Illegal logging: Room for manoeuvre
by EU governments

Introduction

This paper describes what roles governments and NGOs can play at national and international -particularly EU- level, and what legal and voluntary instruments they can apply, to combat the problems of illegal logging.

Illegal logging is a pervasive and widespread problem, causing enormous damage to forests, forest peoples and the economies of producer countries. No exact figures exist, but reliable estimates suggest that over 50% of tropical timber imports into the EU are illegally sourced and between 10 and 20% of timber from the boreal region. Costs to producer countries are high, ranging from 1.8 billion USD in the Philippines to 3 billion USD in Indonesia, for instance.

Concern over the extent of illegal logging around the world has grown significantly in recent years, with discussions taking place in many international forums, including the G8, the World Summit on Sustainable Development, the WTO and the EU. This heightened awareness has developed, in part, as a response to growing evidence of the destruction of forests and the accompanying serious loss of government revenue. In part, it is an offshoot of the growing emphasis on ‘good governance’ in international policy. And in part it reflects the increasing recognition of the role of consumer countries in fuelling demand for illegal products.

Despite this growing concern, there is a clear lack of immediate and well co-ordinated action at national and international level to address the problem. This paper lists strengths and weaknesses of different options. It also examines the roles different stakeholders can and ought to play for any measures to be effective. Existing agreements that can be used to address this problem, such as the OECD Convention on Bribery, CITES, Money Laundering Legislation as well as forest certification schemes and standards for the financial sector are surveyed; however, additional legislation is needed.

Last, this paper underscores that a revision of forestry laws in most timber-producing countries is an essential condition to tackle the problem, as it has become clear that greater enforcement of forestry and conservation laws has the potential to affect rural livelihoods negatively. That is because existing legislation typically favours the timber industry over local people and often prohibits forestry activities such as small-scale timber production, fuelwood collection, and hunting that millions of poor rural households depend upon.

January 2004

Nicole Gerard

Saskia Ozinga

Chapter I: The problem of Illegal logging

1.1. Scale of illegal logging

There is no doubt that illegal logging is a pervasive problem, causing enormous damage to forests, to forest peoples and to the economies of producer countries. Some estimates suggest that the illegal timber trade may comprise over a tenth of the total global timber trade, worth more than $150 billion a year[1]. Although exact figures are difficult to obtain, given the illegal nature of the activity, reliable estimates indicate that more than half of all logging activities in particularly vulnerable regions – the Amazon Basin, Central Africa, Southeast Asia, the Russian Federation and some of the Baltic states – is illegal[2].

Activities constituting illegal logging include the harvest, transportation, purchase or sale of timber in violation of national laws. The harvesting procedure itself may be illegal, including using corrupt means to gain access to forests, extraction without permission or from a protected area, the cutting of protected species or the extraction of timber in excess of agreed limits. Illegalities may also occur during transport, such as illegal processing and export, fraudulent declaration to customs, and the avoidance of taxes and other charges.

Although the clandestine nature of the illegal trade makes its scale and value difficult to estimate, extensive unlawful operations have been uncovered wherever authorities have tried to find them. As the World Bank observes, “In many countries, illegal logging is similar in size to legal production. In others, it exceeds legal logging by a substantial margin … [P]oor governance, corruption and political alliances between parts of the private sector and ruling elites combined with minimal enforcement capacity at local and regional levels, all played a part”[3].

Illegal logging is the cause of widespread environmental damage and presents a grave threat to biodiversity. In addition, the scale of illegal logging represents an enormous loss of needed revenue to many countries. For example, a Senate Committee in the Philippines estimated that the country lost as much as $1.8 billion per year from illegal logging during the 1980s[4]. The Indonesian Government estimated in 2002 that costs related to illegal logging are $3 billion a year[5]. The substantial revenues from illegal logging sometimes fund and thereby exacerbate national and regional conflicts, as in Cambodia, Liberia and the Democratic Republic of Congo.

Illegal logging: some facts

· A joint UK–Indonesian study of the timber industry in Indonesia in 1998 suggested that about 40% of throughput was illegal, with a value in excess of $365 million.[6] More recent estimates, comparing legal harvesting against known domestic consumption plus exports, suggest that over 70% of logging in the country is illegal in some way[7].

· Over 80% of logging in the Amazon may be in violation of government controls[8].

· A World Resources Institute comparison of import and export data for Burma in 1995 revealed substantial under-declaration of timber revenues, accounting for foregone revenue of $86 million – equivalent to almost half of official timber export revenues[9].

· Studies in Cambodia in 1997 by the World Bank suggested that illegal extraction worth between $0.5–1 billion, may be over 4 million m³ – at least ten times the size of the legal harvest[10]. If this level of extraction continues, the country will be logged out within ten years of the industry’s official beginning.

The vast extent of the illegal timber trade distorts the entire global marketplace for a number of key timber products such as logs and sawn timber. It robs governments of revenue, and undermines both legal and sustainable management – which has to bear the additional costs of good husbandry and proper tax declaration. As the World Bank reports, “widespread illegal extraction makes it pointless to invest in improved logging practices. This is a classic case of concurrent government and market failure”[11].

