Conducting Customer Due Diligence to Prevent Environmental Crime

The prevention of money laundering is one of the European Union’s top priorities. The Directive (EU) 2018/1673 established a definition of criminal activity, together with a list of 22 so-called predicate offenses of money laundering. In many jurisdictions, these predicate offenses are independent crimes not necessarily linked to money laundering. Regardless, it is not only decision-makers and law enforcement authorities solely in charge of combating financial crime, but also financial institutions have a role as key actors that can substantially contribute by identifying (potential) customers involved in fraudulent activities.

Environmental crime is highly appealing to criminals, it is a low-risk but high-profit crime that is estimated to generate around USD 110 to 281 billion in criminal gains each year, many of which travel through the financial system disguised as legitimate proceeds. The current system provides appealing opportunities for criminals in this area, such as legal discrepancies among countries, low risk of detection, or marginal penalties. For example, criminalization concerning wildlife trafficking is, in general, low. The consequences of environmental crime are disastrous for humankind because resources at stake are finite and their constant exploitation brings about their rapid end. Once these resources run out, it will be virtually impossible to replace them, therefore severely harming our planet.

Criminals usually work through complex business structures hiding behind the facade of legitimate businesses, even though some of them have criminal enterprises exclusively dedicated thereto. In some cases, environmental crime is an offense committed in addition to drug trafficking or arms trafficking, which expands criminals’ expertise on trafficking routes, legal voids, means of transportation, corruption of border officials, document fraud, and, of course, money laundering.

In this sense, it is important to note that environmental crime can take several forms, such as (but not limited to):

  • Improper collection, transport, recovery, or disposal of waste
  • Indiscriminate logging
  • Illegal, unregulated, and unreported fishing
  • Killing, destructing, possessing, or trading protected wild animal or plant species
  • Production, importation, exportation, marketing, or use of ozone-depleting substances

The environment is of such high importance that the United Nations recently declared a healthy environment a human right, and in the most recent years, interesting discussions have been put forward to consider ‘ecocide’ a criminal offense under the jurisdiction of the International Criminal Court. It is however not clear how environmental crime will be further protected -or criminalized- in the coming years if relevant actors do not take the necessary steps to safeguard existing resources at the present. Perhaps, future discussions will fall into the void without anything left to protect.

But what can financial institutions do to prevent, or reduce environmental crime?

One of the most efficient and impactful ways in which financial institutions can contribute to the prevention of environmental crime (and the other predicate offenses), is by properly conducting Customer Due Diligence (CDD). It is an essential process that must be performed, not only to be compliant with laws and regulations but also to be aware of who -potential- customers are and to identify activities that might harm the business and the financial system in general. CDD starts at the beginning of the business relationship but should continue throughout it by properly monitoring transactions, keeping up to date on the customer’s risk profile, and guaranteeing that the person is not involved in financial crime.

One of the most critical elements of CDD is understanding what the sources of funds of wealth are, what the customer’s business is, and what the purpose and nature of the business relationship are. This will considerably help the financial institution to understand if a person is acceptable or not as a client, and will moreover contribute to identifying whether a person might be involved in criminal activities.

Another important factor is that financial institutions, in certain cases, are obliged to perform Enhanced Due Diligence (EDD), which is the performance of additional checks to minimize risk exposures, violations of regulatory compliance, and the prevention of financial crimes. The 4th AML Directive establishes minimum requirements, but financial institutions can expand on the scenarios to conduct EDD based on their risk assessment and risk appetite. In the field of environmental crime, it would be beneficial for organizations to conduct EDD for customers involved in the business of antiquities trade, transport logistics providers, construction or manufacturing companies, cosmetics or herbal medicine among others. These types of companies have a higher risk of being involved in the supply chain of wild trafficking or other types of environmental crime.

An example to illustrate this can be drawn from the Shuidong case study. This case, grosso modo, relates to an investigation started in 2014 by the Environmental Investigation Agency in Mozambique, a country known for the extensive poaching and ivory trade. This investigation revealed a Chinese criminal syndicate with powerful trafficking networks between Africa and Shuidong. Interestingly, this case was based on red flags such as financial activity inconsistent with the client’s profile, multi-country accounts, and payment schemes, international bank transfers via international trading companies, heavy use of case, and deposits followed by immediate withdrawals of similar amounts. If CDD is conducted properly and done regularly and as part of an ongoing conscious process, these kinds of red flags can be more effectively identified combined with event-driven reviews or periodic reviews that might, in turn, help the FIUs and law enforcement authorities to better fight financial crime.

As long as the fight against environmental crime continues with relevant stakeholders involved, there is still a chance to detect and dismantle these criminal networks. An interesting development worth highlighting is the Basel AML Index, which is the Basel Institute’s global money laundering index and risk assessment tool that is adding environmental crime data to its set of indicators of ML/TF risk. If financial institutions conduct regulatory updates and follow the latest trends and developments on financial crime, it is more likely that policies inside the company will be more efficient.

Criminals are constantly reinventing themselves and developing new ways of making crime possible. Many environmental crime cases do not involve gang criminals, but rather businessmen and women operating under the guise of legitimate businesses. For this reason, CDD conducted consciously and diligently will enhance the chances of really understanding who the customers are, their intentions throughout the financial relationship, and if they are involved in fraudulent activities. It is yet to be seen how the environment will be further protected on an international level and what this will mean for financial institutions.

Sources and references:


2. Ege, Gian & Howe, Georgina. (2020). Criminalisation of Wildlife Trafficking. 10.24921/2020.94115945.09





7. THE SHUIDONG CONNECTION: Exposing the global hub of the illegal ivory trade.


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