At a cost of up to $258 billion a year, green crime can no longer be ignored.The United Nations estimates that environmental crime is rising between five and seven percent annually — that’s two to three times the rate of the global economy. Both the Financial Action Task Force (FATF) and the latest European Money Laundering Directive (6MLD) have acknowledged the threat such criminal activity poses to financial institutions (FI) and have indicated it will be a future focus for enforcement actions. What does green financial crime look like and how does it affect your compliance program if you are an FI or an investor?
Green crime is a significant threat to peace, development, and security that affects everything from the air we breath to the food we eat. Right now we are feeling the reality acutely: The origins of the coronavirus pandemic have been traced back to the pangolin, the most trafficked mammal in the world.
The UN describes green or environmental crime as:
“Illegal activities harming the environment and aimed at benefiting individuals or groups or companies from the exploitation of, damage to, trade or theft of natural resources, including serious crimes and transnational organized crime.”
Common examples include waste trafficking, illegal fishing, logging and mining, wildlife trafficking, and pollution crime. Traditionally environmental crime was seen as a lower risk activity for criminal networks as governments around the world ranked it as a lesser priority behind drugs, counterfeiting, and human trafficking. But a new level of scrutiny has brought this criminal activity into the spotlight. Global networks of criminals are using increasingly sophisticated techniques for ill gain.
The Global Response
Historically, there have been many gaps that exist in state-level responses to environmental crime, including a lack of knowledge, legislation, international cooperation, and governance. But a growing global awareness is now being reflected in increased policy and regulation. Interpol has a dedicated Environmental Crime Unit, FATF priorities for 2020 now include a focus on illegal wildlife trade, and the expanded list of predicate offenses under 6AMLD now includes environmental crime mirroring the EU’s priorities.
Further, businesses are increasingly faced with investors who are more aware of and driven by sustainable investment goals. The coronavirus pandemic has accelerated the shift toward new approaches to investing with global sustainable funds seeing inflows of $45.7 billion, bucking wider market trends.
How Can Compliance Officers and Investors Mitigate Risk?
One such example and threat involves organized crime groups who stand to make significant profits from their activities and look to launder their ill-gotten gains to conceal their criminal activities. Often cash-heavy businesses, these criminal groups utilize complex supply chains to move goods to meet global demand. Red flags include utilizing shell companies in tax havens and creating elaborate beneficial ownership structures to hide their true identities and illegal activities. It is also thought that criminals create shell companies to act as shipping and logistics agents to send and receive products and use multi-jurisdictional accounts to conduct complex cross-border transactions.
Disrupting the criminals responsible for green crime requires careful consideration from compliance professionals. Robust due diligence practices that are applied consistently are an essential first step in identifying red flags when onboarding new customers. Environmental, social and governance (ESG) risks must also be evaluated to verify and validate claims relating to environmental standards and regulations. In addition, a detailed look at beneficial ownership and sources of wealth will reveal the true identities and activities behind complex business structures. Compliance teams will benefit from a risk-based approach, applying enhanced due diligence to higher risk industries such as logistics or those linked to natural resources.
For investors concerned about green financial crime, IntegrityRisk is bridging the current gap in the marketplace by focusing the risk, compliance, and due diligence lens on the world of impact investing through ImpactCheck. We’ve teamed up with FinClusive to transform sustainability risk management through commercially oriented, evidence-based impact risk assessment, analysis, and reporting.
Reach out to us today to discover how we can identify potential signs of green financial crime.