1.2. Trade liberalisation and illegal logging

Globalisation of trade, the elimination of barriers to trade and the increase of incentives to export have all to some degree facilitated not only international timber trade generally – an intended effect – but also the ‘laundering’ of illegal timber by providing opportunities to disguise the true provenance of logs, and facilitating transport. Trade in timber has grown from $29 billion in 1961 to $152 billion in 1999[12]. It is widely argued[13] that trade liberalisation in the form of lowering tariffs on timber and timber products has contributed to this increase. Although specific research regarding the impact of trade liberalisation on illegal logging is lacking, it is clear that increase in illegal logging has gone hand in hand with increase in international trade in timber and timber products. Furthermore the breaking down of border controls (such as in the EU) and the increased transport of logs, sawn timber and paper and pulp from one producer country to another have all facilitated laundering of illegally sourced timber.

Laundering illegal logs

One current example concerns Indonesia’s recent (summer 2002) moratorium on exports of its logs, following on the temporary ban it had imposed in October 2001. Malaysia’s role in smuggling illegally sourced timber from Indonesia has been clearly exposed[14]. To counter criticisms it was laundering illegal logs, Malaysia ostensibly passed a ban on Indonesian logs[15]. However in May 2003 an investigation revealed that Indonesian timber listed under CITES (the Convention on International Trade in Endangered Species), was being smuggled into the port of Batu Pahat in Peninsular Malaysia. In addition to disregard for CITES, the evidence proved that Malaysia’s own import ban of Indonesian logs was being ignored: in the period of one hour, 32 Indonesian vessels loaded with illegal logs arrived at the port of Muar in Peninsular Malaysia [16].

1.3. Urgency of revision and reform of forestry laws

An immediate problem facing any attempt to control the trade in illegal timber and wood products lies in defining what constitutes illegality. In many countries, forestry legislation is simply unclear and insufficient in terms of legal certainty. For example, a 1998 review of Cambodian forest legislation by the White & Case law firm found that the legislation was “difficult to obtain, difficult to analyse, provides few objective standards for forest protection and provides no integrated guidelines or standards for forest management”[17].

An overview of Indonesian forest governance in 2003 revealed that 90% of state forest lands have never been legally transferred from traditional landholders to the jurisdiction of the Forestry Department, meaning that most ‘legal’ forestry operations in Indonesia are in fact of dubious legality (see box below)[18]. In Canada, also, the legal situation is complex. In large parts of British Columbia, indigenous peoples hold the rights and titles to their ancestral lands; in a recent decision, the Supreme Court of Canada upheld these rights. However, jurisdiction over resource management, including forest concessions, remains in the hands of the government, creating an unclear legal situation that has led to sometimes violent disputes over unceded lands[19].

Lack of clarity in the legal framework can be linked to a second problem that raises even more fundamental questions: the perceived legitimacy of the legislation. As a recent study by CIFOR notes[20]: “Many existing forests and conservation laws have unacceptable negative impacts on poor people, ethnic minorities, and women, and in many places they are enforced in a fashion that is discriminatory and abusive". Ways must be found to address the problems associated with illegal forestry activities that at the very least do not aggravate the negative impacts of existing regulatory efforts on the rural poor. In many cases that will mean a revision of forestry laws, taking into account local peoples’ traditional and user rights.

Uncertain legal framework

In Indonesia, the 1945 constitution provides for state control over all forests. Building on this, the 1999 forestry law explicitly classifies indigenous peoples’ forests as state forests, giving the Ministry of Forestry primary responsibility to manage these forest resources. As a result, logging, mining and plantation companies have been granted rights over vast tracts of forest lands that local people consider to be theirs – with forest destruction and human rights conflicts as a result.

The examination of global options for addressing illegal logging should therefore not be undertaken in a vacuum, but rather with the understanding that underlying issues of clarity and fairness of the national legal context, in addition to political commitment to implementing and enforcing such rules, are critical to the success of any action.

Chapter 2: Existing measures to address the problem.

Effective control of illegal logging will require action across many policy areas: the promotion of good governance, action to tackle corruption, land reform, industrial and fiscal policy reform, development assistance and so on. This paper focuses principally on the control of imports of illegally produced timber and the financial transactions surrounding the illegal timber trade. Even when thus narrowing the focus, governments and civil society organisations face many hurdles when attempting to tackle the problem. These include proving illegality and the question of co-operation with enforcement authorities in the country of origin, which is in many cases poor or non-existent.

In addition, September 11 has had a resonating impact on global initiatives in almost every domain. Currently, the international focus is on security and anti-terror measures and now, more than ever, environmental issues do not appear to receive high priority. Under such circumstances, the greater wisdom may simply be to try to work within the current international tendencies, in an attempt to make these work to the environment’s advantage. A number of international measures exist that could be used to address illegal logging as well as other environmental issues, despite the fact that they are not tailored to the environment.

Moving from general to more targeted initiatives, here we briefly examine the OECD Convention on Corruption, the EU Money Laundering Directive, measures targeting the financial sector, forest certification schemes and CITES as CITES as it relates to timber species. The list is by no means exhaustive; the examples are to be viewed as instruments that have the potential to be effective in addressing certain contributing causes and auxiliary effects of the illegal timber trade. For instance, other potential tools include stolen goods legislation and Guidelines for Multi National Enterprises, such as the OECD guidelines. For a more general overview of these tools, please refer to "Options to Control the Import of Illegally Sourced Timber" by FERN/RIIA[21].

