logging

Illegal logging and deforestation: money does grow on trees

Of all the environmental crimes, illegal logging (including illegal land clearing) is understood to be the most profitable. The illegal timber trade is said to account for up to 90% of tropical deforestation in some countries and attracting the world’s largest organised crime groups. Along with economic damage it does even more harm to the environment, as well as society, and increases violence amongst criminals operating in the regions of deforestation.

Illegal logging is not simply the felling trees that shouldn’t be have been chopped down and can extend right through the timber supply chain, from the obtaining of permits through corruption to obtaining logging licenses illegally, as well as exceeding of logging limits to the evasion tax and much more – including the setting up of illegal timber plantations.

INTERPOL, which has carried out multiple global police operations spanning back over 10 years has seen both global organisations and organised crime groups involved in the industry. The international criminal police organisation highlights that the trade attracts tax evasion, corruption, violent crime, fraud and money laundering – they even note the hacking of government websites by those seeking to obtain permits.

Shift in focus

In his message about environmental crime to G7 leaders ahead of the June 2021 Summit in Carbis Bay-UK, Marcus Pleyer – President of the Financial Action Task Force (FATF) said “…the impact of criminals looting the world’s resources need[s] to be an urgent priority…Our planet is literally being robbed of a sustainable future”.

The Carbis Bay G7 Summit communiqué included six points under a shared agenda for global action, of which one was to ‘Protect our planet’ – under this area fell ‘climate and environment’. Illegal activity was broadly covered here under damage to the environment and reducing biodiversity loss, where the communiqué noted that the G7 will “…use appropriate levers to address unsustainable and illegal activities negatively impacting nature”.

Following Pleyer’s message and after the G7 Summit, a recent FATF report on money laundering from environmental crime, which covered ‘forestry crime’ (the label given to illegal logging and land clearing), included estimates that suggested this crime type generated approximately $51 billion to $152 billion annually. It also highlighted information from 2019 which put estimates of lost global tax revenue from just illegal logging alone at $6 billion to $9 billion.

The report did not cover what it refers to as ‘secondary commodities’, commodities grown on illegally cleared land (such as soya, beef and palm oil). Those in the financial sector dealing with clients and supply chains involved in these types of commodities should be cognisant that there may be potential for a nexus to environmental crime, even if it is not immediately obvious.

The focus by FATF on environmental crime, as well as the G7’s focus on the environment in general, only strengthened existing focus put forward through the European Union’s (EU) 6th Money Laundering Directive (6MLD). The Directive lists criminal activities which constitute predicate offences, one of them being environmental crime, which should help turn ‘focus’ into ‘effort’ in order to make a real difference.

Following on from the G7 Summit the UK has a prime opportunity through its presidency at the COP26 global climate summit later in the year, to get commitment to not only focus on environmental issues in general but specifically drive home the importance of focus and action on illegal logging and deforestation.

The Environment Bill going through parliament in UK will see law put in place to prevent illegal deforestation in supply chains of UK companies. The new law will also require that companies can demonstrate that they know where the commodities they use have come from and comply with local laws.

The EU is also looking at bringing in laws, under ‘corporate due diligence and corporate accountability’, which will mean companies will have to conduct due diligence through their supply chains to help prevent and mitigate their impacts on human rights and the environment. It will give offer recourse to those who have suffered as a result of corporate abuse, by allowing them to hold companies liable.

The wood from the trees

When journalists went to visit an illegal logging operation in the state of Rondônia in the Brazilian Amazon, what they found were poorly paid workers who, similar to coca plant farmers, often appreciate what they do may be funding illegal activity but at the same time have to make a living for themselves. When asked, the workers said “We have to survive somehow” – whilst illegal logging may be wrong, this side of the challenge in tackling it highlights that solutions need to look beyond simply outlawing the activity – again, like coca plant farmers, suitable alternatives for some of the poorest people involved in the chain of activity need sustainable alternatives to make a living.

