How Environmental Crimes Fuel Trade-Based Money Laundering?

Did you know that environmental crimes, including mining, logging, fishing, illegal wildlife trade, and waste trafficking, are currently known to be the fourth most lucrative criminal activity in the world? 

You’ll be surprised that these crimes are growing faster than the global economy, approximately at an annual rate of 5-7% as per the Earth.Org.

Their rapid expansion and growth are overtaken by human trafficking as the third largest criminal sector in the world today, with drug trafficking and counterfeiting at the top.

These criminal activities are often executed by disregarding quotas and other requirements, and a lot of times, they are planned through concessions or contracts achieved by threats or coercion.

Run by sophisticated criminal networks, environmental crimes not only cause permanent damage to the planet and the ecosystems but also lead to numerous financial misconduct, including money laundering, bribery and corruption.

Environmental crimes, also known as ‘green crimes,’ include deforestation and illegal logging, which lead to endangerment of species through poaching, giving rise to exacerbated climate change.

These activities leave a trail of destruction and funnel economic resources into the shadow economy due to weak legal frameworks that further fuel exploitation.

As per the FATF report, illegal land clearing and illegal logging, both of which come under the forestry crimes category, cause an estimated loss of USD 51 to 152 billion annually

In both academic and industry circles, not much is discussed about the complex financial networks that enable these criminal operations, with trade-based money laundering (TBML) turning out to be the key mechanism.

For this blog, we will be discussing the direct connection between environmental crime and TBML and how global trade systems are exploited to launder proceeds from ecological destruction and sustain criminal enterprises.

What Exactly Are Environmental Crimes?

Any crime that exploits natural resources, violates conservation laws, and harms the environment for the sake of financial gains is known as ‘environmental crime.’

Some of the examples include

• Waste trafficking: where hazardous materials are illegally dumped or shipped to developing countries.
• Illegal wildlife trade: which threatens species like elephants and rhinos.
• Deforestation: which destroys rainforests for timber or agriculture.

According to current estimates from INTERPOL and UNEP, criminals steal natural resources valued between USD 91 billion and USD 258 billion yearly, robbing nations of potential income and development prospects.

The implication of environmental crimes is overwhelming. In terms of ecology, it disrupts ecosystems, exacerbates climate change, and accelerates biodiversity loss.

Their impact in terms of human societies is also alarming, as they exploit vulnerable populations, fuel corruption, and deprive local communities of essential resources.

Such crimes don’t occur as isolated incidents; in fact, they are operated by large, organized networks of criminal organizations that function on a transnational scale.

The organized groups utilize the trade-based money laundering (TBML) tactic to launder their profits to fund their illegal operations.

These networks are usually also involved in and run other criminal operations, such as human smuggling and drug trafficking.

What is Trade-Based Money Laundering (TBML)?

Disguising ill-gotten gains by exploiting international trade transactions is what is known as trade-based money laundering (TBML).

To bypass the regulatory mechanisms, criminals utilize apparently legitimate-looking trade mechanisms to hide, clean, and move money gained from illegal businesses.

Over-invoicing is the most common method of TBML where goods are overpriced to transfer excess funds. Undervoicing means goods are undervalued to downplay declared income through false documentation, such as forged invoices or misrepresentation of goods.

These strategies make detection extremely challenging for the authorities as they take advantage of the intricate structure of the international trade systems.

Transnational trade networks and different regulatory frameworks are what enable the TBML, leading it to occur on a massive scale. Corrupt intermediaries, offshore accounts, and shell companies are used as a legal front to obscure illegal activities.

TBML is currently one of the significant methods of money laundering and enables the laundering of hundreds of billions of dollars annually.

It’s primarily used for laundering illicit profits from waste trafficking, illegal logging, and wildlife trafficking. For example, timber or wildlife products are often mislabeled or undervalued to mask their origin and illicit nature.

Profits made from TBML enable criminals to reinvest their ill-gotten gains into other illegal activities.

Challenges in Combating Environmental Crime and TBML

The first challenge is the lack of awareness among the stakeholders, including law enforcement, regulatory authorities, and businesses.

Not many are aware of the tangled connection between environmental crimes like deforestation or illegal wildlife trafficking and their financing through TBML schemes, which hinders enforcement efforts and effective policy making.

Lack of transnational cooperation led criminals to exploit regulatory weaknesses and build sophisticated networks of shell companies and supply chains by using offshore accounts and falsified documents to bypass detection and intervention.

Moreover, laws governing both environmental crime and money laundering are either outdated or poorly enforced in a lot of countries.

Corruption within enforcement agencies can further sabotage efforts to combat transnational crimes, which directly enables perpetrators to continue operating with impunity.

Finally, technological gaps bring in their own set of problems. Despite progress in data modeling and monitoring tools, the global trade system’s sheer complexity makes identifying TBML patterns arduous.

Many regulatory bodies lack the technical infrastructure and expertise to analyze the vast amounts of trade data effectively.

Money launderers and transnational criminal gangs, meanwhile, often take advantage of advanced technologies and encryption to stay ahead of detection efforts.

So, what’s the way out?

Well, overcoming all these problems necessitates a combination of increased awareness, better international cooperation, powerful regulatory frameworks, and investment in cutting-edge technology.