2.1. The OECD Convention on Bribery[22]

The OECD Convention on Bribery is a legally binding instrument whose requirements must be incorporated into or implemented in national legislation by its parties (OECD members[23] and other signatory governments). The Convention makes it a criminal offence to bribe a foreign public official. As illegal logging in a number of cases involves bribery, the OECD Convention clearly has a role to play in controlling illegal logging. The problem often lies in proving that bribery has taken place. The Convention’s effectiveness would increase if all parties to the Convention implemented the recommendations made by the OECD, such as excluding companies that have been found guilty from bidding for public contracts

The globalisation of international trade has contributed greatly to international initiatives to tackle corruption across governments and within industries[24], and in the past decade and a half such initiatives have gathered momentum. Importantly, it is recognized that to be effective the fight against corruption must be undertaken on a multi-lateral basis. Importantly also, the self-interest of the entities involved is what generates this momentum. As stated in the Preamble of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, bribery “distorts international competitive conditions”. The desire to compete on equal footing, a principal impetus behind the Convention, may ultimately prove to be a significant factor in its success. Anti-corruption measures will be more assiduously applied if the perceived interest of industry lies, for competitive reasons, in eliminating the corrupt practices.

The purpose of the Convention is to deter bribery in international business transactions and to criminalize the act of bribing a foreign official[25], to give ‘bite’ in the national penal system to provisions punishing international corruption It approaches its goals with flexibility: States party are required to implement the Convention’s objectives, yet can choose the means most suited to their national legal traditions.[26]

Globalisation and fair competition drive Bribery Convention

Previous suggestions to tackle corruption had lain dormant until, in 1989, the US suggested that the OECD examine the issue of an international instrument criminalizing foreign corrupt practices. Again, globalisation of trade and concern to have all players aligned at the starting post was at the heart of this impulse; the US felt disadvantaged by the stringent requirements of its own Foreign Corrupt Practices Act (Foreign Corrupt Practices Act, 15 U.S.C.§ 78dd-2), and urged the OECD to create a level playing field. Adding to this, political change in Eastern Europe presented new opportunities in international commerce and intensified concerns regarding the issue.

The Convention entered into force in early 1999. As of February 2003, 34 countries had ratified it, including Chile, Brazil and Argentina. Obviously many countries in which illegal logging occurs are not signatories to the Convention, such as Russia, Malaysia, Indonesia, Burma, Cameroon, Gabon and Congo. Nonetheless, the OECD secretariat has undertaken outreach efforts to raise awareness regarding the Convention and its objectives[27], and it is hoped that, if the Convention proves successful in addressing bribery generally, more members will be forthcoming.

Links between bribery and illegal logging

The OECD Convention clearly can play a role in controlling illegal logging and other illegal activities. Simply put, without addressing pervasive corruption, efforts in almost any domain to combat illegal logging will be thwarted. In the forestry sector, bribery and corruption occur regularly in several areas: for example, in the allocation of a forest concession; in the setting up or operation of a pulp and paper mill that does not respect standards of health and environmental protection or that cannot source sufficient legal timber for its operations; in the procurement of official documentation legalising ‘illegal’ timber, particularly export licences (e.g. CITES permits); in the illegal construction of logging roads. A recent Greenpeace report on the timber industry in Indonesia is chilling: not only is corruption routine[28], but the military is a tool of the illegal loggers, perpetrating human rights abuses in the process. Finally, other official interests are complicit in the failure to prosecute crimes and human rights abuses committed by timber companies[29].

As with any illegal activity, the problem often lies in proving that bribery has taken place. However, because this Convention addresses the supply of bribes it adds a valuable dimension to efforts to eradicate bribery. It does not rely solely on the will of the government receiving such income to address the problem – e.g. under this Convention, a western company providing a bribe can become a target of legal action.

The instrument is imperfect. For example, a weakness of the Convention is that foreign subsidiaries of companies are not explicitly covered. This is a serious omission in that payments are often made through subsidiaries[30]. That said, the Convention casts a wide net in providing criminal liability for complicity in bribery (“incitement, aiding and abetting, or authorisation of an act of bribery”), and this could – and NGOs would argue certainly should – be instrumental in covering the parent company[31].

One of the most interesting features, however, is the monitoring and follow up foreseen by the Convention[32]. This incorporates a process of peer review to be carried out within the context of the OECD Working Group on Bribery in International Business Transactions, involving questionnaires that governments must complete[33]. Both OECD and non-OECD parties gather to examine, in a first phase the harmonization of national legislation with the Convention’s obligations. During a hearing that involves a to-and-fro between examining countries and the State party under examination, the quality of the transposition is assessed. In a follow-up, the country’s response to remedy shortcomings noted during the phase one assessment is itself assessed.

The phase two evaluation implies an assessment of the Parties’ efforts on a practical level, including the resources dedicated to the effort, the number and training of personnel, the structures in place for dealing with cases, the identification of obstacles to initiating prosecutions. It may also include an on-site visit. The procedure is open to members of civil society “who can, and have, contributed written comments….publication of the reports is mandatory and they will also be available on the Internet”[34].

It is too soon to evaluate the effectiveness of the Convention’s implementation[35]. Where the Convention’s existing provisions are not effective, they can be amended[36] given the political will to do so. The procedure is in place to remedy and adapt with experience. The Convention may yet prove an effective instrument in combating international corruption, with significant hopes for combating international trade in illegal timber[37]. A difficulty, however, will be for the Parties to obtain sufficient evidence to prosecute nationals for bribery offences. The Parties are obliged to co-operate and provide each other with legal assistance in criminal investigations and prosecutions.

