Yesterday, governments, civil society representatives, academics and advocates from around the world began gathering in Dubai for the 28th meeting of the Conference of Parties (COP28), the United Nations’ annual climate change conference. At the top of this year’s priorities will be fast-tracking the energy transition, climate finance and inclusivity.
But while fast-tracking climate finance for a sustainable and inclusive transition, state parties must not neglect the illicit finance risks that will inevitably arise. As Creon Butler, Sean Hagan and Dominic Martin argue in a 2022 paper for the Peterson Institute for International Economics, climate finance faces significant corruption, fraud and embezzlement risks, because the very necessity of the financing speed and scale create incentives to just ‘get the money out there’ and to see transparency, due diligence and safeguards as a secondary consideration.
Public infrastructure projects, for which the climate transition will be heavily reliant, face acute corruption risks, which can be exacerbated by financing scale and speed. They emphasize that treating corruption risks as secondary considerations will undermine the long term effectiveness of climate financing, and with only a small window left to get the climate transition right, there is little time to learn from mistakes. Indeed, we have already seen examples of these risks such as the infiltration of the Italian renewable energy sector by organized crime groups. While these instances pale in comparison to the levels of corruption seen in the fossil fuels industry, the climate transition is so existentially important that we must make every effort to protect it from corruption which would impede its purpose. We cannot afford for green energy to repeat the corruption problems found in the fossil fuels industry.
One way to help protect the financial integrity of the climate transition is to learn from progress made (as well as identifiable gaps) in addressing illicit financial flows in the environmental crime context. While the climate transition and environmental protection sometimes raise separate issues and require distinct solutions, the two areas run in parallel and are mutually reinforcing – preventing climate change helps prevent environmental degradation and vice versa. Illicit financial flows and corruption cost these initiatives both money and time, and their prevention must be recognized as a core policy goal. Lessons learned in one context can inform actions in the other, and underscore the importance of financial integrity in all environmental and climate pursuits.
Addressing illicit financial flows from environmental crimes
On October 26, the FACT Coalition launched its latest report, “Dirty Money and the Destruction of the Amazon: Uncovering the U.S. Role in Illicit Financial Flows from Environmental Crimes in Peru and Colombia” to a full room and online audience of civil society representatives, government officials and international policy makers. The report details the links between U.S. financial secrecy and a broad array of environmental crimes in Latin America. Drawing on interviews with government officials, activists, indigenous leaders, and anti-money laundering professionals from Peru, Colombia, and the U.S., the report lays out a comprehensive domestic reform agenda to help deny financial safe haven to environmental criminals.
Among numerous civil society and academic experts from Brazil, Peru and the U.S., the launch benefited from the presence of U.S. administration officials working at the intersection of financial and environmental crimes: Jimmy Kirby, Acting Deputy Director, Financial Crimes Enforcement Network (FinCEN) and Matthew Spivack, Senior Policy Advisor, Office of Terrorist Financing & Financial Crimes, U.S. Treasury Department. Together, they affirmed the critical importance of addressing illicit financial flows arising from environmental crimes, and the role of civil society organizations in partnering with government efforts to address the problem.
FinCEN’s Acting Deputy Director emphasizes addressing illicit financial flows in environmental crime and draws connection to climate change
Acting Deputy Director Kirby emphasized upfront in his remarks the critical importance of addressing the illicit financial flows that derive from environmental degradation: “environmental crimes result in significant harm to local ecosystems at a time when the world is marshaling its efforts to combat climate change and threats to biodiversity… the crimes are perceived to be low risk with the promise of high reward… [and] also deplete countries’ domestic resources.” The World Bank estimates that source countries lose $7-12 billion dollars per year from such activities, which are also closely connected to corruption, terrorist financing, money laundering, human trafficking and drug trafficking. These billions of dollars could instead be put toward the climate transition, protection of the environment, and other public goods.
The recommendations outlined in FACT’s report overlap with many of FinCEN’s priorities such as implementing the Corporate Transparency Act, which establishes a database of the true, or “beneficial,” owners of small legal entities such as anonymous shell companies. “Illicit actors, including those engaged in nature crimes, often use opaque corporate structures to facilitate their criminal activity,” said Kirby. “Simply put, successful implementation of the CTA in requiring reporting of beneficial ownership information will help untangle these opaque corporate structures, thereby allowing enforcement authorities to go after criminals and combat a range of illicit activities, including environmental crimes.”
