Environmental crime and money laundering

Environmental Crime and money laundering pose a threat to both the natural world and global financial systems, generating billions of dollars per year for criminals all around the world. While it may not have the visible impact of other types of crime, environmental crime (also known as green crime) is no less damaging and involves exploiting natural resources and wildlife, with a range of associated criminal activities that include violence, theft, and trafficking. 

Environmental crime is a global problem estimated to be worth over $250 billion per year by the UN’s Environment Program, making it one of the most lucrative criminal enterprises behind illegal narcotics, counterfeiting, and human trafficking. The UN also estimates that environmental crime is growing at a rate of 5-7% per year, outpacing the growth of the global economy by 2-3 times. 

Given the growing threat, it is important that firms understand environmental crime and their  AML/CFT compliance response for customers that present a money laundering risk…

What is environmental crime?

Environmental crime involves the violation of laws put in place to protect the environment and wildlife within a given jurisdiction. Typically, environmental crimes include the exploitation or trafficking of resources or animals for profit and can be organized into crimes involving the climate, forests, oceans, and wildlife. Specific examples of environmental crime might include:

• Animal poaching, such as illegal capturing or killing for body parts
• Animal smuggling, such as the trafficking of ivory or rhino horns
• Production of hazardous waste
• Pollution of the atmosphere, oceans, rivers or earth
• Illegal or unreported fishing
• Illegal logging

Environmental crimes tend to generate significant financial gains and are especially prevalent in low-regulation countries where animals and natural resources are relatively plentiful and more easily exploited. Elephant poaching, for example, remains a serious problem in many African nations, while deforestation of the Amazon contributes to the destruction of natural ecosystems across South America. 

Accordingly, environmental crime is widely considered a major money laundering predicate offense.

Consequences of environmental crime

Since environmental crimes tend not to directly involve human victims, they are often perceived as less damaging by authorities and are not prioritized over other types of crime. That perception also leads to lighter punishments and, by extension, less disincentive for criminals. 

However, the consequences of environmental crime are severe, both for the ecosystems and species that it affects directly and for the communities and individuals that it affects indirectly. Illegal loggers and developers that tear down a forest, for example, not only destroy the habitats of animal species; they also displace indigenous residents and contribute to climate change. Similarly, the illegal trade of ivory may be used to finance other criminal activities, perpetuating violent conflicts and other forms of human suffering. 

In any context, criminals who profit from environmental crimes must find ways to launder their illegal funds. Illegal mining and logging enterprises may set up shell companies to disguise the origins of their products, while poachers and hunters may set up as companies in the fashion or pharmaceutical industries in order to trade skins, furs, and other biological materials.

Crime regulation

Global regulation of environmental crime is inconsistent. However, various international organizations and intergovernmental bodies have introduced legislation to address environmental crime as a predicate offense to money laundering. 

In June 2020, the Financial Action Task Force (FATF) held a plenary session in which it adopted a report on the illegal wildlife trade that urged member states to increase their focus on environmental crime laws and policies. Similarly, the EU’s 6AMLD, set to be introduced on 3 December 2020, expands its list of AML predicate offenses to include environmental crime. In the United States, the Eliminate, Neutralize, and Disrupt (END) Wildlife Trafficking Act (2016) specifically categorizes wildlife trafficking as a money laundering predicate offense.

AML compliance

The introduction of international and domestic environmental crime regulations means that financial institutions must implement appropriate AML/CFT measures to address the money laundering risks presented by their customers. Those measures include:

• Customer due diligence: Firms should take steps to accurately verify the identities of their customers and the nature of their business relationships. When dealing with customer entities, firms must take steps to establish beneficial ownership. 
• Transaction monitoring: Firms must monitor their customers’ transactions on an ongoing basis for indications that they are involved in money laundering. Relevant suspicious activity might include unusual transaction patterns or transactions with high-risk countries.
• Sanctions screening: Customers that are involved in environmental crimes may be included on international sanctions lists or other watch lists, or feature in adverse media stories. Accordingly, firms should screen customers in order to verify their sanctions status and detect when they are connected to negative news media.

Money laundering through environmental crime: Red flags

In order to spot customers who are involved in environmental crime and are attempting to launder the proceeds of that illegal activity, firms should be familiar with certain characteristic “red flag” behaviors. These include:

• Corporate deception: Environmental criminals may set up shell companies to handle shipping for illegal goods. Shell companies may have obscure beneficial ownership, overly complex infrastructures or be located in tax havens.
• Transaction patterns: Environmental criminals may engage in irregular or inconsistent transaction patterns, transact in amounts that don’t match the scale of their stated business or transact with high-risk countries and environmental crime hotspots.
• Cash transactions: By dealing with cash, environmental criminals may be able to operate with a greater degree of anonymity. Firms should be on the lookout for a high frequency of cash transactions or requests for high denomination bank notes.
• Shipping: Criminals may seek to avoid AML checks when transporting the products of environmental crimes by faking, failing to complete or manipulating shipping documents. 
• Unknown goods: Environmental crimes often involve exotic animal species or rare substances. Employees of financial institutions may not be familiar with these species and substances or may not even be aware of laws restricting their trade. 

Adverse media categorization: Involvement in adverse media is an important indicator of money laundering risk linked to environmental crimes. However, collecting and analyzing adverse media is often time-consuming, requiring managing large amounts of AML data. 

In order to manage that requirement, firms should seek to implement AML software with adverse media categorization capabilities. By categorizing adverse media, firms will be able to screen for environmental crime predicate offenses much more efficiently, prioritizing high-risk customers, better remediating red flags and ultimately ensuring suspicious activity reports (SARs) are submitted to the relevant authorities as quickly as possible.