To support these investigations, guidelines that help identify the types of bribery or corruption that occur in the forestry sector should be developed. Civil society exerts a watchdog role that is critical to uncovering corruption-related offences. The confidence of “whistleblowers” in coming forward will be a determining factor in the effectiveness of applying the Convention’s provisions and the possibility to denounce corruption anonymously would be extremely helpful; a complaint procedure such as that available in the EU or an ombudsman would be useful in this framework.

NGOs must continue to emphasise their role in providing and promoting information regarding the hidden destruction of the forestry industry. A few high-profile criminal prosecutions early in the Convention’s implementation could provide a critical boost to its effectiveness, as well as a deterrent to international bribery; these would be a vital indication that the will to prosecute such crimes does exist.

In sum, one of the Convention’s strengths lies in the self-interest that generated it: the will of the industries affected to eliminate the unfair competitive advantage gained and/or the cost of bribery from business transactions. The initiative should be supported by the NGO community, since in the absence of addressing the rampant corruption in the forestry sector, any other measures adopted to do so will come to nothing. Increased efforts to encourage more timber-producing countries to become Parties could be useful. Further, although not perfect, a solid peer-monitoring framework exists, covering implementation on paper and on the ground, in which civil society can hope to be active participants. With genuine monitoring and participatory procedures in place, even where substantive implementation is lacking, it can be hoped that lessons taken from experience will be incorporated and used to improve performance.

Recommendations to Governments:

· Governments should develop – at national, international or regional level – forest sector guidelines for tax inspectors and public prosecutors to help them identify the possible forms that bribery and corruption can take in the forestry sector.

· Governments should send a questionnaire to all public prosecutors to ensure that they report on all cases involving the application of bribery legislation to forestry sector-related crimes. Problems preventing prosecutions should also be reported.

2.2. Money Laundering Measures

Every EU Member State and many other countries have legislation on money laundering – the disposal of the proceeds of criminal activity. This legislation has the potential to be effective against the problem of illegal logging, so long as the legislation is sufficiently broadly defined. If illegal logging and the trade in illegally sourced timber are criminal offences under Member States’ law, then the proceeds of these activities could be subject to money laundering legislation, provided they were deposited or disposed of within the EU. The fact that the activities themselves may take place overseas and be carried out by non-EU nationals is not relevant. To date, no EU country has attempted to use this legislation to tackle the proceeds of illegal logging. Governments should alert banks, lawyers, accountants, etc. to the possibility that clients with interests in the forestry sector, particularly in countries where illegal logging is widespread, may be engaging in money laundering.

As with efforts to address international corruption, anti-money laundering efforts are another current international focal point, following September 11; again, the challenge is to try to make an existing instrument with broad-spectrum potential work for the specific purpose of addressing illegal activities such as illegal logging. Money-Laundering provisions could provide an interesting tool with which to target the illegal timber industry indirectly. Enhancing such provisions could eventually encourage, or even require financial organisations to take a more pro-active approach to due diligence research regarding their clientele. Certainly, companies known to be involved in illegal timber trade, or indeed in any illegal activity, should be shunned by the legitimate financial and credit community.

Money laundering refers to the processing of the financial proceeds of crime in order to disguise their illegal origin. At a global level, money laundering is a problem of vast proportions: one recent estimate puts worldwide money-laundering activity at roughly $1 trillion per year; another, by a former IMF Director, placed this at 2 to 5 percent of the world's gross domestic product, or between $800 billion and perhaps as high as $2 trillion[38]. National legislation allowing authorities to tackle money laundering and seize the proceeds of criminal activity has traditionally focused on the illegal trade in narcotics. Over the past decade and more, however, the need to expand the focus was increasingly recognized.

Every EU Member State possesses legislation on money laundering. At EU level, the EU’s first Directive on Money Laundering, which applied only to the proceeds of drug-related crimes, dates from 1991.[39] In December 2001, a second Directive – Directive 2001/97 – was adopted[40] that extended the scope of the 1991 legislation; it entered into force in June 2003.

To date, no EU country has attempted to use this legislation to tackle the proceeds of illegal logging. Theoretically, such legislation has the potential to be effective against the illegal timber trade, so long as the legislation is defined in a sufficiently broad manner and if the political will can be found at various levels, among Member State authorities and co-operating institutions, to give substance to these provisions. With sufficient awareness of the problem and the willingness to interpret provisions in a manner applicable to the trade in illegally sourced timber, the proceeds of this trade could be subject to seizure.

A challenge for the national NGOs, therefore, is to undertake awareness campaigns aimed at both authorities and the affected institutions regarding the destructive consequences of the illegal trade in timber, in terms of lives disrupted, loss of state revenue, and environmental devastation.

EU Directive on Money Laundering

Directive 2001/97 expands the institutions and persons subject to anti-money-laundering obligations to include insurance companies, investment firms, currency exchange offices, as well as certain non-financial businesses, such as casinos, real estate agents and in many cases legal professionals who participate in financial or corporate transactions[41] (hereinafter “affected institutions and persons”). The directive further expands the list of underlying offences that trigger its obligations. The definition of serious crimes must include, “at least”, narcotics-related offences, those linked to organised crime, fraud, corruption, and offences “punishable by a severe sentence of imprisonment” under the penal codes of the Member State[42]. Furthermore, “Member States may designate any other offence as a criminal activity for the purposes of this Directive”[43]. This is clearly a possibility to include activities surrounding the illegal timber trade, particularly as Member States are to amend the definition of this last category of ‘serious crime’ by 15 December 2004[44].

