Environmental crime is among the most profitable financial crimes with criminal proceeds of $110 billion to $281 billion annually. Forestry crime, illegal mining and waste trafficking1 amount to 60% or two-thirds of this figure. The effects of environmental crime extend beyond economic development. Environmental crime also destroys our planet, contributing to climate crisis and negatively impacting public health, safety and social growth.
In December 2021, heads of international organizations including the United Nation’s Office on Drugs and Crime (UNODC), the U.N. Environment Programme (UNEP) and the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) had their first meeting with the Financial Action Task Force (FATF) to discuss and develop partnerships for targeting the illegal gains that help fuel environmental crimes. Since then, FATF has continued to highlight the critical relationship between environmental crimes and climate crisis at various international forums for industrial nations, such as the G-7 and G-20 leaders’ summits.
In addition, the increasing threat of a climate crisis and its catastrophic impacts have led to endeavors including the initiation of various “environmental justice” programs and the introduction of a range of presidential actions, as outlined in President Joe Biden’s executive order of January 27, 2021, to confront climate change and environmental crimes in the U.S. and internationally.2
Key Red Flags
Environmental crime intensifies corruption and it is generally commingled with other organized crimes, such as drug trafficking and human trafficking. Here are some key red flags for detecting environmental crime:
Ending Environmental Crimes
States and/or institutions in Europe and North America that are not considered “source countries” have not factored money laundering risks from environmental crimes into their assessments. Not including environmental crimes in their risk assessment is leaving institutions exposed to such crimes, which can originate in other regions. There are additional factors described below that make the fight against environmental crime difficult.
Shell Companies to Hide Beneficial Owners—Known cases point to the significant role of
trade-based fraud and the use of shell and front companies to launder illicit funds. Offshore jurisdictions facilitate the placement and/or layering of funds, which further complicates the identification of the ultimate beneficial owners.
Commingling with Legitimate Business—It is common for criminals to frequently commingle legal and illegal goods early in the supply chains to conceal their illicit source. This makes it difficult to distinguish between legitimate and illicit financial flows.
Highly Organized Networks—Criminals rely on specialized networks to move their goods and facilitate the financial flows. These networks leverage from cash couriers or networks of front and shell companies to move funds. In addition, environmental crime can be integrated with a broader criminal network engaged in diverse criminal activities such as human trafficking, drug trafficking, corruption and tax evasion. Therefore, the financial flows generated by environmental crime could be incorporated within the larger criminal network, making it extremely difficult to detect.
Inadequate Access to Banking—Several natural resource-rich jurisdictions—and broad segments of their populations—face issues related to their access to banking. These jurisdictions are often in regions that rely heavily on a correspondent banking system for their access to the global financial market. Without adequate access to banking and other financial services, implementing efforts to combat money laundering presents a challenge.
Corruption—In some resource-rich jurisdictions, the regulatory compliance of resource extraction and license issuance can be opaque and highly exposed to corruption. This happens in remote areas where the presence of authorities for monitoring and enforcement can be limited. In addition, there can be insufficient societal awareness and political will to follow the money for environmental crimes.
The complexity of these crimes combined with the crimes being committed in geographic areas that are far from administrative and financial centers contribute to levels of isolation and gaps in traceability. This can not only prevent the identification of predicate offences but can also create novel challenges for understanding and tracing the financial flows linked to environmental crimes.
The Solution: Understanding the Big Picture
Countries and institutions frequently indicate that while they are aware of sporadic or individual cases of illegal mining, logging or waste dumping, there is limited understanding of the risk or its role in a wider, known illicit supply chain. Below are three primary approaches to understanding the “big picture” view in the fight against environment crime.
- Entity Resolution for a Holistic View—The use of shell and front companies makes it difficult to understand the identities of the true beneficiary owners. Therefore, it is critical that institutions correlate their internal data for customers and other involved parties with external company registry data to uncover hidden, highly organized networks and actual beneficiary owners.
Once the parties are resolved and the linking between them is understood, this information should be maintained and updated on a regular basis as part of an enterprise-wide, well-documented data platform for further monitoring and investigation. This approach ensures that institutions can link companies in resource-rich jurisdictions to offshore shell or front companies and the ultimate beneficiary, who may be related to other high-risk individuals such as PEPs.
- Typology-based Monitoring—Environmental crimes are based on transnational criminals commingling illegal and legal operations. Traditional rules-based detection, which only focuses on limited red flags such as large volumes of transactions and geography risk, are proven to be ineffective in detecting most environmental crimes. Therefore, when entity resolution is completed, monitoring should consider the entire network of related parties and associated risk indicators including external risks such as negative news and high-risk lists—typology-based monitoring as opposed to monitoring based on a single risk indicator. By leveraging typology-based monitoring, institutions can look for seemingly unrelated, yet hidden networks and the various risk indicators associated with them.
For example, typology-based monitoring can be effective in detecting corrupt public officials facilitating complex money laundering schemes who leverage complicated corporate structures with connections to other PEPs or their family members. In these scenarios, PEPs and their relatives often act as local representatives for multinational mining ventures or as nominated directors of the companies.
