Building a robust financial crime control framework for climate finance
A $300 billion climate finance (CF) deal was reached at COP29 on 24 November, aiming to support developing nations in adapting to climate change . This agreement comes as CF reached an all-time record of an estimated $1.5 trillion in 2023 and has the potential to increase sixfold to $8.5 trillion annually between now and 2030. However, the fact that the largest recipients of climate-related funds also rank among the highest on the Corruption Perception Index (CPI) raises concerns.
This surge in CF funding creates new and substantial opportunities for financial crime to exploit vulnerable supply chains due to a lack of institutional accountability, inadequate fund distribution mechanisms, and systemic corruption. This raises a critical concern: where significant funds flow, financial crime inevitably follows.
Tackling financial crime in CF is an important part of Deloitte’s wider insights Financing the Green Transition series. In our previous blogs, we explored the increasing risk of fraud and corruption within the CF supply chain and looked at ways to reshape the CF chain and ensure better governance and control . This blog considers the complex ecosystem of the CF supply chain, highlighting the financial crime risks at each stage and outlining practical steps to strengthen the financial crime framework across the ecosystem.
Navigating the complex climate finance ecosystem and identifying financial crime threats
The management of risk within the CF supply chain is distributed across multiple climate finance institutions, recipient countries and implementing organisations.
A three-layered approach to financial crime risk management
To effectively combat financial crime within the complex multi-national supply chains, covering high-risk industries and jurisdictions, a robust approach is essential. Therefore, a three-layered solution is proposed, focused on Prevent, Monitor, and Respond, covering all stakeholders within the CF ecosystem.
1. Prevent
The first layer focuses on proactively analysing and strengthening the defensive environment against financial crime before funds are disbursed.
Central to this defence are robust financial crime risk assessments conducted by all CF stakeholders. This includes evaluating the capacity of entities to receive funds and manage projects effectively and efficiently, as well as to assess macro risks, including corruption and fraud risk, governance structures, and the organisations involved. These assessments should inform the design and implementation of an appropriate preventative control environment, including enhanced due diligence and background checks on the recipients. Capacity building and training should be encouraged for recipient parties on how to receive funds and manage financial crime risk.
Meanwhile, implementation partners should ensure robust internal financial controls and governance through robust policies and procedures, as well as publishing detailed information on the project implementation for transparency purposes.
2. Monitor
Ongoing monitoring of the portfolio and project delivery is crucial to identify activities related to financial crime. Systems should be put in place to track both a project’s climate impact and its financial activity. This includes monitoring how funds are used, tracking progress against goals, and watching for any red flags.
Forensic analysis, using techniques such as advanced data analysis and machine learning, helps enhance the monitoring of fund utilisation and potentially identify abnormal activity. This analysis allows for a seamless transition into deep forensic investigations when necessary. Meanwhile, recipient countries can establish dedicated CF units within national agencies that focus exclusively on monitoring CF projects, ensuring transparency throughout the project lifecycles. Finally, the stakeholders should also make sure to establish confidential channels to report fraud and misconduct during every stage of the project delivery phase.
3. Respond
When suspicious activity is identified, a swift response is critical from all stakeholders. Having clear procedures for investigating allegations of financial crime, including robust mechanisms for receiving and acting upon whistleblower reports, allows organisations to handle detected anomalies efficiently. Investigations should be thorough and independent, potentially employing asset tracking and recovery specialists, open-source intelligence (OSINT), and other corporate intelligence means. Collaboration with law enforcement agencies is essential to determine the nature and extent of any wrongdoing.
Recipient countries could encourage internal public-private collaborations in CF on investigations, information sharing, and intelligence exchange on suspicious transactions and fund flows. Finally, transparent reporting of financial crime issues and incidents to relevant stakeholders, including donors, beneficiaries, and law enforcement agencies, is crucial.
Strategic recommendation
The CF landscape is complex, yet delivering impact remains critical. To achieve this, stakeholder collaboration and best practice sharing are essential. Therefore, establishing or scaling up existing mechanisms to connect CF institutions, developing countries, civil society organisations, and the private sector would be valuable. These platforms could facilitate the sharing of best practices and the development of common standards and guidelines, aligning all stakeholders within a robust financial crime framework.
Conclusion
The complex, multi-national, and leading-edge nature of CF means it is especially susceptible to financial crime. It requires a collaborative effort to protect CF from financial crime. Failure to address these challenges will jeopardise critical investments, hinder the achievement of climate-related goals, and damage public trust. To safeguard these investments, a robust approach, including proactive prevention, continuous monitoring, and decisive response is crucial.
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References
1 Climate finance refers to local, national or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change. Introduction to Climate Finance | UNFCCC
2 Understanding the Global Push for Climate Finance | Council on Foreign Relations
3 Understanding the Global Push for Climate Finance | Council on Foreign Relations
