What are the implications for banks?


Through Christophe gribbin, Partner, White Collar Crime & Investigations Group, Mishcon de Reya

Eenvironmental crime is a term used to cover any illegal conduct that harms the environment; it deals with everything from pollution, illegal logging and mining, trafficking and dumping of waste and chemicals to illegal wildlife trafficking. The damage caused can be measured financially: according to the latest figures from INTERPOL (International Criminal Police Organization) and the United Nations, environmental crime currently represents up to $ 259 billion per year and is increasing by 5 to 7%, but it also causes profound damage, damaging ecosystems, depleting natural resources and, in some cases, accelerating the rate of climate change.

Developments in law enforcement in the UK

In the UK, environmental crime has historically been governed by a patchwork of rather archaic laws that have sought to outlaw direct environmental damage or otherwise regulate it, with enforcement primarily run by the Agency for l environment (EA). In general, the enforcement record has been limited, with minimal cross-border investigations and, with a few exceptions, low-level fines or penalties – certainly, it is certainly not an enforcement landscape that has been. likely to confuse those who operate in the financial sector.

The environmental crime law enforcement landscape in the UK is changing, and criminal and regulatory risks to the regulated industry and other businesses are changing in three key areas.

However, the picture of environmental crime law enforcement in the UK is changing, and criminal and regulatory risks to the regulated industry and other businesses are changing in three key ways:

  1. Increased application sophistication and AML risks

First, the enforcement of environmental crime law is becoming increasingly sophisticated in the UK, for the first time involving multiple enforcement agencies together, with an appetite for further investigation in multiple jurisdictions and recovery proceeds of crime. This change in attitude towards law enforcement can be seen in part by the formation in January 2020 of a specialized enforcement unit comprising the EA, the HMRC (Her Majesty’s Revenue and Customs), the National Crime Agency and others designed to target serious and organized crimes related to waste disposal, with a greater emphasis on transnational activity.

The consolidation of several enforcement agencies was also born out of frustration at the historic failure, in the context of environmental crime, to deploy powers of financial investigation and to ensure the recovery of the proceeds of conduct. It follows that this change in approach to enforcement means that the use of forfeiture or compensation orders is to be expected, as is the deployment of disruptive enforcement powers generally associated with simple criminality in white collar, such as account freeze orders.

From the perspective of banks and other regulated entities, the increasing sophistication of environmental crime enforcement means that we are more likely to see an emerging recognition of the money laundering risks posed by companies active in industries related to crime. environmental damage. For example, companies involved in waste disposal or engaged in the processing of natural materials such as wood may be recognized as operating in high-risk sectors and subject to closer scrutiny or enhanced due diligence, calling for to a more cautious approach.

To some extent, this shift is already visible in the context of illegal wildlife trafficking, with the UK anti-money laundering framework requiring enhanced due diligence for ‘ivory and other transactions. articles related to protected species ”since December 2019 [Regulation 33(6)(vii) of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017].

  1. Focus on supply chain due diligence

Along with an increasingly robust enforcement approach, there has been a legislative movement towards accountability for a company’s supply chains, which in turn presents new risks for those who provide facilities. banks or otherwise fund such entities. For example, the UK is currently in the process of introducing legislation (Environment Bill 2019-21) that would introduce civil penalties for companies that use products obtained through illegal deforestation. In addition, companies that use forest products such as cocoa, rubber, soybeans and palm oil would be required to exercise due diligence on how the products were obtained.

The environmental bill has been delayed by the COVID-19 pandemic, according to the government, but it is still expected to become law later this year. In addition, the French government recently introduced similar legislation to address supply chain issues more generally, and the German government is considering introducing a due diligence law with a similar objective.

The impact of these measures would be to create civil liability for the companies involved rather than direct criminal exposure, but it nevertheless indicates a changing landscape with more emphasis on the integrity of supply chains, which is important. in the context of environmental protection. crime in light of the fact that harm (eg deforestation) can often occur in jurisdictions at the end of a supply chain.

As it stands, the AML (anti-money laundering) – and more broadly reputational – risks associated with supply chains are generally not as well recognized as the risks associated with operating in commercial establishments. jurisdictions or particular industries, but the shift in legislation across Europe to the supply chain due to due diligence is likely to translate, as this culture takes hold, into a component of risk assessments of LBA.

  1. ESG and regulation

Finally, although a priori a positive development for the environment, the growing demand for the introduction of environmental, social and governance (ESG) measures by organizations, or investment products reflecting ESG objectives, presents new risks of application of its own, in particular around allegations of “greenwashing”.

For those in the regulated sector, the FCA (Financial Conduct Authority) has indicated that it will take action when it sees a potential for greenwashing, which it has defined as “marketing that presents products, activities or policies. of an organization as producing positive environmental results when it does not ”—with particular emphasis on the risk that consumers will be misled or that products will be poorly sold. In addition, the Prudential Regulation Authority (PRA) and FCA are both introducing mandatory climate risk disclosures for banks and listed companies, with asset managers and other companies to follow, in order to to allow investors and others to form an opinion on, for example, the sustainability of the respective companies.

These changes inevitably present new risks, and negotiating the new regulatory landscape will require caution. While we’re unlikely to see a robust application response in all but the most egregious cases, the only reputational damage from a greenwashing discovery, for example, is likely to be significant.

Next steps

These three developments in the UK make it clear that the travel direction is towards much closer scrutiny of those involved in environmental damage and stricter enforcement of environmental crime laws. This will inevitably extend to those engaged in financing or investing in these entities, bringing new AML considerations. The rise of ESG brings more direct problems for companies seeking to actively market themselves as having a positive impact on the environment.

This is a rapidly developing area, and as policymakers around the world address these issues, the pace of change in environmental crime law enforcement is set to accelerate further. This will have further implications across the industry, including for banks, businesses and investors, and should be watched closely.


Christophe gribbin is a partner in the White Collar Crime & Investigations Group of Mishcon de Reya in London. He advises individuals and businesses facing regulatory or criminal investigations in a wide range of areas, including money laundering, corruption, fraud, market abuse and other financial crimes.

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