Without resolving these impediments, the illegal proceeds of environmental crimes will continue to fuel global corruption and ecological damage.

What’s the Connection Between Environmental Crime and TBML

Trade-based money laundering is acutely intertwined with all environmental crimes, including wildlife crimes, illegal logging, pollution, waste trafficking, and illegal fishing.

The ill-gotten gains obtained from all these crimes leverage TDML and sustain as well as expand their operations.

One prominent example of this connection is illegal logging. Using false invoices to hide the profits made from the illegally harvested timber is the prime method used by organized criminal groups.

They obscure the origins of their ill-gotten gains and evade taxes by misclassifying timber shipments or underreporting the original value.

The illicit proceeds are then funneled through a network of shell companies, bank accounts, and trade intermediaries, which makes it completely challenging to trace the money back to its source.

In terms of wildlife trafficking, endangered species like exotic birds, pangolins, and rhinos sold on underground black markets also utilize trade-based money laundering to hide their substantial profits for traffickers.

False documentations and shell firms are again employed to launder their funds. For instance, a shipment of illegal animal products disguised as legitimate goods may use fraudulent invoices to justify transactions.

This not only facilitates money laundering but also allows traffickers to reinvest in further criminal activities.

According to World Wildlife Fund’s (WWF), since the 1970, populations of vertebrates including birds, mammals, amphibians, fish and reptiles have gone through a catastrophic drop of 69% on average.

Criminal organizations rely on sophisticated global networks to exploit international trade systems.

They manipulate loopholes in customs regulations, take advantage of inconsistencies in cross-border enforcement, and use advanced technologies to stay ahead of detection.

TBML allows them to move large sums of money with minimal inspection, which helps make sure that the illicit proceeds of environmental crime remain hidden.

The global nature of trade facilitates these crimes. With thousands of shipments crossing borders daily, monitoring every transaction is nearly impossible.

Without stronger oversight and partnership among nations, TBML will continue to fund and sustain the devastating impacts of environmental crime worldwide.

Key Regulations and Global Initiatives

International regulations and initiatives play an important role in combating the intertwined challenges of environmental crime and trade-based money laundering (TBML).

The Financial Action Task Force (FATF) offers decisive guidelines, such as its Recommendations, which detail best practices for combating money laundering, including TBML.

These recommendations emphasize customer due diligence, trade monitoring, and international cooperation to disrupt illicit financial networks.

Additionally, the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal focuses on preventing illegal waste trafficking, a significant form of environmental crime.

Global collaboration is indispensable in this fight, with powerful institutions like INTERPOL and the United Nations Office on Drugs and Crime (UNODC) spearheading efforts.

INTERPOL aids in the sharing of  intelligence and joint operations to dismantle criminal networks, while UNODC provides technical assistance and policy guidance to countries battling TBML and environmental crimes.

These bodies work very closely with national authorities to bridge regulatory gaps and strengthen enforcement. One remarkable sensation is Operation Thunder, coordinated by INTERPOL and the World Customs Organization.

This global initiative disrupted numerous wildlife trafficking and hazardous waste networks linked to TBML.

When the resources and intelligence from over 100 countries were merged, the operation resulted in the seizure of vast amounts of illegal goods and the dismantling of transnational criminal networks, showcasing the potency of international collaboration.

Tech Today & Environmental Crimes

Advancement in modern technology has been groundbreaking to counter trade-based money laundering red flags (TBML) and environmental crime, as now one can leverage innovative tools for prevention, monitoring, and detection.

As in other areas, data analytics and artificial intelligence have taken over to pinpoint suspicious trade patterns in transaction data and anomalies that stand out from regular data.

AI aids financial institutions and regulators in detecting under-invoicing, over-invoicing, and other irregularities by means of scanning through vast datasets, which helps indicate TBML activities linked to environmental crimes.

This is particularly useful in monitoring the production chain of goods and making sure that they are sourced ethically and not tied to illegal practices such as wildlife trafficking or deforestation.

How AML Watcher Supports the Fight Against Environmental Crimes

Environmental crimes are often not considered as financial crimes and hence, not made part of public policy in any country.

Despite billions of dollars lost every year due to environmental crime, countries around the world still deal with it like a conservation issue rather than categorizing it as a serious financial crime.

Even the countries that do not have domestic natural resource industries must pay attention to environmental crimes and trade-based money laundering risk.

Combat TBML using AML Watcher, with access to over 21 million Politically Exposed Person (PEP) profiles across 235 countries, 1,300 official watchlists, and 5,000 news sources for adverse media screening.

Adverse Media Screening

AML Watcher screen international and national news sources to pinpoint allegations or news relating to waste trafficking, logging, and illegal mining that may get missed on government sanctions and watchlists.

AML Watcher offer proactive insights into environmental crimes and flag individuals and entities that get negative coverage in the media.

Custom Risk Scoring & Continuous Monitoring

AML Watcher offers custom risk-scoring features to assess and manage risks linked with individuals engaged in environmental crimes in a right way. And provide a continuous monitoring feature to adapt to ever-evolving threats.

Transaction Monitoring

AML Watcher will help you monitor international transactions and spot or flag anomalous transactions in high-risk jurisdictions that may comprise common characteristics of TBML.