The relationship between money laundering and environmental crime trafficking and examples

There is money laundering in environmental crime. Estimates of the size of the financial flows from environmental crime vary widely, but evidence suggests that the revenues amount to hundreds of billions of dollars annually, affecting all areas. Environmental crime, with the exception of waste trafficking, is often committed in resource-rich, underdeveloped and middle-income countries, with revenues coming from richer, industrialized economies.

Regional financial centres around the world play a major role in providing funds for these illegal activities. They also play a major role in laundering the proceeds of these crimes, due to the irregular money transfers associated with environmental crime.

Examples of money laundering in environmental crime

Money laundering and trafficking in environmental crime are two interlinked issues that pose significant challenges to global security and sustainability. Environmental crime includes activities such as illegal logging, wildlife trafficking, illegal fishing and hazardous waste dumping. These activities generate significant profits for criminal organizations, who often use money laundering techniques to hide their illicit profits.

Money laundering is the process of concealing the origin of illegally obtained money by making it appear as if it came from a legitimate source. Criminal organizations use money laundering to avoid detection by law enforcement and to integrate their illegal proceeds into the legitimate economy. Environmental crime is often lucrative, and the profits generated from these activities are often laundered through legitimate businesses and financial institutions.

Involvement of frontline companies

Criminals blend profits from illegal logging, mining, and waste smuggling with their regular business accounts through the use of front companies. These front firms often participate in numerous transactions with small individual profit margins in the environmental industry. Such front firms range in sophistication from basic schemes with obvious idiosyncrasies to sophisticated companies with large legitimate operations, making it difficult for law enforcement and the business community to distinguish between legal and illegal activities.

Criminals occasionally use front companies in other cash-intensive industries outside of the resource industry. For example, two species of rosewood found in Madagascar are on the verge of extinction. Authorities point to the emergence of organized and sophisticated smuggling operations, and the inextricable link between illegal logging and political stability and corruption. There have been 76 cases brought to court involving an estimated US$160 million in illicit financial flows between 2009 and 2020.

The widespread use of bank transfers, actual money transfers from Madagascar to the location of sellers, and the repatriation of foreign currency related to export earnings have all been identified by Madagascar as important payment techniques for illegal logging. Criminals often mix money from legal, commercial enterprises, such as importing essential items, mining and exporting products, etc., with illegal earnings to commit money laundering. Authorities have identified the cash-intensive vanilla industry, the country’s largest export, as a channel for laundering illegal logging. In 2014, people purchased large quantities of vanilla to inflate prices to conceal the mixing of illegal profits with legal vanilla earnings.

Involvement in trade fraud

The use of trade-based fraud to conceal the movement of money across borders is another common feature of all environmental crimes, which includes the falsification of paperwork, particularly relating to the export and import of goods, and the fabrication of invoices and trade transactions to disguise the movement of money across borders. This can be particularly applicable to environmental crimes, such as the mislabeling of hazardous waste or protected timber to conceal their true meaning. The tendency to over- or under-declare transported items and the use of fraudulent specifications are common elements of trade fraud and trade-based money laundering or TBML activities.

Let’s look at this example. During a tax investigation in Italy, a global criminal organization was discovered and dismantled that was involved in the trafficking of illegal waste, tax fraud and money laundering.

A scrap metal company was the subject of an investigation by Guardia di Finanza, which revealed inconsistencies in the origin of the waste, the associated paperwork and the related invoices. The fabricated invoices totaled US$68 million. By falsifying fraudulent commercial transactions with other countries, proceeds of crime were transferred abroad and then sent back.

Involvement in the financial sector

All proceeds from environmental crime are laundered by criminals using the legal banking system. Examples of this include withdrawing funds obtained through wire transfers to a third party, while posing as payments for products and services, as well as investments and sponsorships. Due to the irregular financial flows related to environmental crime, regional financial centers and commodity trading and trade finance companies around the world play an important role. Some investments were made for shell companies that were recognized by government agencies, but did not carry out significant economic activities, thus concealing the real beneficial ownership.

For example, through Operation Diez Condores, a joint investigation between the FBI and the Chilean Investigations Police was able to dismantle a transnational criminal organization, or TCO, operating in Chile and involved in the transportation of illicit gold. The Chilean operation obtained gold from various illicit sources and worked with shady companies to produce false documentation about the composition and true origin of the gold.

TCO couriers flew the gold between Chile and the US on commercial aircraft and delivered it to NTR Metals Miami, a US refinery, which then sent money back to Chile via bank transfer as payment for the gold. Employers at NTR Metals were incentivized to acquire as much gold as possible as quickly as possible using a commission system.

While some of their activities were genuine, the TCO activities were responsible for the majority. After the investigation revealed that $80 million in gold shipments were being moved through various shell companies, the TCO members were detained in Chile in August 2016.

Involvement of shell companies

Case studies show that in addition to using front companies, criminals often use shell companies to pose as genuine services and payments related to the timber, mining or waste sectors. A shell company is a company that exists only on paper, with no physical location or employees, but may have a bank account, hold passive investments or be the legally recognized owner of assets such as vessels or intellectual property.

For example, a suspicious transaction report, or STR, detailing the financial transactions of a company operating in the metal and waste processing industry, but which had no functional organizational structure or any indication of registered economic activity, served as the basis for an investigation in Italy. Other inconsistencies included the fact that the previous owners were under investigation by the Public Prosecutor’s Office in 2015, that the shareholder had paid significantly less than market value for the company, and that they lacked the knowledge and expertise needed to operate in the highly regulated sector.

Investigations revealed bank statements of companies showing bank transactions that were interpreted as advance payments of bills by Italian companies. These companies were active in the same sector that had previously been investigated for tax evasion, unlawful disposal of metal waste and laundering of criminal profits of the mafia. Some of these companies have been investigated by the Salerno Public Prosecutor’s Office for criminal involvement in the export of waste to East Asian countries.

Investigations revealed a large network of real individuals who traded capital inflows on prepaid cards and withdrew money, including the ultimate owners of these organizations. This was revealed by observing that most of the debit transactions in the reported corporate account statements included cash withdrawals and wire transfers that were organized for the benefit of foreign organizations. The total amount of money movements involved was approximately US$14.2 million.

Final thoughts

Money laundering in the environmental crime trade has several negative consequences for society and the environment. Environmental crime has a significant impact on biodiversity, natural resources and the overall health of the planet. By enabling the laundering of the proceeds of these activities, money laundering perpetuates the cycle of environmental degradation and undermines efforts to promote sustainable development.

In conclusion, the link between money laundering and trafficking in environmental crime underscores the need for a comprehensive and coordinated global response. This response should include measures to strengthen law enforcement and regulatory frameworks, enhance international cooperation, and promote public awareness and engagement. Only by addressing both money laundering and environmental crime can we effectively combat these interlinked threats to global security and sustainability.