Other obligations of interest in combating illegal logging include the fact that affected institutions and persons are required to examine “with special attention any transaction which they regard as particularly likely, by its nature, to be related to money laundering”[45]. Affected institutions and persons must volunteer such information to relevant Member State authorities, and co-operate fully with those authorities when they receive requests for information[46]. Stock, foreign exchange and financial derivatives markets are also required to report to Member State supervisory bodies if they discover what could be evidence of Money Laundering[47].

If the activity in question is illegal under Member State criminal law – as is the case with illegal logging in the UK, and the Netherlands– then the proceeds of the activity could be subject to recovery, provided they were deposited or disposed of within the EU. The fact that the activity itself may take place overseas and be carried out by non-EU nationals does not preclude application of the directive’s provisions[48].

Using such legislation is not without difficulty. Setting aside the difficulties of proving that a shipment of timber is illegal[49], there is a potential hurdle of political and institutional will. Not only must Member State authorities be willing to take action to interpret the provisions in ways relevant to the forestry sector, and to act when they receive reports of suspect activities/clients, but the institutions and persons subject to the Directive’s provisions must also co-operate actively. Furthermore, in the case of offences committed in foreign countries, the success of action taken under money laundering legislation will require co-operation with enforcement and judicial authorities in the country of origin, which may not always be forthcoming.

For the Directive to be an effective tool, institutions and persons subject to the Directive must alert the appropriate Member State authorities of suspect activities. Therefore, on a very practical level, the Directive’s effectiveness also hinges on the level of awareness of the institutions carrying out those transactions – indeed, the directive is concerned with raising awareness[50]. It is likely that many of these institutions are not familiar with the extent of criminal activity in the forestry sector. Information and guidance are needed. The institutions that may handle the proceeds of the crime – banks, accountants, lawyers, etc. – should be alerted to the possibility that clients with interests in the forestry sector, particularly in countries where illegal logging is widespread, may be engaging in money laundering.

Indeed, a key to success in using any Money Laundering provision to combat illegal logging lies in inspiring banks and other relevant institutions and persons to carry out assiduous due diligence reviews, with a full awareness of the likelihood of certain clients’ involvement in such activities. They must also alert authorities where they have reason to believe that their client may be engaged in criminal activities. Given that the majority of logging activities in many countries are generally accepted as illegal, this should be a strong signal to a bank that clients operating forestry businesses in those countries may be committing forestry crimes. Such due diligence measures would in fact be good business practice, as illegality, by definition, means increased risk. Nonetheless, banks and other institutions may well resist the widening of the Directive’s reporting burden on them[51].

Here is an opportunity for NGOs to embark on an awareness-raising campaign targeting both Government and financial industry officials with targeted information regarding the devastating consequences of the illegal timber industry. Publicity of identities of wrongdoers and information exchange regarding suspicious companies is critical. As with anti-corruption measures, international efforts to address corruption (above) and money laundering can be expected to reinforce each other.

The Financial Action Task Force (FATF)[52] publishes an annual blacklist of Non Co-operating Countries and Territories, which have critical deficiencies in their anti-money-laundering systems or a demonstrated unwillingness to co-operate in anti-money-laundering efforts. As of June 2002,[53] four timber producers were included on the list: Indonesia, the Philippines, Russia and Burma.

In sum, the main advantage of Money Laundering legislation is that the international pressure to eradicate money laundering has increased recently. The significant disadvantage is that applying such provisions to proceeds of the illegal timber trade involves not only problems of proof but is premised upon the willingness of political and institutional actors to take meaningful action. This should not be ruled out; the will already exists in those Member States that have provisions applicable to illegal logging in their penal codes. A positive point is that lack of awareness of the illegal logging industry may be an obstacle that is relatively easy to fix; in the right ear, targeted information provided by NGOs could bring concrete results. As with anti-corruption measures, a few successful prosecutions could have genuine impact.

Recommendations to EU governments

· As Member States are likely to expand the list of offences in the third Directive on money laundering, it is important: 1) that governments ensure that illegal logging falls within the revised definition; and 2) that the burden of proof be shifted so that banks must report any activity they should consider suspicious based on the information they have available.

· EU governments should inform and guide institutions that may handle the proceeds of crime – banks, accountants, lawyers, etc. – about the possibility that clients with interests in the forestry sector, particularly in countries where illegal logging is widespread, may be engaging in money laundering.

· EU Member States should investigate the possibilities for taking action against illegal imports under national money laundering legislation; UK legislation in particular appears to allow for this.

2.3 Financial Institutions[54]

Finance from private sources – banks, investment and pension funds – can be an important source of revenue for logging companies and other sectors of the forestry industry. Some, notably ABN-AMRO, have already announced that they will not fund any forestry companies involved in, colluding with, or purchasing timber from illegal logging operations. Other financial institutions should follow this example. EU and Member State authorities should take action to encourage, and in due course require, financial institutions to draw up policies and action plans to ensure that they do not finance companies involved in illegal logging practices. This would also facilitate the implementation of any money laundering legislation.

The timber industry, the pulp and paper industry, the extractive industries (oil, mining) and agribusiness (soya, oil-palm, etc.) all contribute to forest loss; linkages with illegal (logging) practices have been clearly documented in all these sectors. The more capital intensive the industry, the more important is the involvement of financial institutions. Capital-intensive sectors, such as pulp and paper, extractive industries and agribusiness, all rely to some extent on financial institutions to enable them to operate. These financial institutions can be either private financial institutions, including banks and institutional investors or pension companies, or (semi) public financial institutions, including multilateral development banks, foreign development agencies and export credit agencies.

