Money laundering in environmental crimes

The FATF published a report in July 2021 titled “money laundering from environmental crime”. This study reinforces FATF’s understanding of the money laundering risks in this criminal sector, highlighting the need to continue working on this issue.

The need to focus on environmental crimes arises not only from the document published by the FATF earlier this year, but also from organizations such as the G7, G20, and the UN, which have highlighted the necessity of addressing these crimes and the financial flows resulting from them. For example, the UN General Assembly in December 2019 urged Member States to classify the illegal trafficking of endangered wildlife species and other environmental crimes, such as timber trafficking, precious metals, gemstones, and other minerals, as “serious crimes”.

The EU adopted a Directive on environmental protection through criminal law back in 2008. The Commission emphasized, through the EU Strategy against Organized Crime 2021-2025, the need to pay special attention to environmental crimes. Therefore, the Commission will propose an amendment to this Directive “to clarify the scope of environmental crimes, provide more precision regarding penalties, facilitate the use of effective investigative tools, and promote cross-border cooperation and information exchange.”

FATF Report

The FATF states that environmental crimes generate between $110 billion and $281 billion annually. Moreover, environmental crimes are the third most lucrative criminal sector, after drug trafficking, counterfeiting, and smuggling. This figure includes profits obtained from environmental crimes such as: forestry crimes, illegal mining, waste trafficking, illegal wildlife trade, illegal extraction and oil theft, and crimes related to illegal fishing.

In its report, the FATF outlines various methods used by criminals. For example, they use “shell” companies to combine legal and illegal profits. These companies are often linked to the natural resource sector—timber, waste, or mining companies—and conduct numerous transactions with low profit margins.

On the other hand, the report notably emphasizes the special attention FATF gives to PEPs— or politically exposed persons. The report points out that in resource-rich countries, the issuance of exploitation licenses can be subjected to opaque processes vulnerable to corruption. Therefore, FATF highlights the importance of monitoring PEPs and how complex business structures connected to PEPs or their relatives pose challenges in combating illegal mining and logging.

Finally, the FATF emphasizes that such environmental crimes are often linked to other criminal sectors. For instance, corruption not only provides access to resource exploitation but can also significantly aid in the export of raw materials. There are also indications of connections with human trafficking, which supplies the necessary labor for mining and logging activities, and with terrorism, as the latter uses natural resources as a funding source.

The UN in 2014 already warned about how corruption was significantly impacting the proliferation of illegal sand mining, one of the most exploited natural resources.

Solutions Proposed by FATF

To tackle this problem, the FATF proposes a series of good practices:

1. Coordinated risk assessments involving environmental and anti-money laundering agencies;
2. Clear and consistent legislation;
3. Guidelines for national cooperation;
4. Joint working groups for information exchange and asset recovery.

Regarding risk assessments, the FATF notes that “there is a common misconception that a lack of national natural resources or environmental crimes means there is no need to assess the risk.” This leads to insufficient resource allocation and institutional collaboration, resulting in increased criminal activity and consequently money laundering.

Moreover, the study indicates that there are certain gaps in the legal frameworks addressing environmental crimes, hindering countries’ responses to such crimes and international cooperation. Therefore, the FATF proposes solutions such as implementing transparent monitoring systems for resource extraction licenses, or administrative frameworks where officials have clear enforcement powers to help mitigate the excess of false documentation or corruption.