FinCEN is also developing new approaches to combat these illicit activities, such as launching in 2023 the U.S.-South Africa Task Force to Combat the Financing of Wildlife Trafficking, which aims to protect the environment by preventing illicit funds from getting into the hands of criminals and terrorism organizations, and through the December 2021 FinCEN Financial Threat Analysis on wildlife trafficking and illicit financing.
Likewise, beneficial ownership information can also be directed toward integrity concerns in climate projects. These tools, however, can also be useful beyond helping detect explicit criminal activities in climate projects. For example, as Andres Knobel of the Tax Justice Network suggests in the ‘Uses and Purposes of Beneficial Ownership Data,’ beneficial ownership data can be used to ensure that promises of institutional investors to divest from fossil fuels are not circumvented by opaque legal structures, and to help consumers make informed decisions when seeking to make climate conscious purchasing decisions.
U.S. Treasury outlines increased environmental crime emphasis and the role of civil society
One key recommendation in FACT’s report is for the Treasury to develop an interagency strategy on environmental crimes and illicit financial flows. Matthew Spivak noted strong alignment between that recommendation and conversations currently occurring at the Treasury, which has recently undertaken a strategic review on both existing and experimental tools available to combat environmental crime. Treasury has also conducted extensive conversations with other U.S. agencies and civil society, with a view toward aligning its approach with emerging trends and threats in environmental crime.
Spivak also outlined an increased focus and coordination amongst government departments on the connection between environmental crime and illicit financial flows. In 2022, for the first time Treasury’s 2022 National Money Laundering Risk Assessment included risks associated with wildlife trafficking, and the need to improve understanding of illicit financial flows derived from the proceeds of wildlife trafficking. The 2022 Assessment also applies a risk-based approach to different types of AML measures that are put in place to arrive at a more effective overall strategy.
Sanctions are also part of the Treasury’s toolkit. While there are not currently specific sanctions targeting the perpetrators of environmental crimes, OFAC can leverage investigations and designations related to environmental crime when it connects to other crimes such as human rights abuse, environmental degradation, and transnational organized crime. Spivak highlighted Treasury’s sanctioning of two individuals and a network of entities they controlled for human rights abuses on fishing vessels engaged in illegal, unreported and unregulated fishing, in the first example of a company on the Nasdaq exchange being designated. The same logic could be applied to financial crimes in the climate space which have a similar nexus to sanctionable offenses.
Civil society organizations, with deep local connections and understanding of risks as they emerge, can play a key role in identifying wrongdoing and bringing such crimes to the attention of the enforcement authorities across jurisdictions. For example, Transparency International has done significant work both in examining corruption risks for the climate crisis and in cataloging instances of corruption with climate consequences.
Recommendations to U.S. Treasury on environmental crime
In seeking to address the U.S. role in harboring money from environmental crime, the FACT report features a number of other recommendations specific to the U.S. Treasury and FinCEN, including facilitating access for trusted foreign law enforcement agencies to beneficial ownership information under the CTA, closing down real estate loopholes, increasing technical assistance to foreign law enforcement partners and increasing the use of sanctions against environmental crime groups. FACT’s full list of recommendations are located here.
The U.S. still has a long way to go in finding, freezing, and ultimately preventing illicit financial flows associated with environmental crime. These same vulnerabilities also make the U.S. susceptible to illicit financial flows associated with crime in climate financing. Yet, as demonstrated by recent Treasury actions, progress is being made, and it is still possible for the U.S. to move from being an enabler of environmental crimes to a global leader in blocking the dirty money derived from this hugely profitable illicit industry. Arguably an even bigger challenge – ensuring the financial integrity of the climate transition – will require a similar combination of leadership, intergovernmental coordination, and methodological innovation. Many of FACT’s recommendations above, designed in the environmental crime context, apply equally to the climate context because of their deep connections, and to the extent there are distinct considerations, progress in addressing illicit financial flows in environmental crime can be leveraged both directly and indirectly for protecting climate financing.
The world must throw every solution it can at the growing climate crisis, as well as the resources to back up those solutions. To safeguard any climate commitments that may be made at COP28, we must make sure that those solutions and resources are not commandeered by opportunist criminal enterprises, corrupt officials, and illicit financiers. We will not have a climate-sustainable future if we do not address financial accountability now.