A 2002 study by Profundo[55] identified 21 financial institutions prominently involved in financing logging operations in the Congo Basin in Africa, including ABN-AMRO, HSBC, Credit Lyonnais and Deutsche Bank. A study by FERN strongly links illegal forestry activities to the lack of due diligence in researching proposed activities on the part of export credit agencies, as well as private financial institutions. The study links the involvement of ten export credit agencies to illegal practices in Indonesia, Bolivia and Peru. Without the financial backing of these institutions, many destructive and illegal activities would not be possible. Despite this, the role of these institutions has been given very limited attention in intergovernmental debates on illegal logging.

Financing destruction

A clear case of financial investors tumbling over each other to finance a environmental, social and economic disaster concerns a fully unsustainable paper mill in Indonesia: the case of Asia Pulp and Paper. Over 300 international financial institutions were heavily involved in providing finance and guarantees to Asia Pulp and Paper (APP), inflating the company with a USD 13.4 billion debt. These institutions failed to recognise that there was insufficient supply for the paper mill: the plantations that were to feed the mill were not ready and by no means able to provide the supplies, leading to large destruction of primary forests and human rights abuses. As a study by CIFOR points out, Indonesian pulp producers may have obtained as much as 40% of the wood they consumed between 1994 and 1999 from illegal sources[56].

Because of the lack of attention given to the financial sector in relation to illegal activities, few existing regulations provide effective options to address the concerns. An international framework for risk assessments, developed by the Basel Committee on Banking Supervision, was adopted in the Basel Accord[57] – which is currently being renewed – but these do not include any reference to environmental risks or risks related to illegal activities. Nevertheless, over the past few years the Committee has moved more aggressively to promote sound supervisory standards worldwide. In October 2001, the Committee published a report on Customer Due Diligence for Banks[58]. It has been suggested that the Basel Committee on Banking Supervision will formulate criteria to guide credit ratings by credit rating agencies and by banks. These criteria can play a crucial role in stimulating rating agencies and banks to give sufficient attention to risks related to illegal activities in forest-related and other sectors[59]. NGOs have been active in convincing export credit agencies to adopt binding standards, with some success: the OECD has developed a non-binding agreement and is revising this agreement with the intention to strengthen it[60].

In co-operation with NGOs, Dutch commercial banks developed in 2001 a set of minimum criteria for financial institutions servicing the Indonesian oil palm sector. It specified that banks should not be involved in clearing land by burning, deforestation, ‘illegal’ activities and activities that generate social conflicts. Related discussions led four banks (ABN-AMRO, RaboBank, INGBank and Fortis Bank) to adopt risk assessment policies that took these criteria into account. Some of the banks expanded the scope of the proposed criteria to other sectors, such as the pulp and paper sector, while others weakened the scope, by focusing exclusively on illegality[61]. A more comprehensive set of minimum criteria for was developed by ABN-AMRO for forests and plantations.

Again, their genuine effectiveness on the ground remains to be seen, but these initiatives should be in principle supported and carefully monitored by NGOs and the Banks. Adequate participation by NGOs could help to give substance to such initiatives, encouraging their adaptation where needed to ensure that they will have a positive contribution to halting illegality and supporting sustainability.

Making financiers pay

The first regulatory attempt to cast a very wide net in making polluters pay – and financiers co-responsible for the environmental degradation caused by the (illegal or legal) activities of their clients – was the U.S.’s forward-looking Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or “Superfund” of 1980. The Act does not hold financiers explicitly liable, but in the famous Fleet Factors court case in 1990, a bank was nevertheless held responsible for the environmental pollution of its client. The outcome of this trial sent a shockwave thorough the US and international banking community. Banks found liable were obliged to pay remediation costs and some banks even went bankrupt[62]. Some years later the modifications limited the liability of financial institutions.

In the European Union, given the difficult history of attempts to adopt a stringent directive on environmental liability, where the scope of proposals has steadily shrunk and liability has shifted from strict to fault-based, it is unlikely that legislation will soon make financial institutions liable for financing damaging activities. Though political will seems to stop increasingly short of imposing liability on financial backers, accountability of financial institutions in a less legal sense must continue to gather momentum.

In sum, when addressing illegal practices, such as illegal logging, the role financial institutions play cannot be overlooked. Private commercial banks as well as (semi) public export credit agencies appear to be looking more seriously into risk assessments of their lending practices; however, more is needed. NGOs have been at the forefront of confronting financial institutions with the impact of their financial activities and must continue to monitor the positive steps certain banks have taken. Without continued NGO interest and pressure, such initiatives may risk becoming paper tributes to a cosmetic public relations exercise.

Recommendations to governments and financial institutions

· Financial sector regulators should issue specific industry guidelines for forestry sector activities specifying that companies wishing to raise equity on financial markets must disclose potential risks linked to forestry crime; this should encourage all financial institutions to adopt specific policies and guidelines for investments in the forestry sector.

