Second Post in a Series on the FATF Plenary Outcomes
As we blogged, last month the Financial Action Task Force (“FATF”) held its fourth Plenary, inviting delegates from around the world to (virtually) meet and discuss a wide range of global financial crimes and ongoing risk areas. Following the Plenary, FATF identified a number of strategic initiatives for future research and publication, and issued six reports to detail their findings on specific topics. One such report, Money Laundering from Environmental Crime (the “Report”), and its implications for anti-money laundering (“AML”) and countering the financing of terrorist (“CFT”), will be the focus of this post.
The 66-page Report is compiled from case studies and best practices submitted by over 40 countries, as well as input from international organizations like the International Monetary Fund and World Bank. While this Report is the first deep dive into environmental crimes and recommendations for members of the FATF Global Network, it is not the first time FATF has addressed environmental issues. The current Report aims to build upon FATF’s previous study on money laundering and the illegal wildlife trade, on which we also blogged. The current Report is also connected to earlier FATF studies on money laundering risks from the gold trade and the diamond trade. Indeed, the Report references U.S. enforcement cases involving money laundering and gold or diamonds on which we previously have blogged (see here, here and here).
As this post will discuss, these areas of money laundering risk are often overlooked and are especially difficult to monitor. Further, the Report finds that “[l]imited cooperation between AML/CFT authorities and environmental crime and protection agencies in most countries presents a major barrier to effectively tackle [money laundering] from environmental crimes.” Stated otherwise, government AML/financial flow experts and government environmental law experts don’t understand or even consider each other’s area of expertise, and often don’t communicate with each other, resulting in missed enforcement opportunities. With global environmental crimes generating up to $281 billion per year, the Report suggests that government interventions are not proportionate to the severity of this issue. By issuing this Report, FATF hopes to raise awareness of the scope and scale of harm caused by environmental crimes and related money laundering, and enhance collaboration by financial crime and environmental crime enforcement officials.
Environmental Crimes and Money Laundering
The Report focuses on several particular forms of environmental crime due to their significant and illegal degradation of the environment. FATF provides the following definitions:
Illegal logging includes the harvesting, processing, transporting, buying, or selling of timber in contravention of domestic and international laws.
Illegal land clearing refers to the illegal acquisition and clearing of land either for farming, building or real estate speculation.
Forestry crime is an umbrella term to describe criminal activity in the forestry sector covering the entire supply chain, from harvest and transportation to processing and selling, including illegal logging and land clearance.
Illegal mining refers to mining activity that is undertaken without state permission (in absence of land rights, mining licenses, and exploration or mineral transportation permits), or mining activity with state permission obtained through corruption.
Waste trafficking includes the illegal export and/or illicit disposal of electronic waste (e-waste), plastics, and hazardous substances, among others.
While each type of environmental crime has its own nuance and risk profile, one common theme is that all can be considered by their perpetrators to be “low risk, high reward.” This is due to a combination of regulatory gaps, inconsistent cross-border enforcement (often with low penalties for transgressions), and comingling of legal and illegal environmental actions. The Report notes that existing FATF standards regarding environmental crime require countries to:
Although we discuss the Report in detail, it is lengthy and very detailed. Anyone interested in learning more is encouraged to read the Report, because it contains thoughtful analysis and details regarding specific environmental issues and interesting enforcement case studies from around the world
The practice of comingling makes environmental crimes notoriously difficult to track and prosecute. Early in the supply chain, illegally obtained products such as logs, stones or waste can be strategically mixed in with their legal counterparts. Without a serious investigation and cross-border coordination, these illegal products appear benign to customs officials, and will thus go unnoticed and untraced. Entities that buy or sell comingled goods later in the supply chain may have no indication that some were obtained illegally.
Another complicating facet of environmental crime is identifying the illicit act itself. It can be uniquely difficult to distinguish between legal and illegal iterations of the same behavior because the framework of environmental laws largely relies upon quotas and state sanctioned contracts. In other words, legal logging can quickly become illegal once a quota has been filled; legal mining can become illegal once a government official is bribed.
