According to Global Canopy, US$6.1 trillion in funding was provided to the 350 companies with the greatest risk exposures to tropical deforestation by some 150 financial institutions in 2023. This is bad news for the financial sector—and the world at large—since deforestation is responsible for a range of devastating environmental and social impacts and poses a serious threat to global efforts to tackle climate change. Deforestation—covering the destruction, conversion or degradation of natural forests—is perhaps the most widely discussed form of land conversion (a broader term that covers land-use changes—for example, into agricultural land—across a range of different biomes, such as savannah, grassland and marshland, not merely forested areas).

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Deforestation and land conversion: a serious global issue

Cutting down trees reduces the number of carbon sequesters that capture and store then prevent carbon from being released into the atmosphere, where it contributes to global warming. This activity significantly undermines efforts to curb climate change; land-use changes have been estimated to be responsible for as much as 12 to 20 percent of global carbon emissions. Indeed, the latest United Nations’ Intergovernmental Panel on Climate Change (IPCC) report stressed that one of the most important mitigation options to fight climate change is to reduce the conversion of existing natural ecosystems.

However, it can be just as problematic when people plant trees on land that previously didn’t have them or even replace the trees they cut down with different ones. When grassland or marshland is cleared to make way for palm-oil plantations, the biome is significantly altered, changing the habitat of the many species that have adapted to that specific environment. Monoculture plantations for commodities, such as soy, coffee, rubber and palm oil, host and support nowhere near as many diverse species as the wild and natural ecosystems they replace and cause soil degradation. In fact, 69 percent of the world’s wildlife has been lost since 1970—the majority from land-conversion hotspots.

What’s more, land conversion accounts for numerous human-rights violations through illegal land grabbing and violence against Indigenous Peoples and local communities in forested areas. It is the primary cause of the murders of environmental human-rights defenders across the world, equating to a rate of one killing every other day. It is further associated with forced labour. It is thought, for example, that up to 40 percent of all deforestation worldwide is carried out by victims of modern slavery or forced labour, and that, as a result, slave-based deforestation is responsible for the emissions of around 2.54 billion tonnes of carbon dioxide each year. Child labour, too, is often utilised in commodity-producing sectors that drive land conversion, such as mining (children can be sent into smaller spaces than adults) and on cocoa farms (for example, Ghana’s remote cocoa belt, where children as young as five have been found wielding machetes to harvest beans that are used in the supply chains of global household brand names).

Land conversion is thought to increase the risk of zoonotic-disease outbreaks since land-clearing pushes wildlife outside their former habitats, increasing interactions between humans, wildlife and domestic animals, resulting in the mergence and emergence of novel pathogens.

Given these effects, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) has estimated that the degradation of the Earth’s land surface through human activities is currently negatively impacting the well-being of at least 3.2 billion people, pushing the planet towards a sixth mass extinction and costing more than 10 percent of the annual global gross domestic product (GDP) in loss of biodiversity and ecosystem services.

Impact on financial institutions

This is bad news for society, but how does it specifically affect financial institutions? Financial firms can be exposed to—and essentially support—deforestation and wider land-conversion activities directly and/or indirectly through debt or equity investments, the provision of capital or financial services (including correspondent banking) and the financing of trade in hard and soft commodities—particularly cattle, soy, palm oil, timber, cocoa, coffee, rubber, minerals, oil and gas—for which land is aggressively cleared.

These commodities pose high risks to firms since, globally, more than 90 percent of forest loss is thought to be from conversion into agricultural land, according to satellite imagery from the Food and Agriculture Organization (FAO) of the United Nations. The level of risk associated with each commodity depends on the region of origin: for example, research indicates that in Southeast Asia, rubber, pulp and palm oil drive most of the land conversion; in South America, soy and cattle; and in Africa, cocoa, coffee and timber.

Through this exposure, land conversion presents numerous supply-chain risks to firms, namely:

• The reputational risks posed by adverse media (exacerbated further if linked to any human-rights abuses in the context of land conversion).
• The legal risks represented by increasing regulatory and legislative pressures on companies and financial institutions to prevent deforestation.
• The physical risks present, given that most bank-financed businesses and commercial services ultimately depend on natural capital and resources directly or through their supply chains. Aggressive consumption of resources reduces their availability in the long term, undermining sustainable development and creating economic instability. Indeed, the World Economic Forum (WEF) has estimated that at least 50 percent of global GDP is reliant on nature and warned that the impacts of climate change would significantly destabilise global trade.

Deforestation and land conversion: convergence with financial crime

Given these issues and the substantial environmental, social and governance (ESG)-related concerns, many financial institutions are already risk-assessing and attempting to limit their exposures to land-conversion-related activities. However, in addition—and as important to compliance teams as they are to ESG teams—land conversions, regardless of whether they are legal, frequently converge with an array of financial crimes (and, indeed, much activity occurs in grey areas between the two).

These financial crimes can actively drive, enable or converge with land conversion in numerous ways. Corruption and bribery, for example, widely underscore the activity—used to secure permits for land clearing that should not have been issued legally—as does fraud via the alteration or falsification of documentation, such as mis-invoicing, permit trading, trade-database hacking or fraudulent bills of lading that can conceal or misrepresent activities.

