical leadership? In support of Sharma et al. (Leadersh Org Dev J 40(6):712–734, 2019), many leaders today consider ethics important. It is considered that the leaders ought to look out for the people, fairness, sustainability, and integrity. Leaders need to be open to allocating power, giving clear ethical directions at their workplace, building respect, honesty, sincerity, equality, and transparency. It has also been argued that leaders need to foster trustworthy relationship between people that work in the same workplace, thus creating an ethical corporate culture, in other words, being effective leaders (Duggan, What are the key elements of ethical leadership in an organization? https://yourbusiness.azcentral.com/key-elements-ethical-leadership-organization-8819, 2018). In the final part of the chapter, the findings of a study of 153 companies that are considered ethical and sustainable in 24 countries and 11 different industries will be discussed using an econometric model. The authors conclude that companies that are considered ethical and sustainable need to have ethical leaders who will drive and foster a corporate ethical culture so they can have sustainable finance. As illustrated in this chapter, firms that disclose their ESG policies are sustainable and resilient but a driving force behind that is the ethical leadership that fosters and incorporates compassion, resilience, and the creation of a fair and trustworthy workplace.

In developing countries, ethics is a utopia antithetical to corruption that permeates every aspect of society and whose deleterious effects are felt for years. In these countries, acts of corruption take many forms, ranging from minor infractions to the most pernicious acts. The role of the leader is prominent in public and private organizations as he is the main catalyst that promotes ethical or corrupt behavior. In the presence of a corrupt leader, acts of corruption abound, but when the leader is ethical, employees are more inclined to apply ethics and follow existing regulations. The behavior of an ethical leader can be institutionalized in the company through a strong ethical organizational culture that applies to all levels of the hierarchy and contributes to sustainable finance and goals.

Sustainable finance is basically linked to prevention strategies against corruption. It presupposes moral/ethical decision-making processes. The prevention strategies against corruption and the corporate decision-making processes may be either ethically oriented (toward a virtuous life) or morally grounded (in moral duties). The “ethical” approach was enhanced by Aristotle’s ethics of virtues, while the “moral” approach was largely developed by Kant’s ethics of duties. The axiological choice between the ethical approach (virtue-centered) and the moral approach (duty-oriented) unveils the way the organization perceives and interprets the good/evil dualism. Moreover, it influences the capacity of the organization to endorse sustainable finance decisions and strategies.

Corruption, defined by the misuse of public power for private gains, is endemic, pervasive, and a significant contributor to low economic growth. There is a vast volume of research on the relationship between corruption and economic growth that empirically show the negative effects of corruption on growth, development, and investment. Corruption distorts investment and provision of public services and increases inequality to such an extent that international organizations like the World Bank, the IMF, and the UN have identified corruption as “the single greatest obstacle to economic and social development” and gave the fight against corruption high priority. To fight the multidimensional issue of corruption, its causes should be studies. Based on the literature, there are three conditions necessary for corruption to arise and persist: (1) discretionary power of public officials, (2) the possibility of economic rent extraction, and (3) weak institutions. Many scholars have emphasized on the role of institutions (broadly defined to include political, bureaucratic, juridical, and economic institutions) in combating corruption and find a causal order running from weak institutions to corruption to poor economic outcomes. In other words, corruption is seen as the symptom that something more fundamental (institutions) are not efficient. Thus, to tackle corruption, institutions should be strengthened. Strong institutions also affect and change the financial environment on a country that could, in turn, provide a fertile ground for sustainable finance by adhering to environmental, social, and governance (ESG) standards. Institutions in a county can affect the ESG disclosure quality.

This chapter adopts an inductive qualitative approach to examine the case of Algerian entrepreneurs and their experience with corruption. In contexts marked by unstable institutions, corruption is often considered necessary for survival. We explore and expand on this line of reasoning through a discursive legitimation approach, relying on the work of Vaara et al. (2006) and Van Leeuwen (2007). We show that Algerian entrepreneurs adopt five legitimation strategies to justify engaging in corruption: moralization (value systems), rationalization (cognitive validity), normalization (common behaviors), authorization (authority of persons), and mythopoesis (use of narratives and stories). Thus, our chapter elucidates the mindset behind why entrepreneurs engage in corruption. We contribute to the understanding of corruption in three ways. First, we show that when corruption is embedded in an institutional environment, the decision to engage in corruption is beyond a black-and-white issue. Second, our study reveals the multifaceted interpretations of corruption by tracing the various justification discourses mobilized by entrepreneurs. Third, our chapter suggests that the multiple discursive justifications call for a broader approach to fighting corruption than what has conventionally been used.

