Root-and-Branch Response to Environmental Crime

Financial institutions face legal battles if they fail to enforce crime-free value chains, warns Simon Zadek, Chair of Finance for Biodiversity.

Forget drug smuggling, forgery or vice; if you want to make money from crime, the environment provides the biggest returns.

According to The Financial Action Task Force (FATF) – the global money laundering and terrorist financing watchdog – environmental crime is “one of the most profitable criminal enterprises”, generating around US$110-281 billion in criminal gains each year.

Illegal activities include logging, wildlife trade, waste trafficking, extraction and trade of forestry and minerals, and land clearance.

Perpetrators range from individuals to large organised gangs, all of whom are reliant on the financial and non-financial sectors to launder their proceeds.

FATF says: “Environmental crime has far-reaching impacts beyond the financial cost, including for the planet, public health and safety, human security, and social and economic development. It also fuels corruption, while converging with other serious crimes such as drug trafficking and forced labour.”

Not a priority

Yet governments and regulators have done relatively little to combat these devastating impacts.

FATF says that globally, “government actions to detect and disrupt these financial flows have not been proportionate to the scale of this issue. For example, despite the significant proceeds involved, the focus on environmental crime in relevant risk assessments and financial investigations has been limited to date.”

In 2015, European Union Action to Fight Environmental Crime – an EU-funded research project involving 11 think tanks and research institutions – said: “In the UK, environmental crimes are not a priority for the Government or for the national and local policing… The UK legal system provides neither a specialised legislation concerning the environmental organised crime nor, more generally, legislation dedicated to the organised crime.”

In 2021, the UK introduced the Environment Act giving government powers to set new binding targets covering air quality, water, biodiversity, and waste reduction.

But given environmental law charity ClientEarth says the act “falls short of the world-leading ambition that the government initially set out to ensure”, it may be necessary to look beyond legislation to effect meaningful change.

It is – says Simon Zadek, Chair at Finance for Biodiversity Initiative (F4B), which aims to increase the materiality of biodiversity in financial decision-making – incumbent upon investors to pressurise financial service providers into taking a stronger stand against laundering the proceeds of environmental crime.

Zadek says: “Our banks and pension funds benefit from environmental crimes as they unlock low-cost ecosystem services to the business in which they invest. Today’s anti-money laundering rules simply ignore this unintended route for turning the proceeds of crime into legal financial flows.”

F4B’s January 2022 report, ‘Breaking the Environmental Crimes-Finance Connection’, argues that financial institutions can do more to address the occurrence of environmental crime in their financial value chains by improving due diligence.

Zadek says that alongside strengthening anti-money laundering rules, “the faster way up the mountain is to establish new mechanisms for ensuring environmental crime-free value chains, building on comparable experience in addressing conflict diamonds and other unacceptable practices”.

Imminent litigation

Zadek argues that while financial institutions have shown willingness to tackle risk from illegality in other areas of their value chain, including in response to laws against financing terrorism introduced over the last two decades, environmental crime is yet to garner the same consideration.

“When it comes to activities that constitute real risk to investors, [financial institutions] demand that investee companies demonstrate they’re not thieves and crooks and that they’re not linked to thieves and crooks.  That just doesn’t happen as much with nature crime,” Zadek says.

However, he says that CEOs of “serious” financial institutions do want to eradicate environmental crime from their value chain, but not enough of them believe it is a big enough issue to warrant taking a leadership position.

“Number one, that’s because [environmental crime] hasn’t really become a public campaigning issue. Number two, there has been no litigation in this space yet,” Zadek says.

He emphasises the ‘yet’ and predicts that financial community will soon be on the receiving end of legal action about alleged profiting from environmental crime.

“We are just a few steps away from one or other public interest groups taking this to court arguing that a financial institution is benefiting from environmental crime. There will be an indigenous group in the courtroom along with the public interest NGO.”

Zadek says the finance sector fails to prioritise environmental crime because they believe it is law enforcement’s responsibility to take control, rather than that of the investment community.

However, he is quick to dismiss the argument.

“Some of the most progressive financial leaders believe this isn’t their issue, and our response is simple. First, [financial organisations] are incentivising the problem. Second, you may be benefiting from the crime and that makes you complicit. Third, we need to use the power of the financial community to make changes that regulators in countries find difficult. Environment ministries in nature-intensive countries don’t always have the political weight to enforce good environmental regulations.”

He continues: “We don’t feel shy that the financial community should be part of the solution rather than stepping back and saying somebody else’s problem.”

Cutting off supply

F4B wants to see financial institutions carry out a root-and-branch assessment of their value chains to identify where they may be inadvertently facilitating environmental crime, and ultimately cut off that supply.

“If they were applying the correct due diligence mechanisms then the financial oxygen that encourages environmental crime would be partly blocked off,” says Zadek. “For example, a beef company will no longer be granted the finance to buy cattle from farmers who farm on illegally deforested land. Then gradually, the financial value of illegal deforestation goes down.”

Without financial institutions introducing such due diligence, notes Zadek, regulators are unlikely to implement stronger anti-money laundering regulation focused on environmental crime.

“The regulators are under a lot of pressure not to add too much cost to financial institutions. If a small group of leading financial institutions stand up to be counted and say, ‘we do not believe any nature crime should be in our value chain and as a group we are going to develop due diligence mechanisms that can be widely adopted’, that will ensure that all financial institutions follow suit. If that work begins to happen, then the regulators will have more appetite to step in because they see that it’s possible and that it’s not too expensive.”

The FATF 2021 Money Laundering from Environmental Crime report supports this sentiment, recommending that countries should consider establishing and strengthening public/private sector dialogue to share risk information, and organisation or industry-led initiatives to strengthen due diligence of supply chains and their financial flows”.

Public pressure

Zadek says financial institutions should be ready for their investors and the wider public to demand greater effort to stem environmental crime.

“There are lots of ESG issues that are not very public-friendly in terms of getting people’s attention, but the idea that your neighbourhood bank is financing institutions that are part and parcel of destroying the Amazon is something that will catch people’s attention,” he says.

F4B has a three-to-five-year mission to ensure financial institutions are addressing nature crimes in a more systematic way.

Zadek admits this is ambitious but says there are “no practical impediments in the way”.

“In our discussions with leading figures from the financial community, we accept that this is not going to be a piece of cake, but it should be relatively easy to pull together a coalition of financial sector leaders to tackle environmental crime. I am not one to make big bets, but I do believe this is an area whose time has come.”

Finance for Biodiversity recommendations for tackling environmental crime

  1. Improve the empirical evidence of the breadth and depth of the links between environmental crimes and entirely legitimate financing providers, and the impacts of such links in terms of environmental effects and arising benefits to financial institutions and the organisations they fund.
  2. Ensure that emerging frameworks to advance the quality of financial institutions’ environmental-related risk assessment and reporting – such as the Taskforce for Nature-related Financial Disclosures – take account of and prioritise their importance in underpinning effective environmental crimes-related due diligence.
  3. Explore the merits and implementation options in advancing requirements for financial institutions to demonstrate their financing value chains are free of environmental crimes and any beneficial flows associated with them. This should include consideration of both voluntary actions and standards, and the potential for regulatory measures, perhaps in the first instance linked to emerging due diligence requirements regarding deforestation.

Source: Finance for Biodiversity Initiative

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