Eastnets’ deputy CEO Deya Innab explores the role banks can play in stopping environmental crime.
To claim banks are playing a part in saving the world might sound far-fetched. Yet this is exactly what they can and must do. We’re not talking about executives putting on capes and coming to the rescue, superhero style. Rather, the organizations they run have a responsibility to stop people from benefitting economically from environmental crimes.
This includes over-fishing, deforestation, and other ventures that threaten ecosystems, decrease biodiversity and increase carbon dioxide in the atmosphere.
There are three factors driving this. Firstly, it’s the right thing to do from an ethical perspective. Banks cannot idly stand by when the COP26 clearly stated that global economies need to adapt to protect communities and natural habitats.
Secondly, consumers now demand action. What’s more, they’re willing to pay for it. About 60 percent of people will pay more for sustainable banking in the US, UK, and Germany. But perhaps most compellingly, the banking rules have changed. It’s no longer just the ethical thing to do, but a legal requirement.
In November 2021, the US Financial Crimes Enforcement Network (FinCEN) urged banks to take action. It said, “Global environmental crimes are estimated by some international organizations to generate hundreds of billions in illicit proceeds annually and now rank as the third largest illicit activity in the world following the trafficking of drugs and counterfeit goods.”
To stem the flow of cash from such undertakings, FinCEN demanded that financial institutions should report suspicious activity to the regulator to allow investigation and action. This includes details of how illicit products were acquired and paid for, among other things. They also need to provide the names and contact details of the suspected criminals.
This isn’t just a US initiative. The EU issued a notice to stop forest degradation at around the same time. And the Financial Action Task Force (FATF) issued a report in July 2021 that said its members must, “Strengthen their operational capacity to detect and pursue financial investigations into environmental crimes.” As the global money laundering and terrorist financing watchdog, FATF is the leading organization in this field.
In short, banks are being asked to literally help save the world in the wake of the COP26 summit in Glasgow. And the risks of non-compliance are high. While there has been no enforcement action taken specifically in relation to environmental crime, FinCEN once fined Capital One $390 million for AML compliance failures. It might only be a matter a time before a fine is issued for allowing crimes against the environment.
Rising to the challenge
But how can financial institutions begin to deal with these demands? How are they expected to monitor, spot, and report on payments linked to illicit trades of which they have little understanding?
The first step is to take preventative measures and ensure it’s a priority across the sector. This requires a greater focus on beneficial ownership (BO) information. To put it another way, banks need to be clear about how they will monitor who is benefitting from payments that pass through shell companies, trusts, or other legal constructions that can hide the proceeds of crime.
Secondly, there should also be greater dialogue and collaboration between the public and private sectors to ensure information is shared about risks. Public bodies should also consider money laundering from environmental crime in their work.
For example, it should be part of FATF’s regular Mutual Evaluations. These are reviews of each member country that assess how well FATF recommendations are being implemented to prevent financial crime. Finally, these bodies and authorities need sufficient powers and capacity to investigate and trace assets from suspected environmental crimes.
Once these industry-wide steps have been taken, there are also practical actions financial institutions can take with their anti-money laundering (AML), trade-based money laundering (TBML), and watchlist screening solutions. These collect real-time and historical data about transactions. Then they centralize, correlate, and visualize it into a single, user-friendly interface that allows suspect patterns to be seen and concerns raised.
The key is being able to spot the transactions that may come from environmental crime, which are often linked to other crimes, such as corruption, terrorism, tax evasion, smuggling, illegal wildlife trafficking, and modern slavery.
To achieve this, users need to understand the risks associated with certain industries and locations. Agriculture, mining, and construction sectors might score highly on a risk register. As might businesses operating in the rain forests of South America, or gold-rich areas of the Democratic Republic of Congo.
Taking this a step further, it’s important to create scenarios that help software spot potential crimes. For example, the technology could be trained to look for payments from firms in regions where deforestation is taking place, which has spent a lot with plant machinery manufacturers.
This could be an agricultural company based in Brazil’s Amazon region investing in bulldozers, diggers, and other vehicles. There are plenty of reports available to help develop a picture of what to look for. WWF’s Deforestation Fronts report provides examples of industries that cause deforestation and the locations where it occurs most.
Another scenario could be monitoring for payments to trawler firms that occur out of regulated fishing seasons or in areas where landing catches is forbidden, such as near coral reefs. At the same time, users also need to create lists of goods that come from trusted sources to avoid stopping legitimate payments.
This is where further action is required. In fact, a recent report from the organization, Finance for Biodiversity, suggests there is an urgent need, “To establish the breadth and depth of linkages between financing and environmental crime.” It also says, “There may be merit in establishing an online, digital map highlighting the specifics of this relationship.”
With these systems in place, it’s also vital to ensure leaders drive cultural change. They must make it clear to staff that striving to halt environmental crime is a priority that must be given attention, from a compliance and ethical perspective.
This is vital because the sector now has a remit and responsibility to save the world. And the environmental clock is ticking.