Until the Great Recession, the largely unregulated over-the-counter (OTC) markets received relatively little attention from compliance officers, regulators, and lawmakers. More broadly, the markets were widely perceived to be sufficiently large, liquid, and competitive to withstand manipulative and collusive attempts by traders and banks. However, this status quo was radically altered with the so-called LIBOR scandal in 2013, or the revelation that major international banks had systematically manipulated the world’s most widely used interest rate benchmark. The LIBOR scandal was quickly followed by the “Forex scandal” and discoveries of serious misconduct in a range of other OTC benchmarks and markets. This chapter explores financial crime in OTC markets through the lens of three high-profile case studies involving LIBOR, foreign exchange, and government bonds, respectively. Particular emphasis is put on the nature of money-related markets as decentralised, bank-oriented and their inherent link to the central bank, government, and citizens. Most importantly, we demonstrate why it took so long to discover that the OTC markets were unsustainable and far from immune from criminal behaviour.

This chapter targets the estimation of the impact of fiscal pressure upon tax frauds, through a linear and parametric approach on panel data as well. For this purpose, we use a sample consisting of 38 OECD countries for the period 2005–2020, which is divided into two subgroups of countries (old countries (old) and new ones (new)). Our results confirm the existence of the Laffer curve (having a U-shape) for the majority of our results, except for the social and security contributions for the all and old OECD samples, and direct taxes for the new OECD sample. Then, we find that the level of resilience of new OECD countries is below that of old OECD countries. In addition, the form of the relationship differs between old and new countries, while the highest disparity in the form of the relationship regarding shadow economy is found for direct taxes. All our results are interpreted in detail and their policy implications are discussed as well. The limits of this study leave avenue for future research in the field: different tax fraud proxies, supplementary control variables, other multivariate data techniques.

The present chapter examines the relation between shadow economy and economic development from a global perspective for 185 countries over the period 2005–2017. Increasing the economic development in many countries was accompanied by a decline of the level of shadow economy. In the same time, the shadow economy seems to have an impact on economic and sustainable development. For capturing the existence of this bidirectional causality, we will test Granger causality along with the panel econometric analysis realized for low-, middle-, and high-income countries. The main empirical findings based on fully modified ordinary least square (FMOLS) and Granger causality tests confirm the significant impact of shadow economy on the economic development. The results of this study can play an important role in the political fight against the shadow economy, even if in some cases the positive impact is confirmed. The government should be aware of the fact that shadow economy will decrease the public revenue, and this will lead in the long run to lower public investments. In this context, the sustainable economic development is affected and all the political efforts for combating the shadow economy must consider all the favoring factors of shadow economy.

Despite the growing popularity of sustainable finance and the emergence of an industry dedicated to solving urgent global problems while making profits, high-profile corporate governance failures do not appear to slow down. In 2018, Abraaj, a well-known figure in impact investing, collapsed after its CEO was arrested for fraud and misappropriation of funds. Similarly, in 2020, Boohoo, a previously reputable online fashion retailer, faced intense scrutiny over work slavery that ended up being the subject of a UK parliament inquiry and lost support from responsible investors. This chapter proposes to go back to these two recent high-profile cases to discuss the extent to which the lack of accountability, ethics, and corporate governance might be conducive to economic crimes and detrimental to investors willing to embrace the principles of sustainable finance. Then, the concept of sustainable corporate governance is introduced, and a discussion of its implications for the fields of corporate governance and criminology is provided. Finally, two incentive alignment mechanisms promoting sustainable corporate governance, CSR committees and CSR contracting, are presented to help align executives’ interests with those of all legitimate stakeholders. This chapter contributes to the literature on corporate governance and criminology by examining the role of a more sustainable governance in preventing and deterring economic crimes.

Internationally seen, WireCard is a scandal like many others. It is a story about greed, hubris, arrogance, vanity, self-enrichment and appetite for power. Like in many other cases, it is a story about fraudulent accounting, investment fraud, bogus companies, over complex and opaque organizational structures, round tripping transactions, money laundering and phony business partners. At the end of the story, it turned out that WireCard was not any more than a Potemkin village. However, the question is not whether WireCard was managed by a handful of avaricious psychopaths or what specific practices WireCard used in detail to fake business success. The more interesting question is why WireCard could become one of the most beloved shares for German investment funds, why red flags have been ignored for so many years and why state officials did react so late. Analysing the case from this perspective it appears that WireCard is a unique German case. As we will show in our contribution, the late reaction of governmental agencies and the long-time support of politicians might be explained by an attitude of ‘national pride’ and ignorance. In the German public WireCard was hyped by the media as the new German star in the FinTech market. This, at least partially, might explain why so many people for so long time turned a blind eye to the obviously dubious business practices at WireCard.