Notably, front companies are often used to launder illicit gains by comingling them with legal-source funds. Many “front” companies are not complete or “true” fronts because they in fact are related to the industry itself, meaning that they already deal in natural resources and therefore have the benefit of knowing how to conceal comingled illicit products and funds, thus providing plausible cover for illicit conduct. Some front companies are not directly related to illegally obtained products, but deal in other cash-heavy trades. Not surprisingly, shell companies—sometimes established under the guise of waste management or another environmental industry—are also used to launder money from environmental crimes. The success of front companies and shell companies to launder money further underscores the importance of beneficial ownership transparency, and is especially timely for U.S. policymakers as FinCEN decides how to regulate the reporting of beneficial ownership under the Corporate Transparency Act.
Because environmental crimes deal heavily in raw materials and goods, trade-based money laundering (“TBML”) plays a key role in cleaning the proceeds from environmental crimes. TBML typically takes the form of over- and under-invoicing or shipping goods and services. As the Report explains, “for environmental crimes specifically, this could include mislabeling of hazardous waste or protected wood to conceal their real value.” TBML is a different practice from the comingling described above; in comingling, the goal is to conceal the true origins of the goods, whereas in TBML, the goal is to launder ill-gotten gains through the international trade system.
Finally, the Report makes an important point about coordination between law enforcement personnel within the same country (we will discuss international cooperation infra). As to enforcement personnel trained to focus on money laundering, financial crime and tracing illicit proceeds, and enforcement personnel trained to focus on the technicalities of difficult environmental laws and regulations, the left hand often does not know what the right hand is doing:
Limited cooperation between AML/CFT authorities and environmental crime and protection agencies in most countries presents a major barrier to effectively tackle [money laundering] from environmental crimes. The FATF Standards require that policymakers, FIUs, law enforcement authorities, supervisors and other relevant authorities have effective mechanisms in place to co-operate, coordinate and exchange information domestically to combat [money laundering]. However for environmental crimes, relevant agencies often include authorities outside of traditional AML/CFT agencies, which requires countries to proactively establish coordination channels. Such agencies include those responsible for resource licencing and oversight, and environmental crime and protection experts.
A crucial factor underlying this challenge is the non-conventional and specialized nature of environmental crime detection and investigation. In many countries environmental agencies are the leading body responsible for tackling environmental crime. While these bodies have expertise in environmental issues, they often have [in]adequate expertise or powers to identify and disrupt complex organised crime conspiracies, (which include [money laundering] schemes). Environmental agencies are often non-traditional law enforcement partners, and do not receive resources or training to conduct financial investigations, which means that important financial evidence may be overlooked. On the other hand, traditional AML agencies, such as financial intelligence units and law enforcement agencies typically do not recognize environmental crimes as a priority area, and rarely engage with counterparts in environmental agencies to assist in or pursue cases.
FATF’s point is justified. Government enforcement personnel tend to work in silos. Further, and as we have observed (here and here), the penalties associated with convictions for offenses classified as environmental crimes can be light. But if the exact same conduct – which invariably will involve financial transactions – is instead characterized by the government as “mail fraud,” “wire fraud,” or “money laundering,” then the litigation calculus changes and penalties can be severe.
Convergence with Other Crimes
Environmental crimes are strongly intertwined with broader criminal activity—namely, human trafficking, corruption and terrorist financing. Human trafficking and child labor provide the manpower required to harvest, transport, and otherwise deal in such labor-intensive raw materials. Further, cross-border migrant smuggling routes are often used for smuggling timber, stones and wildlife as well.