The ‘Apuleia leiocarpa’ and the ‘Peltogyne paniculata’ may not mean much to the average household but they will be familiar with products made from them, ranging from floor decking to musical instruments. Whilst these trees start their journey in places like the Amazon they do end up in many US and EU households because of demand.

Challenges of tracking and stopping illicit flows of wood were highlighted in a recent United Nations Office on Drugs and Crime (UNODC) report, which noted that “Unlike illicit drugs, timber is not sold in acknowledged illegal markets, but rather fed into legal industries where its illegal origin is obscured” and “…timber illegally harvested in one country may be legal to import into another”. Challenges are further increased because there is no universal definition of ‘rosewood’ – one of the most popular illegally traded woods. As a result, there are no global statistics on the size of the rosewood market.

Rosewood, a term used to describe a range of hardwoods, can find its way into even innocuous items such as guitars, which had made them susceptible to risks from illegal logging. Rosewood used in the manufacture of musical instruments like guitars had previously required a permit following an announcement from CITES – the restrictions applied to; manufacture, retail and transportation of the wood. Although the restrictions were aimed primarily at tackling increasing demand in Asia for ‘hongmu’ furniture made from rosewood, the effect was felt on the guitar industry despite it only using one-tenth of 1% of all trade wood species. CITES later exempted musical instruments in 2019 from the restrictions put in place but the effect was positive for some in the guitar industry – they shifted to focussing more on sustainable development, knowing the impact their trade has on exotic wood.

It is not only wood types like rosewood that drive illegal logging. ‘Balsa’ wood, formally known as ‘Ochroma pyramidal’, is a common type that is used in everything from model aircraft to surfboards.

In the last two years, balsa wood has been used more and more in the production of wind turbine blades fuelled by an increased shift towards clean energy, which has been driving exports out of Ecuador. Balsa from Ecuador’s border regions can be found in wind farms in both the United States and China, driven by government subsidies and tax credits granted in a shift towards cleaner energy.

Increased demand is understood to have been behind a recent rise in both prices and illegal logging activity, particularly in Ecuador. Whereas a tree typically sold for $5 in 2019, this increased up to $45 in 2020 and the amount of illegally obtained balsa wood seized in Ecuador also rose by 180% – from 700 cubic meters in 2019 to 1,973 cubic meters in 2020.

Reaching a prime time for cutting within five to seven years and with less regulatory focus compared to rarer trees, it has been found that illegally sourced balsa wood can be ‘laundered’ by mixing it with other types of wood.

Cocaine cowboys

Illegal logging, where the wood is used to generate illicit funds, is not the only manner in which damage is caused to the environment. Deforestation also occurs where land is cleared out to grow coca plants, fuelling the production of cocaine. In recent years, satellite image studies found that areas surrounding Bahuaja-Sonene National Park in Peru not only saw rising forest loss from the growth of coca plants but activity within the park also increased. Coca crops not only surrounded the park but also crossed over into it and cocaine processing facilities along with clandestine airstrips where also noted.

Drug trafficking is also responsible for deforestation even where land is not cleared for crops but used to launder the proceeds of drug trafficking itself. Studies of three areas sampled of Guatemala’s Maya Biosphere Reserve found that drug traffickers had deforested protected areas to illegally ranch cattle allowing them to not only launder the proceeds of drug trafficking but also to smuggle the drugs and control territory. Researchers and journalists had analysed “narco-cattle ranching” activity and “narco-deforestation” caused by it but had not quantified the contribution of illegal activity to the amount of trees lost.

The research found that the illegal cattle ranching was responsible for a large part of the deforestation in the Maya Biosphere Reserve, with their estimates put at 59% to 87%, based on photographs of deforested areas from the three sampled areas. The findings go on to say that “Contrary to popular debate, these findings suggest drug traffickers in the context of the US-led War on Drugs are to blame for forest loss, not subsistence farmers illegally living in the reserve”.

