Environmental Crime and Money Laundering – Supply Chain Risk
This article provides a high-level overview of what environmental crime is, how environmental crime committed overseas can impact UK company supply chains in the context of the Proceeds of Crime Act 2002 (“POCA”) – the UK’s primary money laundering legislation – and what steps can be taken to mitigate the risks of environmental crime and money laundering.
What is environmental crime?
According to the European Commission’s Q&A on the revised EU Directive on environmental crime (2021), environmental crime is the fourth largest criminal activity worldwide and is growing at a rate of 5-7% annually; two to three times the pace of global economic growth. It comprises, among other things, certain criminal offending codified in the Environmental Protection Act 1990, Environmental Permitting (England and Wales) Regulations 2016, Environment Act 2021 and the Wildlife and Countryside Act 1981, such as illegal deforestation, illegal gold mining, illegal waste disposal and wildlife trafficking.
Most relevantly, the European Union’s 6th Money Laundering Directive (2020) identified environmental crime as a predicate offence in the definition of ‘criminal activity’ for the purposes of money laundering. This suggests that any benefit obtained from environmental crime, such as money or commodities, may represent the proceeds of crime.
Furthermore, the UK’s POCA has extraterritorial effect. Any conduct committed overseas which, if committed in the UK, would be punishable by more than 12 months’ imprisonment under UK law, will be caught by POCA.
Consequently, any person who acquires, uses, transfers, converts, or controls the proceeds of environmental crime may be in breach of the primary money laundering offences under POCA (ss.327 – 329). For example, a UK company acquires cocoa beans from its Ecuadorian supplier that are grown on land that has been illegally deforested. But for the land being illegally deforested, the cocoa beans could not have been grown and therefore are likely to represent the benefit from that criminal conduct. When the UK company acquires the cocoa beans, it may be in possession of criminal property.
Even though the illegal deforestation took place in Ecuador, if it had occurred in the UK, the offending would likely be punishable by more than 12 months’ imprisonment. In such circumstances, POCA applies to the UK company.
A key risk for businesses is the ease at which the proceeds of environmental crime can make their way into supply chains. According to a report published by Greenpeace UK in 2021, the UK is allegedly the third largest importer of Brazilian gold and almost 30% of gold mined in Brazil in 2019/20 was mined illegally. However, due to opaque supply chains, it is difficult to know whether imported Brazilian gold has been legally mined. Criminals may also use shell companies to conceal beneficial ownership and/or exploit weak regulatory oversight in environmental resource chains to facilitate their crimes (e.g., by using “comingling” to conceal illegal products with their legal counterparts, such as mixing hazardous by-products with non-hazardous products). They may also make fraudulent representations about the origins of the products being purchased, making it harder to know whether an environmental crime has been committed.
Mitigating the risks
To mitigate the risks of environmental crime and money laundering, companies should undertake thorough supply chain due diligence. In particular, companies should investigate suppliers they contract with to determine, among other things: who the supplier is, the corporate structure of the supplier, the jurisdiction(s) in which the supplier operates in, how the commodity being purchased is produced, and whether the supplier publishes an anti-money laundering policy and incorporates anti-money laundering clauses into its contracts with third parties. Environmental crime should also feature in a company’s anti-money laundering training programme.
As well as identifying any POCA-related risks, conducting supply chain due diligence may also help to avoid reputational harm and establish that a company has implemented procedures that were "reasonable in all the circumstances" and were designed to prevent money laundering. This will be particularly pertinent should the proposed failure to prevent economic crime, including money laundering offence, which is currently undergoing its second reading in the House of Lords, become law.
We advise a broad range of corporates and financial institutions on their environmental and financial crime compliance obligations. If it would be useful to talk through how the issues flagged in this note might impact your business, please do get in touch.