Corruption and bribery play a key role in enabling environmental crimes. Even when land is protected under the law, corrupt government officials can grant access to natural resources to bad actors presenting falsified papers and permits. Corruption also facilitates the comingling process, as fraudulent documentation can help smugglers transport illicit goods past border points by presenting their products as lawfully obtained. Further, many resource-rich countries have minimal regulatory oversight, and any actual surveillance or inspection can be limited through bribes. The Report sets forth this graphic on the convergence of environmental offenses with other crimes:
Another problem facing some resource-rich countries is the presence of insurgent groups with ongoing conflict against governmental authorities. In these places, proceeds from environmental crimes—particularly illegal mining—are often used toward terrorist financing. Because precious metals and stones, even in their raw form, carry inherent economic value, they can be used as currency outside of the financial systems. Unlike other crimes, with illegal mining bad actors do not need to undertake the complex process of laundering proceeds from illicit acts in order to reap their gains—making precious metals uniquely valuable in the payment of weapons and financing of terrorism.
By calling attention to the widespread criminality connected to environmental crimes, FATF hopes this Report will spur further action by governments and international organizations focused on combating crime and human rights violations.
When it comes to global AML/CFT policies, FATF’s recommendations are viewed by many as the gold standard for stakeholders in the public and private sectors to follow. As such, a large focus of this Report is on recommendations for interventions and future studies, as well as existing practices that have proven effective in the fight against environmental crimes.
One major theme of the Report, not surprisingly, is the need for international cooperation among government entities to combat environmental crimes. The Report explains that, while most countries have some domestic laws in place to criminalize environmental crimes, there is a large gap in existing legal frameworks that allows criminal importing, exporting and trafficking in natural resources to go undetected. To close that gap, FATF recommends that countries broaden the types of activities that are considered illegal, strengthening regulatory regimes, and share information with their neighbors. Further, FATF found sanctions for environmental crimes to be disproportionately low given the extent of economic and ecological damage caused.
Policymakers, financial institutions, and law enforcement are always pivotal actors in combatting money laundering crimes. However, as mentioned above, the nuances of environmental crimes can allow bad actors to “hide in plain sight” as they wreak havoc on the environment and commit human rights violations. Therefore, in this context, specialized investigatory agencies and environmental protection experts are absolutely necessary to identify and prosecute criminal activity, especially as it pertains to comingling. Finally, agencies that oversee the resource licensing process are critical to distinguishing between legal and illegal environmental activities. Because of the opacity and cross-border nature of environmental crimes, all of these actors must be able to successfully coordinate their efforts in order to make serious progress.
Another interesting recommendation for the private sector involves a topic which we have blogged on extensively: correspondent bank accounts and de-risking. Financial institutions have immense compliance burdens when forming correspondent bank account relationships with foreign financial institutions, and for many financial institutions, the costs of conducting individual risk assessments on members of “risky” populations sometimes can far outweigh the benefits. Many regions with rich natural resources are also home to such “risky” populations of underbanked and underserved communities, creating the perfect storm for environmental crimes and money laundering to flourish. To chip away at some of these dilemmas, the Report recommends using the correspondent banking due diligence questionnaire from the Wolfsberg Group (an association of global banks that provides guidance for the management of financial crime risk).
Of particular importance to public and private sector intervention is recognizing the risk indicators of environmental crime. The Report lists many of these risk indicators in Annex A, which range from suspicious financial activities to unusual characteristics of customers. Some examples of risk indicators for the detection of financial flows from mining and logging are: increase in transactions between entities not registered in the mining/logging sector and equipment sales companies; sudden and unexplained increases in economic activity in rural or isolated zones, particularly in source countries for illegal logging and mining; companies with mining licenses operating in and around active conflict zones; clients stated business is to export environmental materials but the volume/value is in excess of what is available in the region; sudden and unexplained investment in waste facilities from entities with unclear beneficial ownership information. The Report notes that any one of these risk indicators should prompt further monitoring and examination.
The Report from FATF is timely given how public opinion in many countries shows a growing concern for environmental issues. However, as the Report notes, “economic crime is not often part of the public policy dialogue on environmental protection.” This may soon change, if the extent of lost tax revenue and the overall harm from environmental crimes becomes clearer to policymakers and the general public. Because policies that are simultaneously good for the economy and the environment generally pick up traction, there is hope that the Report delivers on its goal of raising societal awareness and political will in areas where it may be lacking with respect to environmental crimes.
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