A new approach to tackling deforestation

A new approach to tackling deforestation

22 April, 2024    

Over the past three years, the Global Stocktake (GST) embarked on a consultative journey to assess progress towards the objectives of the Paris Climate Change Agreement. The synthesis of these discussions has yielded 17 critical insights, spotlighting both achievements and hurdles in the implementation of the Agreement. Notably, efforts to mitigate climate change, curb deforestation, and safeguard carbon sinks have emerged as significant areas of focus.Environmental crimes, defined as criminal activities that cause significant harm to the ecosystem, pose a major obstacle to the achievement of these goals. Unfortunately, the sheer scale and lucrativeness of unlicensed resource extraction make it a very difficult industry to stop: illegal logging alone inflicts an estimated annual economic loss of USD 17 billion on African economies.  

The illicit timber trade extends its influence beyond environmental degradation, having profound implications on security. The Africa Centre for Strategic Studies (2022) notes that it has exacerbated political instability and conflict in regions such as Liberia, the Central African Republic, DR Congo, and Mozambique by providing financial support to militant groups. 

Although traditionally pursued as separate issues, illegal logging and illicit financial flows are closely linked, highlighting the necessity of integrating financial integrity measures in future approaches toward environmental policy.  

The high environmental and economic cost of deforestation    

The immediate impact of illegal logging is obvious: pristine wilderness areas are replaced by barren and scarred landscapes. However, the more insidious and enduring consequences of deforestation are less immediately apparent. As Africa’s forests disappear, so do the livelihoods of millions of people who depend on them for income and food – leading to large communities of people being displaced. Responsible companies trading in legal and well-managed timber are not immune either as: illegal logging undercuts prices and stifles competition – leading to an estimated US $10 -15 billion loss per year in revenue

The destruction of Africa’s forests also represents the loss of one of our most effective tools in the fight against climate change. The Congo Basin is recognised as the largest carbon sink on Earth, absorbing and capturing large amounts of carbon dioxide from our atmosphere and replacing it with vital oxygen.  

The link between illicit financial flows and deforestation  

One of the most startling consequences of deforestation lies in its nefarious connection to organised crime. The low-risk high-reward nature of illegal resource extraction makes it extremely attractive to money launderers 

Trade-Based Money Laundering, defined by the Financial Action Task Force (FATF) as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins,” is one of the most common ways in which illicit financial flows emanating from the underground timber trade is disguised. Utilising trade-based money laundering tactics, such as manipulating invoices, perpetrators camouflage these funds, thereby eroding efforts towards environmental conservation and bolstering networks of financial crime.   

The Financial Action Task Force (FATF) is critical in combating environmental crimes by providing a detailed framework to identify and mitigate associated risks. This framework includes the criminalisation of money laundering for a wide range of offences and promotes preventative compliance measures against money laundering and terrorism financing within the private sector. It also empowers law enforcement agencies with the necessary authority to track and seize crime proceeds. Key FATF recommendations cover risk identification and assessment for environmental crimes, criminalising money laundering, encouraging private sector entities like financial institutions and designated non-financial businesses to adopt preventative measures, and equipping law enforcement with the capability to trace and confiscate proceeds from crimes.  

Addressing the challenges nations encounter with the FATF’s technical requirements (40 recommendations) and effectiveness criteria (11 immediate outcomes) is crucial. Enhancing the ability of supervisors and financial institutions to integrate environmental considerations into their risk assessments is a significant step forward.  

While the World Bank Risk Assessment model offers the flexibility to undertake such integrations, there has been a lack of practical guidance and technical support for institutions and supervisors on how to implement these measures effectively. Cenfri is dedicated to enhancing this support, aiming to improve stakeholder capacity and promote collaboration across sectors for aligning environmental goals with financial integrity. This initiative is crucial for recognising and addressing illicit financial flows, especially from illegal logging, as not just environmental issues but critical financial integrity challenges with significant climate implications. 

The application of standards to key sectors, including financial institutions and Designated Non-Financing Business Professions offers a significant chance to curb the environmental impact of these illicit flows. Effective integration of strategies against illicit financial flows and environmental crimes in risk assessments is vital for progress in this domain. 

Key actions to addressing the challenge 

The Global Stock Take synthesis report clearly identifies the financial sector’s vital role in combating environmental crimes but emphasises the need for a better understanding of how illegal financial activities are linked to these crimes. This involves identifying the main participants, finding the weaknesses that allow these activities to continue, and understanding how widespread they are.  

Key measures to tackle illegal financial flows and environmental crimes include: 

  1. Generating more evidence to understand the issue better. This involves conducting specific diagnostic studies to map out the entire process of climate risk and environmental crimes, including who is involved and where the money originates from. It also means sharing successful strategies and consolidating best practices from different countries and sectors. Furthermore, there’s a need to keep Anti-Money Laundering and Counter-Financing of Terrorism (AML CFT) strategies up to date with the latest insights on illegal financial flows and environmental crimes. 
  1. Providing targeted support to financial institutions and regulators. This includes helping these entities better understand and manage climate risks and related financing issues, such as incorporating these risks into their overall risk assessments and Suspicious Transactions Reports (STRs). It also involves aiding them in aligning their lending and credit decisions with climate finance goals and improving coordination between those fighting illegal financial flows and environmental crimes. Moreover, strengthening the regulatory framework is crucial to curb these issues. 

However, a significant lack of guidance and technical support exists for embedding environmental considerations into the risk assessments of financial institutions and regulatory bodies. This is an area where Cenfri is keen to begin providing substantial support. A unified policy approach is urgently needed to bridge the gap between viewing environmental crimes solely as conservation issues and recognising them as significant financial challenges. Effective coordination is essential for leveraging the financial sector’s strength in preserving key ecosystems by stopping the financial and trade loopholes that lead to ongoing deforestation. 

The FATF standards and tools provide a useful mechanism for the financial sector to significantly contribute towards protection of our planet’s essential carbon sinks. Tackling illicit financial flows alongside environmental crimes is crucial in developing a unified climate mitigation strategy, not just for Africa, but on a global scale. 

Email info@cenfri.org if you would like to discuss how we can assist you. 


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