Not only are front companies used to evade taxes on land-clearing activities, but vast volumes of financial flows from high-secrecy tax havens actively fund land-conversion activities. Researchers have found that tax havens offer a major conduit through which investors can fund agribusinesses in tropical areas. For example, 68 percent of all investigated foreign capital flowing into nine of the top companies in the soy and beef sectors in the Brazilian Amazon rainforest was transferred through tax havens between 2000 and 2011.

A Serious and organised criminal activity

Confluence with serious, organised crime is also a key risk. Not only is land often cleared to make way for the cultivation of drugs, including marijuana, opium and cocaine, but also to build the infrastructure—such as airstrips, makeshift river ports and roads—necessary to transport narcotics through undeveloped areas. An even greater risk to firms, overlapping with commodity production, is that land is cleared to establish ranches, plantations and mines through which illicit proceeds from serious, organised criminal activity—often drug trafficking—are then laundered (think of the so-called “blood avocados” associated with Mexican drug-cartel activities). In Honduras, for example, the land is cleared by narco-traffickers in wetlands and mangrove swamps to produce palm oil to both legalise drug-trafficking income and legitimise the groups’ presence in areas traversed by trafficking routes.

Cattle can also be used to launder the proceeds of illicit activity. Drug traffickers—especially in Colombia, Honduras and Guatemala––are known to launder revenue from drugs by buying or grabbing land, which they convert into pasture for cattle (also purchased with narco-trafficking proceeds). When the cattle are sold, it is difficult to trace profits back to the drug networks, and their illicit proceeds are effectively laundered. This practice, known as narco-ranching, is suspected of contributing up to 87 percent of deforestation in the Maya Biosphere Reserve, a large UNESCO (United Nations Educational, Scientific and Cultural Organization) heritage forested area covering more than two million hectares of rainforest across northern Guatemala and bordering other protected forests in Mexico and Belize.

Accompanying and feeding such laundering activities, transnational organised crime syndicates are rapidly diversifying their income streams across multiple environmental crimes, engaging in wildlife, drug, mineral and timber trafficking simultaneously. These goods often share the same transit routes, trading methods and shipping processes and move through the same geographical hotspots, ports and consolidation hubs. Indeed, criminal groups that previously operated in cities and urban areas and relocated to the Amazon to occupy drug-trafficking routes have since stayed to take advantage of the rainforest’s natural resources, such as gold and timber, which give them an even higher “growth potential”.

Indeed, in 2022, more than 320 illegal gold mines were counted in the nine states that make up Brazil’s Legal Amazon (Amazônia). Major drug-trafficking factions, including the Brazilian Primeiro Comando da Capital (PCC), have infiltrated mining operations in Indigenous territories, running protection rackets, extorting taxes, controlling pits and forging partnerships with gangs in neighbouring Venezuela to sell contraband minerals. In Colombia and Peru—the world’s largest producers of cocaine—the value of illegal gold exports now exceeds that of cocaine; this is perhaps unsurprising, given that gold can fetch almost twice the price of cocaine, ounce for ounce, thanks to a 360-percent increase in its value between 1990 and 2020.

Themis and WWF’s Deforestation and Land Conversion Toolkit

This research, and more, formed the basis of the Themis and WWF-UK (World Wide Fund for Nature-UK) report “Financial Crimes and Land Conversion: Uncovering Risk for Financial Institutions”, which will be published imminently and acts as an introduction to the Deforestation and Land Conversion Toolkit that is being developed to help firms mitigate their risk exposures to deforestation and land-conversion-related financial crimes. The toolkit will be launched later this year and will equip firms to better detect and monitor illicit activities related to land conversion, encompassing typologies, red-flag indicators, governance and risk assessments.

The toolkit is intended to be a highly practical digital resource that firms can incorporate into their existing control and risk frameworks, helping them to mitigate their own risk exposures to the illicit financial flows associated with land conversion and, therefore, ultimately reduce the financing and impacts of this devastatingly harmful activity across the world. The toolkit will be similar in structure to the highly successful Illegal Wildlife Trade Toolkit already developed by Themis with WWF and TRAFFIC (Wildlife Trade Monitoring Network) for the Government of the United Kingdom’s Serious and Organised Crime Strategy.

The digital Deforestation and Land Conversion Toolkit will help firms lessen their risk exposures to a substantial array of financial crimes beyond illegal deforestation and other environmental crimes, such as illegal logging, given the extensive convergence that exists. Understanding their exposures to deforestation and land-conversion activities can help firms map out the risks of related financial-crime activities at various touchpoints in commodity supply chains—for example, corruption, bribery, tax evasion and fraud.

Dickon Johnstone, founder and chief executive officer of Themis, explained, “Without financing or complicity from the banking industry—whether witting or unwitting—environmental criminals and those profiting from financial crimes related to land conversion will be denied vital sources of funding, reducing their ability to undertake such destructive activities at scale.”

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