Cocaine production is not the only drug-related driver of deforestation, marijuana cultivation has also been found to have been causing signifiant damage to forests in Paraguay. The country’s National Anti-Drug Secretariat (SENAD), seized approximately 80 tonnes between 2015 and 2020 in one forest and investigations of the issue found marijuana farms in a number of national parks and reserves in parts of Paraguay. Despite attempts to clamp down on the activity, in another operation by SENAD, 600 tonnes of marijuana were destroyed from a reserve where 202 hectares of illegal plantations were found.

Corruption risks

Much attention on illegal logging and deforestation has been centred on investigating the crimes directly connected to the activity itself. On 10th November 2020, U.S. Department of State even issued a press statement announcing a ‘first of its kind’ visa restriction on wildlife and timber traffickers. Recognising that wildlife and timber trafficking is connected to serious transnational organised crime that “…threaten national security, undermine economic prosperity, fuel corruption, and spread disease” – the restrictions were aimed at immediate family of traffickers believed to be involved in wildlife or timber trafficking.

Less attention until recently had been focussed on the enablers of illegal logging and deforestation, particularly the role of corruption. The value of a shift in focus on the role corruption and integrating it into the “follow the money” approach, has however been recognised recently by a number of organisations.

The Global Initiative Against Transnational Organised Crime highlight its importance as part of the United Nations General Assembly Special Session (UNGASS) against corruption at the United Nations (UN) in New York in early June 2021. The Global Initiative Against Transnational Organized Crime along with Transparency International and the Wildlife Justice Commission co-sponsored a session hosted by France as part of an official side event programme. Titled ‘Leveraging the Best Tools to Address Environmental Crimes Enabled by Corruption’, it noted the role of illicit activity by corrupt politicians/officials, which also facilitates control of legal markets by organised criminal groups – all which undermine efforts to tackle environmental crime.

Sanctions risks

The EU Timber Regulation (EUTR) was introduced in 2013 and is aimed at making sure no illegal timber or timber products can be sold in the EU. Despite this, questions put to the European Parliament in 2019 around the enforcement of the EUTR in relation to Myanmar offered an insight into some of the challenges in tackling the issue – the information put forward as part of one of the questions stated that a “Myanmar official recently proclaimed that the country has exported 77,199 tons of teak, with the European Union taking all of it”.

In May 2021 it was reported that German company WOB Timber paid a $4 million fine following an investigation within the framework of the EUTR. The court found that the company had evaded EU sanctions through multiple imports through different shipments of teak from Myanmar. A number of the shipments carried timber which was processed in Taiwan and declared as originating from there to hide the fact it was from Myanmar in order to evade sanctions – the company’s director was given a 21 month sentence and fined of $243,000.

The investigation of WOB Timber also noted that the Environmental Investigation Agency (EIA) found it had recently exploited a regulatory loophole to carry out its trade in illicit timber. The investigators found WOB Timber used an intermediary in Croatia to avoid law enforcement in Germany. A Freedom Of Information (FOI) request to the Croatian Ministry of Agriculture revealed a number of European companies, one of which was WOB Timber, that had paid a Croatian intermediary to receive the teak from Myanmar into Croatia, in order to bypass the EUTR.

Efforts to tackle illicit timber from Myanmar are likely to have been accelerated following the coup d’état in Myanmar in early 2021, especially as both the United States (US) and United Kingdom (UK) imposed sanctions targeting one of the sources of revenue for the Myanmar military – Myanmar Timber Enterprise (MTE), a state-owned company involved in the timber trade.

The challenges in managing risks where there is sanctions exposure, such as in Myanmar, and the timber trade were highlighted in another recent investigation by the EIA. Their findings noted ties with Myanmar’s military in timber exports from the country to the EU. They found timber shipments for a company that was found to be providing financial donations used by the Myanmar military in operations against the Rohingya people – based on information from the UN Human Rights Council. Other shipments where found to be from a port that was ultimately owned and operated by the Myanmar military. The EIA also noted that timber shipments were using a port owned by a company whose managing director was accused by the US of laundering money for the Myanmar military, as well as the company making financial donations to the Myanmar military, again with ties to clearing of land owned by the Rohingya people.