· Governments should ensure that export credit agencies apply best available environmental and social rules and procedures to all their operations; they should increase the information disclosure practices of their export credit agencies regarding basic project information and environmental, social and human rights impact assessments and economic analyses; and they should implement independent third-party monitoring of the projects against the above-mentioned rules, once in force.[63]

2.4. CITES

The Convention on International Trade in Endangered Species (CITES) is currently the only worldwide legal agreement that could be used to control a part of the trade in illegally logged timber. It is also the only legal agreement to have been used by some Member States to halt the import of illegally sourced timber. The big advantages of CITES are therefore that it is already in existence and is widely, if imperfectly, implemented. Although the treaty has had some success in preventing the extinction of particular endangered species, weaknesses in the verification of export permits have undermined its ability to operate effectively. To extend its coverage to a substantial volume of international trade in timber species seems unlikely to be feasible. However, it can and should be used as a safety-net mechanism in protecting individual endangered tree species.

The Convention on International Trade in Endangered Species, while not addressing illegal timber specifically, is already a much more targeted (if limited) agreement. CITES is currently the only worldwide legal agreement that could be used to control a part of the trade in illegally logged timber, targeting only certain species. It is nonetheless extremely important, as it is currently the only legal agreement to have been used by some Member States to halt the import of illegally sourced timber.

The 1973 Convention on International Trade in Endangered Species (CITES) aims to protect endangered species from over-exploitation by controlling international trade, employing a system of import and export permits. Species are placed on different lists: Appendix I includes all species that are threatened with extinction; trade in these species ‘must be subject to particularly strict regulation’ and is only authorized in exceptional circumstances. Appendix II includes species that are ‘not necessarily threatened with extinction, but in which trade must be controlled in order to avoid utilization incompatible with their survival’; this further includes other species that must be subject to regulation in order to control the targeted species effectively. Appendix III includes species that a party identifies as being subject to regulation within its jurisdiction for the purposes of preventing or restricting exploitation, and where it needs the co-operation of other parties in controlling trade. Amendments to Appendices I and II are implemented by the Conference of the Parties, whilst Parties themselves can place species on Appendix III[64].

At present, nineteen tree species are listed on CITES appendices. However, an evaluation of 255 tree species carried out in 1998 against the CITES listing criteria found that about 15 new species could be added to Appendix I and almost 100 to Appendix II, if there were the political will to do so.[65] Such additions to the appendices would need to be agreed by the Conference of Parties, and any proposal to add substantial numbers of new species, particularly those important in international trade, would almost certainly rouse strong opposition. Even unilateral additions to Appendix III can produce perverse effects.

Unintended effects

Appendix III of CITES includes species subject to regulation only within the jurisdiction of a party and for which international co-operation is needed to control trade. Indonesia, for example, listed its population of ramin on Appendix III in April 2001, with a zero quota, and the measure became effective four months later. An immediate side-effect was to increase the smuggling of ramin into Malaysia, which has entered a reservation with regard to the listing.[66]

A key weakness of CITES is that the export and import permits effectively acquire a value, opening up possibilities for fraud, theft and corruption. In theory, for an export permit to be issued, the Management Authority of the exporting state must be satisfied that the specimen was not obtained in contravention of the state’s laws for the protection of fauna and flora. On a practical level, lack of personnel and resources to verify compliance with state rules is an impediment to adequate implementation of CITES rules. Furthermore, corruption also frequently plays a significant negative role in the issuance of permits.

A further weakness lies in the cross-checking of the documents against each other. The World Conservation Monitoring Centre (WCMC), part of UNEP, monitors the legal trade taking place under CITES, receiving copies of all import and export permits issued. Simple inspection of the permits is sometimes sufficient to reveal fraud. However, CITES lacks a comprehensive and independent system of monitoring and for verifying the issuance and use of permits. Cross-checking of permits against actual timber species presents further difficulties. Central reporting and cross verification of data would enhance possibilities for verification that fraud has not occurred.

As elsewhere, the political will to devote resources to addressing these shortcomings is a critical consideration. Since the events of September 11 in the U.S. for example, border resources have been diverted from monitoring environmental rules to security concerns. To repeat a truism, in the clash between global commerce and international environmental safeguards, the environment seldom comes out on top.

Disappointing judicial review

The question of the validity of export permits has arisen in particular in recent months with regard to exports of big-leafed mahogany from Brazil. The species is listed under Appendix III of CITES, and in 2001 the Brazilian government ordered a complete ban on logging and export. Nevertheless, exports to Europe and North America continued in the first few months of 2002. Shipments reaching the U.S., Canada and a number of EU countries, including Germany, the Netherlands and Belgium, were seized by the authorities pending further enquiries. In March, the European Commission issued advice to EU management authorities that they should not accept imports of Brazilian mahogany since reasonable doubt existed over their legality.

The willingness of the Commission to take action was very welcome: in this case, the UK government nevertheless declined to take action. The arguments in a subsequent court case brought by Greenpeace against the UK revolved around whether the export permits had been validly issued and under what circumstances the authorities in the importing state would be justified in delaying the shipments and requiring further information on the validity of their export permits. Greenpeace lost their application for judicial review in the Court of Appeal: in a ruling issued on 25 July 2002, two of the three judges concluded that to allow importing countries to query the validity of export permits, even when some doubt existed, would introduce too great a level of uncertainty into international commerce. The third judge, however, dissented, accepting the argument that the survival of endangered species should take a higher priority.

In sum, CITES cannot be expected to address the problem of illegal logging as a whole, but rather with regard to certain tree species CITES’ track record has been proven over three decades, although difficulties persist surrounding fraud in permits, listing of timber species and the willingness of authorities to take action even when aware of problems. As with the Greenpeace case, NGOs must continue to insist on the effectiveness of action taken under this Convention and maintain a high profile where this is being undermined.

