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Sophisticated Crime Groups Need Sophisticated Financing – Illegal Logging Edition

October 3, 2012

By EJ Fagan

EJ Fagan was New Media Coordinator for the FTC from 2011-2013. He is now Deputy Communications Director for Global Financial Integrity. You can follow him on Twitter @ejfagan.

A new UN report finds that illegal logging is on the rise in part due to increased levels of organized criminal activity around logging. Brad Plumer of Wonkblog writes,

The phrase “organized crime” typically conjures up images of drug trafficking or stolen-car rings. But it turns out that the illegal logging trade is just as lucrative — and far more destructive. Between 50 to 90 percent of forestry in tropical areas is now controlled by criminal groups, according to a new report (pdf) from the United Nations and Interpol.

Across the globe, deforestation is a major contributor to climate change, responsible for one-fifth of humanity’s emissions. Farming and logging both play big roles. What makes this area so difficult to regulate, however, is that a great deal of logging simply takes place illegally — much of it in tropical areas such as the Amazon Basin, Central Africa, and Southeast Asia. The U.N. estimates that illicit logging is now worth between $30 billion to $100 billion, or up to 30 percent of the global wood trade.

Plumer touches on this, but I think its important to think about how these types of organized crime activities are enabled. Sophisticated transnational organized crime cannot exist without ready access to sophistical transnational money laundering. If you increase the difficulty, risk, and availability of the money laundering, you increase the cost of doing business for organized criminals seeking to profit off of illegal logging, and therefore decrease the amount of timber being cut down in the world. Like many other problems caused by the opaque, often anonymous flow of money around the world, this one represents some low-hanging fruit for activists trying to reduce deforestation.

Of course, we’re not confronting organized crime with any serious degree of difficulty to launder their money. The recent Senate investigation of HSBC found that the bank was widely involved in all sorts of activity either directly or indirectly connected to drug cartels and terrorist groups. The Senate report was clear that their investigation of HSBC was a case study, and many other banks were likely to be violating anti-money laundering (AML) laws in the exact same way.

We’ve seen an increased level of anti-money laundering law enforcement action over the past six months. Standard Chartered and ING both faced nine-figure fines, and HSBC is rumored to be negotiating a record-setting $1 billion settlement. Still, it is unlikely that these fines create any kind of industry-wide measurable increase in AML compliance. Poorly complying with the law–or in HSBC’s case, pretty much ignoring it–is just too tempting under the status quo. $1 billion would represent just 5% of HSBC’s pre-tax profit, and it represents a rare, record-setting sum. After the Wachovia money laundering scandal, which featured remarkably similar behavior to HSBC’s, the bank was fined just $50 million (plus $110 million in asset forfeiture) for almost $400 billion worth of illegal business.

No one went to jail after the Wachovia scandal, and so far no individual has been charged with a crime after HSBC. Fines are great for holding institutions accountable (as long as they are big enough to serve as a real deterrent), but law enforcement also needs to hold individuals accountable. That’s how we’re going to get banks and some of the people working for them to take real action and stop doing business with criminals.

One last thing: Plumer writes in the comment section,

I’m not sure even this one can be pinned on Wall Street (though, who knows, I might be wrong about that).

We have evidence that we can pin some illegal logging on U.S. banks and financial institutions. We saw with the ING and Standard Chartered cases that there is a very powerful incentive for banks to hold accounts in U.S. dollars, even if their clients are from outside the U.S. This means that they have to open correspondent accounts in the United States for their foreign clients. They are required by law to perform extra checks on high-risk accounts when they do this, and in some cases refuse to open the account. Standard Chartered and ING both found creative (and ultimately illegal) excuses to not treat their Iranian clients as high-risk, which let their clients do business in U.S. dollar accounts despite sanctions. HSBC and Wachovia did similar things with drug cartels, and likely other types of organized crime groups.

But we also have a very concrete example: Teodorin Obiang, the son of Equatorial Guinea’s dictator. Obiang officially spent much of his life as the Minister of Forestry in Equatorial Guinea, a perfect post for someone looking to make a fortune off of the illegal trade of timber. A year ago, the Department of Justice seized $70 million in Obiang’s assets in the United States, much of it derived from illegal logging. He spent as much as $315 million in less than a decade, thanks in large part to secret accounts at Riggs Bank and a series of California-registered shell corporations.

This second part is reason why we need to, in addition to strengthening AML laws and enforcement, end hidden company ownership by passing the Incorporation Transparency and Law Enforcement Assistance Act. A recent article in the Economist found that it was easier to form an anonymous shell company in the United States than pretty much anywhere else in the world, which contributes significantly to our money laundering problems.

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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