Environmental crime is a term used to cover any unlawful conduct that harms the environment; it engages everything from pollution, illegal logging and mining, trafficking and dumping of waste and chemicals to illegal wildlife trafficking. The damage wrought can be measured financially: According to the latest figures from INTERPOL (International Criminal Police Organization) and the United Nations, environmental crime is currently worth up to $259 billion per year and is growing at 5 to 7 percent—but it also causes profound harm, damaging ecosystems, depleting natural resources and, in some cases, accelerating the pace of climate change.
Evolving UK enforcement
In the United Kingdom, environmental crime has historically been governed by a patchwork of fairly antiquated legislations that have sought to proscribe direct environmental harms or otherwise regulate them, with enforcement principally led by the Environment Agency (the EA). In general, the enforcement record has been limited, with minimal cross-border investigation and, with few exceptions, low-level fines or sanctions—certainly, it has not been an enforcement landscape that has been likely to trouble those operating in the financial sector.
- Increasing enforcement sophistication and AML risks
First, the enforcement of environmental-crime legislation is becoming more sophisticated in the UK, engaging multiple enforcement bodies for the first time together, with an appetite for the pursuit of investigations in multiple jurisdictions and the recovery of the proceeds of crime. This shift in enforcement attitudes can be partially seen by the formation, in January 2020, of a specialist enforcement unit including the EA, HMRC (Her Majesty’s Revenue and Customs), the National Crime Agency and others designed to target serious and organised crime relating to the disposal of waste, with a greater focus on transnational activity.
The bringing together of multiple enforcement bodies was also born out of frustration with the historic failure, in the context of environmental crime, to deploy financial-investigation powers and ensure the recovery of proceeds arising from the conduct. It follows that this change in the approach to enforcement means that the use of confiscation or compensation orders is to be expected, as is the deployment of disruptive enforcement powers typically associated with straightforward white-collar crime, such as Account Freezing Orders.
From the perspective of banks and other regulated entities, the increasing sophistication of the enforcement of environmental crime means that we are more likely to see an emerging recognition of the money-laundering risks posed by those companies active in sectors linked to environmental harms. For example, companies involved in waste disposal or engaged in processing natural materials such as timber may be recognised as operating in higher-risk sectors and subject to closer monitoring or enhanced due diligence, inviting a more cautious approach.
To an extent, this shift can already be seen in the context of illegal wildlife trafficking, with the UK’s AML framework imposing enhanced due diligence for transactions relating to “ivory or other items related to protected species” since December 2019 [Regulation 33(6)(vii) of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017].
- Focus on supply-chain due diligence
Alongside an increasingly robust enforcement approach, there has been a legislative movement towards accountability for a corporate’s supply chains, which, in turn, presents fresh risks for those engaged in providing banking facilities or otherwise financing these entities. For example, the UK is currently in the process of introducing legislation (Environment Bill 2019-21) that would introduce civil sanctions for companies that use products obtained through illegal deforestation. Furthermore, corporates that use forest products such as cocoa, rubber, soya and palm oil would be required to undertake due diligence on how the products were obtained.
The Environment Bill has been delayed by the COVID-19 pandemic, according to the government, but it is still expected to become law later this year. In addition, the French Government has recently introduced similar legislation to address supply-chain issues more generally, and the German Government is considering introducing a Due Diligence Act with a similar aim.
The impact of these measures would be to create civil liability for the relevant corporates rather than direct criminal exposure, but it is nevertheless indicative of a shifting landscape with a greater focus on the integrity of supply chains—something that is important in the context of environmental crime in light of the fact that the harm (e.g., deforestation) can often occur in jurisdictions at the end of a supply chain.
As it stands, the AML (anti-money laundering)—and broader reputational—risks associated with supply chains are generally not as well recognised as risks relating to operating in particular jurisdictions or industries, but the legislative shift across Europe towards supply-chain due diligence is likely to translate, as this culture becomes embedded, into a component of AML-risk assessments.
- ESG and regulation
Finally, although a positive development for the environment on the face of it, the rapidly increasing demand for the introduction of environmental, social and governance (ESG) measures by organisations, or for investment products that reflect ESG objectives, presents fresh enforcement risks of its own, particularly around allegations of “greenwashing”.
For those in the regulated sector, the FCA (Financial Conduct Authority) has indicated that it will take action where it sees potential greenwashing, which it has defined as “marketing that portrays an organisation’s products, activities or policies as producing positive environmental outcomes when this is not the case”—with a particular focus on the risk of consumers being misled or mis-sold products. Further, the PRA (Prudential Regulation Authority) and the FCA are both introducing mandatory disclosures about climate-related risks for banks and premium-listed companies, with asset managers and other companies to follow, in order to allow investors and others to form a view about, for example, the sustainability of the respective businesses.
These changes inevitably present new risks, and the negotiation of the new regulatory landscape will require caution. Although we are unlikely to see a robust enforcement response in all but the most egregious instances, the reputational damage alone of a finding of greenwashing, for example, is likely to be significant.
These three developments in the UK make clear that the direction of travel is towards significantly greater scrutiny of those engaged in environmental harms and more robust enforcement of environmental-crime legislation. This will inevitably extend to those engaged in financing or investing in those entities, bringing fresh AML considerations. The rise of ESG brings with it more direct issues for those firms seeking to actively market themselves as having an actively positive impact on the environment.
This is a rapidly developing area, and as policymakers globally come to consider these issues, the pace of change for the enforcement of environmental-crime legislation is bound to accelerate further still. This will have further implications throughout the industry—including for banks, firms and investors—and should be watched closely.