A Guide to Anti-Money Laundering for Crypto Firms
“The world is being dredged of its natural resources, with much of what we rely on for our livelihoods at risk from a new threat: environmental crime.” – Interpol, The Rise of Environmental Crime
Environmental crime has become widely known as one of the world’s most profitable crimes. A recent report by the global anti-money laundering and counter-terrorist financing (AML/CFT) standard setter, the Financial Action Task Force (FATF), found that environmental crime or “green crime” generates between USD$110 to $281 billion annually. It has been linked to transnational organized crime networks, feeds and is enabled by corruption, converges with crimes such as drug, arms and human trafficking – often sharing the same transhipment routes – and finances modern slavery and terrorism. An Interpol report found that environmental crime has become the largest financial driver of conflict. With countries committing to meet the UN sustainable development goals (UNSDGs), pledging to halt climate change, reverse biodiversity loss and protect our planet at COP26, financial regulators will soon be on the case. It is therefore essential that firms prioritize preventing and detecting green crimes.
But what can firms do to identify and manage environmental crime risks?
- Understand what constitutes an “environmental crime” in your countries of operation
Many countries have introduced legislation around environmental crimes. In Europe, countries had to transpose the 6MLD by 21 June 2021, which includes a new predicate offense of environmental crimes as set out in EU Directive 2008/99/EC or in Directive 2009/123/EC, including inciting, aiding, and abetting environmental crime offenses. The US’s Eliminate, Neutralize, and Disrupt (END) Wildlife Trafficking Act (2016) also contains a list of environmental criminal offenses.
More generally, these can be categorized as follows:
- Destruction and trade in protected flora and fauna
- Illegal, unreported and unregulated fishing
- Forest crimes and illegal logging including the destruction of protected habitat
- Release, dumping transhipment of dangerous substances, pollutants, radioactive, electronics or hazardous waste
- Production of ozone depleting substances
- Ship-source pollution
- Trade in or exploitation of natural resources in the extractive industries, particularly in conflict zones or without appropriate permits or licenses
- Carry out environmental crime risk assessments
Most countries require firms to carry out an AML/CFT business risk assessment which should remain up-to-date and relevant to the nature and size of the firm. Firms should ensure that their risk assessments include an understanding of how their business operations, employees, clients, industries they service, products, countries of operation, and delivery channels increase the firms’ exposure to the different types of environmental crimes referenced above. The risk assessment should lead firms to update policies, processes, and systems with a list of higher risk industries, jurisdictions and client types identified as exposing the firm to heightened environmental risk as well as transactions that could increase the risk to firms of laundering the proceeds of environmental crime.
- Train your staff on environmental and wildlife trafficking crime
Front line staff remain a company’s first line of defense to identify and report suspicious activity. While regulatory obligations related to environmental crime should be included in generic AML/CFT training to all staff, targeted training on environmental crime is key for employees who may be more exposed to environmental crime risks. This includes individuals working in trade finance, the financing of extractives, logging, mining, chemical waste disposal, electronic production and waste, fishing or with large portfolios of commodity trading companies in emerging markets. Training should include case studies, red flags and typologies as well as an overview of their policy and legal obligations working in the regulated sector. This will ensure firms have informed and vigilant staff who may be able to detect when their clients are engaged in environmental criminal activities or when accounts and products may be misused.
- Adopt enhanced Know Your Customer & Know Your Business measures for higher risk clients
While all obliged firms have KYC and KYB requirements, how due diligence is carried out may differ for clients presenting a higher risk of environmental crime. For example, firms may wish to look at annual reports to identify a client’s environmental footprint and review sustainability statements. When financing extractive projects, they should obtain copies of required licenses and understand land ownership information. For customers engaged in trading in raw materials, particularly those operating between source and demand countries, firms should consider reviewing trade data of both countries where available to identify any potential discrepancies. Firms may also wish to ask their customers for attestations that their products are legally harvested and traded. Where greenwashing – a claim to a product’s ecological credentials – is a concern firms should ask for underlying data that substantiates claims made. You may wish to identify your client’s target industry and suppliers, as well as who they use to ship goods, flags used by the vessel and if they have the relevant licenses to carry out regulated, licensed, or protected activities such as fishing, mining, or logging. For certain higher risk clients, it is worth asking for a copy of the environmental risk assessment if certain types of commodities are being financed from emerging markets.
- Monitor adverse press and media at onboarding and on an ongoing basis
It is essential that firms continue to carry out adverse press searches at onboarding and on an ongoing basis. The FATF report revealed that most financial intelligence units (FIUs) indicated that media articles, some based on civil society investigations and including those flagging potential illegal activity, triggered the submission of suspicious activity reports (SARs) by firms. Firms should speak with data service providers to understand what additional sources are being collected and if they provide and tag adverse press that covers environmental crimes. Firms may also wish to use open source intelligence and investigative techniques (where resourcing is available) to identify any grand scale ecological changes that may indicate the exploitation of natural resources where their clients operate, including the use of geospatial data. Lloyd’s shipping data could also be used to identify shipping and fishing concerns where firms have the expertise to do so.
- Update transaction monitoring systems to reflect environmental crime illicit finance flows
Firms should speak with their transaction monitoring providers to identify what modules or rules are available to detect laundering of the proceeds of environmental crimes. When a client has been identified as being potentially linked to criminal activity, their account should be flagged for enhanced transaction monitoring to identify any potential suspicious transactions for further analysis and to help determine what should be reported to local financial intelligence units (FIUs). The FATF environmental crime report contains a 4-page annex of risk indicators for environmental crimes and illicit wildlife trafficking that firms should familiarize themselves with.
- Investigate suspicious activity and transactions and submit suspicious activity report (SAR)
Given the nature of their business, financial services firms may be unwittingly financing environmental crime via providing loans, credit, trade, project or infrastructure financing. It is essential that when firms identify suspicious activity, they gather and provide as much financial intelligence and information to their local financial intelligence units (FIUs). Where firms choose not to file a SAR when investigating a suspicion of environmental crime, they must document why they do not believe that the activity is linked to a crime. Firms must keep records of these submissions in line with the local required time limits.
Produced in collaboration with Denisse Rudich, Director at Rudich Advisory & Chief Compliance Officer and Founder of Elementary B
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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