Limitations of AML techniques Controlling imports of illegal

Limitations of AML techniques Controlling imports of illegal timber to the EU Duncan Brack Senior Research Fellow, Chatham House Conference on Following the Proceeds of Environmental Crime: Fish, Forests and Filthy Lucre University of Wollongong, 23 February 2010

EU Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan • Agreed 2003 – main aim to exclude illegal timber from EU market (major importer). Components included: • Voluntary partnership agreements (VPAs) with timberproducing countries to set up legality licensing system • Analysis of existing national legislation relevant to imports of illegal timber; exploration of additional legislative options • Encouragement for government procurement policies • Encouragement for private sector initiatives • Encouragement for financial institutions to exercise due diligence in lending 2

Need for new legislation? • Licensing scheme heart of FLEGT initiative • Some countries will not join VPAs • No explicit EU legislation prohibiting the import and marketing of illegal timber and timber products • Could existing member state legislation be relevant? • Led to six studies (2005– 06): Estonia, Germany, Italy, Netherlands, Spain, UK • Assessed criminal law, civil law, customs regulations and money laundering laws • Focus is not on investigating or following up individual crimes, but on excluding imports of illegal timber 3

Money laundering legislation in UK • Proceeds of Crime Act 2002 deals with disposal of proceeds of criminal activity in UK • Criminal confiscation: applies to proceeds of any conduct which would be an offence if occurred in UK; site of crime and nationality of criminal not relevant • Possibility of civil recovery of proceeds where criminal convictions not obtained (balance of probabilities); but property not recoverable if purchased in good faith • Money laundering offences: converting, acquiring, using criminal property – though purchase at fair market value without knowledge of crime is a defence • ML includes failure to disclose (regulated sector) 4

Scenarios 1. UK importer buys plywood from exporter who sources from mill using illegal logs • Timber meets definition of ‘criminal property’ • But link difficult to prove; illegal and legal products often mixed; documentation may look genuine; if buys for ‘adequate consideration’, has further defence 2. UK bank provides loan finance for pulp mill which turns out to be sourcing illegal logs • Interest payments to bank represent gain from criminal conduct • ‘Adequate payment’ not a defence; bank operates in regulated sector, has stricter disclosure requirements 5

Practical problems • Chain of movements and transactions in the timber trade likely to look much less suspicious than in, e. g. disposing of the proceeds of drugs crime • In most cases, difficult to show that products are definitely illegal, particularly where no prosecution in country of origin • Importers outside regulated sector; will have ‘adequate consideration’ defence • Low levels of awareness, experience in enforcement agencies; competing priorities (UK 100, 000 STRs / yr) 6

Conclusions: where can AML be used? Likely to be most useful where: • Ongoing investigation or prosecution in country of origin – go after proceeds as well • Offence involves actors in regulated sector • Good cooperation exists with country of origin – but in that case VPA option may be preferable 7

Alternatives for excluding illegal timber: bilateral agreements • FLEGT voluntary partnership agreements (VPAs) with timber-producing countries: – Agreed with Ghana, Republic of Congo, Cameroon – Negotiations under way in Central African Republic, Gabon, Indonesia, Liberia, Malaysia – Other countries displaying interest, including PNG • VPAs establish a legality licensing system, subject to independent verification • Aim is to ensure that only legal timber is exported to the EU – creates protected market for legal timber • Include provisions for governance and enforcement improvements, capacity-building assistance from EU • Also possible free trade agreements, e. g. US–Peru 8

Alternatives: broader measures • US: Lacey Act amended in May 2008 to cover timber and wood products • Makes foreign illegal products illegal in US: – Unlawful to ‘import, export, transport, sell, receive, acquire or purchase in interstate or foreign commerce … any plant taken, possessed, transported or sold … in violation of any foreign law …’ • First enforcement action now under way • EU equivalent is ‘due diligence’ regulation now being debated (outcome of ‘additional options’ debate) • Timber operators required to use ‘due diligence systems’ to minimise risk of first placing illegal timber on market 9

Alternatives: public procurement policies • Central government procurement policies being used to require government buyers to source only legal / sustainable products – creates protected market • Belgium, Denmark, France, Germany, Japan, Mexico, Netherlands, New Zealand, Norway, Switzerland, UK; also EU process • Also some regional and local governments in these and other countries • Positive impacts: UK, price premiums ~3%; imports, >80% now certified 10

Conclusions • If aim is to reinforce enforcement actions in country of origin of illegal logging, AML techniques can be helpful • If aim is to exclude illegal timber systematically from a consumer market, AML techniques too limited • Ideal combination of measures: – VPAs (or similar) to establish licensing system with timberproducing countries: covers all trade, establishes identification system, promotes governance reform, important for long term – Measure to deal with timber imports from non-VPA countries – e. g. Lacey Act (least bureaucratic / trade-disruptive) – Public procurement policies aimed at legal and sustainable timber – AML actions to follow up enforcement in country of origin 11

Further information www. illegal-logging. info Next illegal logging update meeting: 24– 25 June 12