This chapter presents a case study of Danske Bank activities in Estonia by application of convenience theory. Reducing financial crime convenience is a matter of financial motives, organizational opportunities, and willingness for deviant behavior. Reduction in crime convenience is thus a matter of reduction in motives, reduction in opportunities, as well as reduction in willingness. Reduction in crime convenience contributes to sustainable finance. The elements of convenience reduction are evident from the structure of convenience theory. First, it is a matter of corporate executive status: disclosure of executive language, removal of powerful people, detection of misleading attribution, disregard of offender humor, and correction of power inequality. Next, it is a matter of access to corporate resources: Restrictions on access to systems, disclosure of entrepreneurialism, review of specialized access, and limits to strategic resources. Third, it is a matter of organizational improvement: transparency to avoid deterioration, replacement of disorganization, detection of crime signals, transparency in accounting, corporate social responsibility, and sharing of audit reports. Fourth, it is a matter of oversight and guardianship: coordination of principal and agent, sensemaking of executive actions, protection of whistleblowers, and corporate principal agent dynamics. Finally, it is a matter of markets and networks: reduction in rule complexity, avoidance of crime networks, combat of criminal market forces, and avoidance of victimization from cartel crime activities.

The Sustainable Finance approach focuses on ensuring that financial investment decisions are made with environmental, social, and corporate governance (ESG) considerations in mind, so that the economic activities that are invested in are sustainable. Absent from this list of considerations is the impact of financial crime, and specifically cybercrime, on sustainability. This chapter discusses the ESG consequences of increased cybercrime, in order to understand the overall impact of cybercrime on Sustainable Finance. The impact of cybercrime is analyzed both in terms of commonly attempted cybercriminal activities (such as phishing and ransomware attacks), activities that primarily have social and corporate governance consequences, and in terms of the infrastructure used to perpetrate cybercrime (such as blockchain, the dark web, and the advanced malware supply chain), infrastructure that has environmental consequences as well. The chapter then demonstrates how focusing on such consequences when combatting cybercrime and the technologies that facilitate it reduces the impact of cybercrime on the goals motivating Sustainable Finance, contributes to the sustainability of economic activity, and therefore strengthens Sustainable Finance.

In its 2018 and Fourth Mutual Evaluation Report of the United Kingdom’s (UK) compliance with its Recommendations, the Financial Action Task Force (FATF) rated the UK’s laundering (AML) and counter-terrorism financing (CTF) regime as the best in world. In order to achieve this rating, the UK has adopted an aggressive and, at times, holistic strategy towards tackling money laundering and terrorism financing. For the purpose of this paper, the UK’s response was identified by reviewing related legislation and policy developments since the UK’s 2007 Mutual Evaluation Review. The legislative measures included the introduction of a comprehensive AML legislative framework that exceeds the international standards. The UK, unlike many other nation states, has an established approach towards implementing a robust CTF regime, which is identified by the FATF as an example of international best practice. HM Government (HMG) stated, ‘the findings of the Mutual Evaluation Report (MER) showed that the UK has the strongest overall … CTF regime of over 60 countries assessed’. However, the rating has been questioned by the Royal United Services Institute (RUSI) who stated that ‘the UK remains central to global money laundering schemes … [thus it] brings into question the relevance of this evaluation’. HMG dismissed these criticisms and referred to the findings of the 2018 Mutual Evaluation Report, which does not consider, among others, the ramifications arising out of the length of time to report and review. The use of Distributed Ledger Technology (DLT) has the potential of overseeing financial transactions for AML/CTF compliance purposes, which by alleviating the need for manual oversight would limit costs and time owing to the innate qualities of the ledger automatically updating its records, thereby facilitating organisations in meeting their regulatory obligations more efficiently as well as working towards a more sustainable regulatory model. The use of technology overall can be beneficial for gathering intelligence through open sources, including social media as evidenced by the work carried out by the Centre for Strategic Counterterrorism Communications in the USA. This chapter presents evidence that there are inherent weaknesses within the UK’s CTF strategy, related legislation and challenges the findings of the UK’s Fourth MER and considers the ways in which technology can be used to tackle terrorism financing.