The growing trend for international banks to view the provision of financial services to individuals or small- and medium-sized enterprises involved activities with an environmental impact such as mining or logging as too risky is creating an opportunity for illicit actors according to a recent report by the Financial Action Task Force (FATF).
The report, Money Laundering from Environmental Crime, says smaller and regional financial institutions are stepping in to provide access to banking services for these types of businesses as larger banks exit less developed countries or business sectors they consider too risky.
But this may create a vulnerability that could potentially be exploited by illicit actors involved in environmental crime the report concludes.
Detection less likely
Smaller financial institutions have fewer resources to dedicate to anti-money laundering and counter financing of terrorism (AML/CFT) controls relative to their larger counterparts says the report.
It says this makes it less likely that they can detect or thoroughly investigate illicit activity.
Obscuring financial flows
The exit of larger financial institutions and entry of smaller or regional institutions has the added benefit for illicit actors of creating additional layers between the originator and the beneficiary.
Nesting the activity within a correspondent banking relationship meanwhile obscures the ultimate beneficial owner and decreases the risk of transactions associated with environmental crime being identified.
Other actors filling the gap
The report also says that larger commodity trading firms and trade finance investment funds, which may have limited AML/CFT obligations, may be moving in to fill the gap left by larger financial institutions.
Larger banks in the formal banking sector are also playing a more direct role moving and transferring financial flows associated with environmental crimes by channelling unusually large amounts to actors working in rural areas according the report (Trade-based Financial Crime, 29 June 2021, Formal banking sector playing a key role channelling financial flows from environmental crimes says FATF).
The FATF report, Money Laundering from Environmental Crime, can be found here.
Categories: Trade Based Financial crimes News