- Contextual Investigation—Generally, institutions have limited oversight over their activity, i.e., global transactions, customer relationships etc. Therefore, it is important to combine contextual information (both internal and external) while investigating flagged cases. Internal data should contain the resolved entity profile, earlier activities and company registry data including recently provided import/export activity. External information should include the natural resource-rich country’s profile, high-risk lists, media scans and critical company details such as an increase in revenue. Moreover, investigators should analyze corporate structures, registration details, alleged company purposes, corporate banking profiles and the relationship between corporate networks, such as common representatives, overlapping ownership structures, identical registration addresses and joint bank accounts.
Leveraging graph data models and combining internal and external data sources also play a fundamental part. By conducting investigations contextually, organizations can create a holistic view of trade activity and the involved counterparties, especially as related to countries that are rich in natural resources. This approach can undercover front companies that frequently have ties to the import-export sector to facilitate the appearance of legitimate invoices and payments to suppliers. Similarly, for illegal logging and mining, such front companies typically operate out of rural areas. Organizations should also strive to uncover other indicators of potential criminality, including output that is at lower levels than suggested by the official production capacity, the production capacity of similar companies in their sector, or the number of employees at a suspect company.
As compared to illegal trade in drugs or other illicit goods, natural resources are limited and cannot be reproduced. Because of this, there is a real sense of urgency to combat environmental crime. It is no wonder that world agencies such as Interpol, the U.S. Department of Justice and the U.N. have indicated the need for more vigorous enforcement of environmental crime as opposed to simply aiming for compliance.
As an example, a 12-country operation against forestry crime led by Interpol in Latin America and the Caribbean has uncovered new intelligence on global timber trafficking. In a coordinated effort, the operation recovered more than 80 truckloads (more than 1,200 cubic meters) of illegal timber from forests across Latin America and the Caribbean. The value of the seized timber was estimated at more than $700,000.3
In January of this year, Interpol shared intelligence gathered from 23 participating countries in an eight-month investigation targeting emerging wildlife trafficking routes. Officers conducted inspections at roadblocks and land, sea, and airport border points, which resulted in the seizing of ivory, rhino horns, pangolin and tiger parts in transit from Africa to Asia.4
Another investigation—launched in collaboration with the customs departments of China and Vietnam with operational support from the UNODC’s Global Programme for Combating Wildlife and Forest Crime—led to the identification of falsified documentation and the discovery of a common timber trafficking method in the region. The operation led to significant results in China, including the arrest of four people in April 2021, the seizure of 29 tons of rosewood and the identification of over 200 containers that had used a similar modus operandi since January 2017.5
It appears that most countries have yet to factor in environmental risk as part of their national risk assessments. Research shows that trafficking of precious metals, stones, timber and waste occurs on a global scale. Therefore, it is critical that countries search for money laundering threats due to environmental crimes—even countries that do not have domestic natural resource industries.
More importantly, international communities should consider establishing and strengthening public-private sector conversation to share risk information and cultivate organization-led or industry-led initiatives to strengthen the monitoring of supply chains and their financial flows. These efforts can play a significant function in fostering awareness of suspicious financial activity relating to illegal mining, forestry crimes and illegal waste management, and in addressing the issue of commingling by finding methods to demonstrate the legitimate source of goods.
FATF, UNODC, UNEP, CITES and other organizations are continuing their efforts to focus on regulatory guidelines and enforcement actions to combat environmental crime. Ultimately, incorporating environmental crimes detection as a mandatory part of compliance programs for all regulated entities is necessary to solve the problem. The fight against environmental crime is essential to ensure our public health and safety and combat the growing climate crisis.
Garima Chaudhary, head of financial crime and compliance management solution consulting—Americas, Oracle, Canada, email@example.com, @garimac12
- “FATF REPORT: Money Laundering from Environmental Crime,” The Financial Action Task Force, July 2021, https://www.fatf-gafi.org/media/fatf/documents/reports/Money-Laundering-from-Environmental-Crime.pdf
- “Executive Order on Tackling the Climate Crisis at Home and Abroad,” whitehouse.gov, January 27, 2021, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/27/executive-order-on-tackling-the-climate-crisis-at-home-and-abroad/
- “Illegal logging in Latin America and Caribbean inflicting irreversible damage—Interpol,” Interpol, April 21, 2022, https://www.interpol.int/en/News-and-Events/News/2022/Illegal-logging-in-Latin-America-and-Caribbean-inflicting-irreversible-damage-INTERPOL
- “Ivory, rhino horns, pangolin and tiger parts seized in transit from Africa to Asia,” Interpol, January 24, 2022, https://www.interpol.int/en/News-and-Events/News/2022/Ivory-rhino-horns-pangolin-and-tiger-parts-seized-in-transit-from-Africa-to-Asia
- “Rosewood confiscation leads to arrests, prosecution, and new policies in the Mekong region,” UNODC Regional Office for Southeast Asia and the Pacific, February 28, 2022, https://www.interpol.int/en/News-and-Events/News/2022/Ivory-rhino-horns-pangolin-and-tiger-parts-seized-in-transit-from-Africa-to-Asia