Supply chain risks

Although the WOB Timber case above suggests egregious failings through a concerted effort to source illegal timber, for those lacking an appreciation of how easily illegal timber can enter their supply chains consequences can vary from embarrassment to enforcement.

One of the first companies in the UK to get fined for illegal timber due diligence failures was designer furniture retailer Lombok in 2017. Following an earlier warning on improving practises to mitigate risks of importing illegal timber, the firm failed to take sufficient action, and when officers visited the company’s showroom in London they found appropriate due diligence checks hadn’t been made on an imported ‘artisan sideboard’ from India for sale in the premises. Although the fine of £8,121 was small it did show early efforts in the UK to tackle the issue.

It’s not just inconspicuous furniture outlets like Lombok that have found themselves in the spotlight when it comes to infiltration of illegal timber in the supply chain – household name IKEA has found itself the focus of attention recently.

In mid-2020, investigations by UK Non-Profit Organisation (NPO) Earthsight alleged IKEA was selling chairs in its stores in the US, UK and Germany where wood from the chairs was illegally felled in Ukrainian forests. Earthsight claimed the illegal harvesting was being enabled by the corrupt state-owned enterprises that ran most of Ukraine’s forests.

Earthsight went on to allege that other furniture products were also questionable, where the wood originated from Ukraine. They claimed corrupt officials received millions of dollars in bribes into offshore accounts from overseas companies during the presidency of Viktor Yanukovych (2011-2014) in order to access the countries timber. It was believed that it was highly likely the wood connected to these bribes may have ultimately made its way into IKEA products.

A more recent investigation, again by Earthsight, states that it is likely IKEA has sold kids’ furniture made from wood linked to illegal logging in Russia for a number of years. Reviews by Earthsight found that some of the pine wood in the furniture is likely to have originated from Russian logging companies in Siberia who repeatedly violated Russian environmental laws designed to protect its forests. The wood is said to have not only ended up in IKEA furniture but that of other companies also. IKEA said they have cut ties to the companies mentioned in the report.

Expert insights

To get insights into the nuanced nature of illegal logging and deforestation I got in touch with James Toone, Senior Campaigner on Forests and Wildlife, from the Environmental Investigation Agency (EIA) who have been mentioned in some of the investigations above.

One of the recurring themes we covered were the complexities around illegal logging. On the one hand there is the sourcing element and what makes the wood illegal, then there is the legal frameworks. On the latter point around frameworks, James explained that “…the country of origin will have laws, but then also the importing country will have [its own] laws and typically wood from Myanmar [for example]…might be processed in a third country…then you’ve got three different legal systems, and some of those laws are lot tougher than others”.

For example, with countries that have stronger regulation such as the EUTR, there is a greater possibility that illegal wood will be interdicted upon import. James went to to say that “Unfortunately when your talking about major timber importing countries in Asia and the two biggest are China and Vietnam, [the regulation] is not so strong…that’s what’s fuelling massive deforestation now – there’s a huge thirst for wood but that wood isn’t mainly consumed, as I understand it [in those countries]…the majority of exports go to Europe and North America”.

There may not appear to be an immediately obvious link between illegal (and legal) logging and tax evasion but it is a risk that needs consideration. As James highlighted “Even if the logging is legal…if they’re basically being criminal around tax…that’s illegal logging and that probably I think is the most significant element of money laundering related to illegal logging”.

