As international banks shy away from traders in developing markets, financial crime watchdogs warn that opportunities are widening for criminal groups looking to exploit the international trade system to profit from environmental crime.

The Financial Action Task Force (FATF), a global standards-setting body for fighting economic crime,  makes the remarks in a detailed new report tracking the “significant criminal gains” from illegal logging, mining, land clearance and waste trafficking.

It notes that “large financial institutions with a global presence will provide financial services in some regions to entities and individuals involved in forestry and mining”.

“However, there is a preference to maintain banking relationships with the larger actors involved in this activity,” the task force says.

“Civil society has observed a growing trend for international banks to view the provision of financial services to individuals or small to medium-sized enterprises involved in business sectors with an environmental impact… as outside their risk appetite.”

In some sectors – notably oil – that trend has been dubbed a flight to quality by larger traders, but has left smaller firms struggling to access trade finance and other banking services.

Though that may create an opportunity for niche or local financial institutions to step in and provide services to smaller traders, the report says that in sectors vulnerable to environmental crime, that shift “may also create a vulnerability that could potentially be exploited by illicit actors”.

“Smaller financial institutions have fewer resources to dedicate to [anti-money laundering] controls relative to their larger counterparts. This makes it less likely that they can detect or thoroughly investigate illicit activity,” it says.

“Further, the exit of larger financial institutions and entry of smaller and/or regional institutions have the added benefit for illicit actors, of creating additional layers between the originator and the beneficiary.”

If those additional layers involve correspondent banking activity, for example, it could become harder to identify the counterparties’ ultimate beneficial owners and so decrease the likelihood of identifying perpetrators of environmental crime, FATF suggests.

Bank wariness around jurisdictions or sectors deemed high-risk has long been a challenge to small and medium-sized companies in developing markets, but in the commodity finance space the trend has intensified over the past year.

ABN Amro revealed in August last year it would cease all trade and commodity finance activities, citing exposure to fraudulent activity in Singapore and Germany, a historic crash in oil prices and a slowdown caused by Covid-19.

BNP Paribas and ING Bank have also scaled back their trade and commodity finance businesses to focus on a smaller number of core clients, while Société Générale and Rabobank have each closed desks in certain locations.

The FATF report notes that in some cases, non-traditional funders such as larger commodity traders and trade finance investment funds could step into the gap left by major lenders’ withdrawals from certain markets.

It points out, however, that they may be subject to less stringent anti-money laundering requirements than traditional banks, again widening the opportunity for groups to launder the proceeds of environmental crime.

The report outlines several case studies where international trade transactions were exploited as a means of smuggling goods or laundering the proceeds of illegal mining or forestry.

In one case provided by Madagascan authorities, criminals manipulated prices within the domestic vanilla trade to disguise the proceeds of illegal logging.

Individuals involved in the scheme would purchase vanilla in bulk to drive the price up, then commingle the proceeds of illicit rosewood trades alongside funds from vanilla sales, giving the appearance of legitimate earnings. Tellingly, it says that vanilla prices stabilised when authorities banned rosewood exports in 2019.

In another case from Italy, a transnational criminal group was found to be involved in illicit waste trafficking – where often harmful waste products are collected and disposed of illegally – as well as money laundering and tax crimes.

Following an audit on a company dealing in scrap metal, Italian authorities found false invoices and other documents were used to simulate cross-border trade transactions worth tens of millions of dollars, as a means of laundering funds.

Gold – long identified by campaign groups as a high-risk commodity in terms of trade-based money laundering – also features in the report.

The task force describes a Chilean company targeted by US authorities. The company was accused of importing gold that was mined illegally, then exporting it to a willing refinery in Miami with the help of fake documentation. The amount of gold moved via the scheme was worth an estimated US$3.5bn, it says.

The report comes as anti-money laundering experts warn that environmental crime is increasingly moving from a conservation issue to an organised crime issue.

Wildlife trafficking, for instance, is now estimated to generate billions of dollars per year, exploiting commodities trading networks in order to smuggle goods and launder funds through the international trade system.