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Clamping down on illicit finance: new opportunities to protect nature and accelerate the climate transition

By Alex Jacobs, 7th May 2024

In every country around the world, unscrupulous actors seek to profit from exploiting nature and the climate response for their own private gain. They engage in criminal activity against the planet, including corruption and environmental crime.

The sums involved are eye-watering. While notoriously hard to pin down, it is estimated that $100bn of climate finance is lost every year to corruption, and up to $260bn per year made in illicit gains from environmental crime in areas like logging, mining, and fishing – with an associated loss of tax revenues.

But these criminals have an achilles heel: illicit financial flows. Illicit finance is their means and their end. So a major, and currently under-used, set of international tools is already available to limit their harm. The machinery of fighting illicit finance and economic crime can be cranked up to fight ‘green corruption’ and environmental crime: plugging the money that leaks out of the system, safeguarding transformative investments, restricting bad actors and hugely boosting the climate cause.

Illicit finance funds corruption and environmental crime, including illegal mining that helps fund other crime. The image shows child miners as young as 11 in Eastern Congo mining for conflict minerals. (Enough Project  / Flickr / CC BY-NC-ND 2.0 Deed)

Global illicit financial flows

By stopping illicit finance from flowing through the global finance system, and making it easier to follow dirty money, bad actors can be constrained and held accountable for their actions. As a result, investments to support this work can yield major gains: both in the volume of finance available for the climate response, and in protecting nature and political integrity.

The world’s finance systems are globally integrated across nations. They have been designed to make it easy for money to cross borders, often beyond the reach of domestic laws. The two largest hubs in the world’s financial systems remain London and New York. Alongside the vast economic benefits created by their financial markets, they both share the shameful distinction of being world-leading jurisdictions for dirty money.

The UK’s National Crime Agency estimates that hundreds of billions of pounds are laundered every year in the UK. And in 2021, the US Treasury Secretary Janet Yellen commented that ‘there’s a good argument that, right now, the best place to hide and launder ill-gotten gains is actually the United States.’

The proceeds of crime in low and middle income countries all too often end up hidden in secret companies in G7 countries – particularly the UK and US. For instance, the US-based FACT Coalition has documented the links between US financial secrecy and environmental crimes in the Amazon. The Paradise Papers provided forensic evidence of the links between offshore finance centres (including UK jurisdictions) and illegal deforestation.

So, from the G7 perspective, change starts by getting our own house in order. We need to restrict the flow of illicit finance through our own jurisdictions. At the same time, there is tremendous scope to work in partnership with others around the world to tackle crime and corruption at source. After all, the largest recipients of climate finance are among the riskiest places in the world for corruption.

The Paradise Papers showed links to illegal deforestation, including in Indonesia. Image shows deforestation in Borneo, Indonesia. (IndoMet in the Heart of Borneo / Flickr / CC BY 2.0 Deed)

Avenues for change in the UK and transnationally

The good news is that we know how to fix this problem.

The last two years have seen great progress in the UK. A small-but-mighty civil society coalition has played a crucial role in two Economic Crime Acts, closing some of the worst loopholes. For instance, for the first time ever, the UK’s Companies House now has to check the identities of company directors, rather than allowing international criminals to hide behind nonsense names like “The Chicken Thief”. Many other welcome new measures have been introduced, such as cracking down on the abuse of UK partnership structures.

But the job is only half done. In April 2024, leading activists published a new Economic Crime Manifesto, with specific recommendations on the next steps to fully close the UK’s doors to illicit finance. They would end secrecy loopholes, for instance around using trusts; boost law enforcement; and create consistent accountability for progress.

Going further, there is important potential to ramp up the use of anti-corruption sanctions. The global reach of UK markets means that UK legal cases have the potential to redefine and limit environmental crime around the world. For instance, the London Metal Exchange is being taken to court over handling the proceeds of environmental crime from the Grasberg copper mine in West Papua.

Illicit finance funds corruption and environmental crime, causing greater harms like plastic pollution in our oceans. Image shows a beach covered by plastic garbage on the island of Santa Luzia, Cape Verde. (CaptainDarwin, CC BY-SA 4.0, via Wikimedia Commons)

Similar reform agendas are being pursued around the world. The US has made huge progress with their new Corporate Transparency Act, which in January 2024 established a federal register of who owns US companies for the first time. Again, civil society played a central role, through the FACT Coalition with the backing of their far-sighted funders.

A wider movement of governments is also working towards greater transparency of who owns companies. Just the example of shadow ships hiding their true ownership behind flags of convenience, and then flouting regulations and sanctions with impunity, demonstrates the central importance of this reform.

In 2021, the UN’s FACTI panel laid out recommendations to tackle illicit finance and ‘foster financial integrity for sustainable development’. Their recommendations could fit naturally as another pillar of the Bridgetown Initiative (which seeks to mobilise large scale funds for sustainable development and reform the international financial architecture). And civil society is mobilised globally as the UNCAC Coalition, tackling environmental crime and corruption.

Success is by no means certain. All these initiatives need active support. Now, as the climate response builds up, we need to redouble our efforts to close down the scope for climate funds to leak out of the finance system and disappear beyond democratic oversight. At the same time, we need to squeeze down the space for bad actors to enjoy their illicit funds with impunity.

The opportunity for donors

Change starts at home, and donors have a crucial role to play. Addressing these systemic issues in the Global North may sometimes seem distant from climate donors’ priorities. But civil society groups working in this field already have a track record of achieving global impact from relatively modest resources. They urgently need additional support to see the job through. There is also real potential for donor collaboration, building on success to date, and mirroring the joined up approach by civil society coalitions. The Joffe Trust is actively working on these issues with UK funders and recipients alike.

Please get in touch to discuss how you can help fix the UK’s dirty money problem, in order to accelerate a just and democratic climate transition around the world.

About the author

Alex Jacobs has been the executive Director of the Joffe Trust since 2018. He was previously a board member and worked closely with Joel Joffe for 20 years. He leads the Trust’s work, with a particular focus on illicit finance and supporting non-profit leaders.

Previously, Alex worked with international NGOs, including Oxfam, Plan International, where he was Director of Programme Quality, and the Cash Learning Partnership. He founded and led the award winning charity Mango for 10 years, and spent several years based in central & southern Africa. He has held visiting fellowships at Oxford and Duke Universities.

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