James also noted that a lot of the companies involved in illegal logging, similar to other crimes, use complex structures and house a branch or subsidiary of their company in tax havens in order to obfuscate ownership and money trails. He said “…and we see a lot of money laundered through Singapore, through Hong Kong…because if you imagine the companies that are doing this are domiciled in Asia, then the two biggest and most important banking centres in Asia are Hong Kong and Singapore…”. He explained that, similarly, companies in Europe use tax havens ‘local’ to them, as do companies in North America and Latin America, making use of countries such as those in the British Overseas Territories.

I also asked James if there were challenges in valuing wood at customs, similar to the diamond trade where its difficult to value them without expertise onsite at customs. He explained that “Misdeclaration of cargo with wood is a real problem because you have to identify the species to be able to value it but also to be able to tell if it’s allowed to be exported…you have to have expertise, so not all customs will have people who will be able to say whether particular pieces of wood are illegal”. He went on to say that “…there should be permits and customs should be able to look at the permit and say whether it is allowed”.

What can be done

Immediate action that firms can at no cost is primarily to be aware of and remain vigilant of risks with illegal logging. Along with FATF’s recent report on money laundering from environmental crime, a short handout was also published by them. The handout included some potential risk indicators that compliance staff and investigators may find useful, these are:

Transactions

  • Frequent payments from companies in the logging, mining or waste trade sector to individuals or beneficiaries unrelated to the legal person’s activity or business.
  • Large cash transfers from cash-intensive businesses to beneficiaries in areas known as a source of gold mining and illegal logging and illegal land clearing.

Customers

  • Unexplained wealth, cash transfers involving senior officials, politically exposed persons (or family members of) with a position of responsibility related to the management or preservation of natural resources.
  • Clients that are unable to provide evidence of compliance with local environmental requirements (e.g., proof of permit for environmental activity, export, and land purchase/lease agreements, etc.).
  • Intermediaries – such as timber processing facilities, sawmills and metal refineries – with financial activity that is not in line with local production levels.
  • Customers with mining or logging licenses operating in or around active conflict zones. PEPs may have interests in these companies, but it is not required.

Economic activity

  • Sudden and unexplained increases in economic activity (formal and informal) in rural or isolated zones, particularly in source countries for illegal logging and mining.
  • This could include unusually high volume of business turnover in cash transactions at businesses providing consumer goods and services in proximity to at-risk zones.
  • Trade transactions to finance extractive business involving high-risk jurisdictions – e.g. that have a proven risk of corruption, conflict and/or illegal resource extraction.
  • False or questionable statements on bank loans, letters of credit, customs and shipping documents associated with the timber trade.
  • Financing for export of environmentally sensitive goods (e.g., round logs) when there is a moratorium, or this has been banned by national authorities.

Whilst much attention may be focussed on companies involved in the timber industry, banks play a key role in the industry also – many companies involved in natural resources are financed by big banks and the lines between legal and illegal logging can be blurred. Findings from one investigation state that in 2019 the world’s largest banks invested over $2.6 trillion (such as through financing) in sectors believed to be primary drivers of biodiversity destruction. Although the amounts provided to the forestry and wood sector was comparatively small, the impacts on biodiversity can be quite severe. Whilst banks may have policies around sustainability and the environment, if they are not able to measure the impact of their activities on the environment, it may render such policies redundant.

Recent increased focus on Environmental, Social and Governance (ESG) metrics may also be a great opportunity for banks to demonstrate their increased commitment to the environment by helping to tackle illegal logging and deforestation, particularly as financial crime ultimately facilitates and drives this activity.

When it comes to illegal logging and deforestation, it may appear somewhat ironic that the very thing that keeps people alive is being destroyed – trees. Tropical rainforests, for example, which have remained relatively undisturbed for around 20 million years are said to provide at least one third of the oxygen we all need. Beyond laws and regulations, it may help to reframe our understanding of the relationship we have with the planet – we belong to it, it does not belong to us.

Dev Odedra

Dev Odedra is an independent anti-money laundering and financial crime expert. He has significant experience in managing financial crime risk in the retail, corporate and investment banking sectors. His expertise covers investigations, advisory and controls implementation and improvement.