Recommendations for governments

· Governments should adopt a more coherent approach to checking the validity of CITES export permits at the point of import;

· Governments should attempt to include more timber species on the CITES appendices generally, as well as to encourage producer countries to list more timber species under Appendix III of CITES.

2.5. Forest certification

Forest certification is a tool to help consumers choose ethical and environmental products from responsibly managed forests. The crucial link between forest certification and verification of legality lies in the tracking of the production and movement of the timber and wood products. Only forest certification schemes that have a rigorous chain of custody control from the forest to the point at which the product is labelled, and that have a certification standard specifying legal compliance, will contribute to controlling the trade in illegally sourced timber

More specifically targeting the trade in timber and timber products, governments have at their disposal a range of instruments that can be used to increase the market share for products that can be positively identified as having been legally produced. These include certification and government procurement policies. Here we highlight the possibilities and problems of using forest certification schemes to combat illegal timber. For a more detailed overview of these tools (including government procurement) please refer to "Options to Control the Import of Illegally Sourced Timber" by FERN/RIIA[67] and FERN (2004)[68].

Forest certification is a tool to help consumers choose ethical and environmental products from responsibly managed forests. The process of certification involves the assessment of a particular forest against publicly available criteria, and only if the forest meets these standards is timber certified. For forest certification to work, consumers must be able to identify timber, wood products or paper that come from well-managed forests. These products therefore need to be labelled. Once a forest is certified, the forest owner obtains the right to label products from that forest with the certifier’s name or logo. There is, however, a long and often complicated path from the forest to the point of sale: the product supply chain. To be able to guarantee the consumer that a particular product comes from a well-managed forest, this supply chain needs to be certified as well. The ownership and control aspect of the product supply chain is referred to as the ‘chain of custody’.

Legal is not sustainable and sustainable is not legal

Certification of responsible forest management is different from legal verification. Legally sourced timber may not come from well-managed forests – indeed, often does not. It is clear that ‘legal’ does not mean ‘sustainable’, as there are many further requirements linked with sustainability other than simply legality. The award of a Forest Stewardship Council (FSC) certificate, for example, requires ten principles and fifty-six specific criteria of good forest management to be met. Only the first principle relates specifically to legal compliance – the others relate to other essential requirements of sustainability. Furthermore, illegally harvested timber does not necessarily mean unsustainably produced. In countries where existing forestry regulations are inadequate or unjust: many undesirable practices in the forestry sector – such as the allocation of concessions on indigenous peoples’ lands – may in fact be legal, under existing laws. In these cases, harvesting the timber in a sustainable manner by the local people is seen as ‘illegal’.

To use a label indicating that the forest product comes from well-managed forests as verification that the wood is legally sourced, three conditions must be fulfilled: 1) the forest certification standard must clearly require compliance with national laws (after a review of these laws, see chapter 1); 2) the standard must be implemented effectively; 3) effective chain of custody control, from the forest to the point at which the product is labelled, must take place.

In order to exclude non-certified content effectively, a credible chain of custody should include three main elements: identification, segregation and documentation. Segregation requires clients to physically keep certified wood separate from uncertified wood at all phases of transportation, production, distribution, sale and export. Accurate records must be maintained for the production of certified products. To date only the Forest Stewardship Council (FSC) scheme, and possibly the Canadian Standards Associations’s (CSA) scheme meet these requirements[69].

However as noted by the World Bank in a recent paper[70] “These ‘quality assurance’ [forest certification] systems have not been designed as tools to enforce the law and to be made compulsory. They are not based on regular and unannounced audits and on continuous sampling and they rely on paper-based chain-of-custody systems that are possible to forge. Given this, certification schemes do not provide the level of confidence that is likely to be required to demonstrate legal origin”. “By design, certification cannot be used as a detection tool: although “respect of all national and local laws and administrative requirements . . is part of FSC principles 1.1 to 1.5, certification audits do not involve probing, in-depth investigation for fraud. Legality is not the primary concern: assessors are not policemen. Certification is a quality assurance approach and demands trust and goodwill. Initial assessments and surveillance visits are limited in time, frequency and area. Current chain-of-custody requirements and audit systems are therefore vulnerable to abuse”.

In sum: Only forest certification schemes that have a rigorous chain of custody control from the forest to the point at which the product is labelled, and that have a certification standard specifying legal compliance (after a review of relevant national legislation), can contribute to controlling the trade in illegally sourced timber. Even then, additional measures are needed. Most forest certification schemes do not meet these requirements. Currently the FSC, and possibly the CSA, are the only exceptions.

Recommendations to governments

· Governments should ensure that all certification schemes operational within the EU have: 1) a forest certification standard that requires clearly that national laws have to be abided by; 2) a system in place to ensure that the standard is implemented effectively; 3) an effective chain of custody control from the forest to the point at which the product is labelled. To date, only the FSC meets these requirements.

· A clear distinction should be made between certification and labelling for sustainable forest management, and certification (possibly without labelling) for legal compliance. Legal compliance is not and should not be an eco-label.

Chapter III

Need for new legislation

Despite the wide range of policies and measures briefly described above that could affect the trade in illegally logged timber, none of them is precisely targeted at the problem. Undoubtedly, more could be done with existing legislation, or with relatively straightforward adaptations of provisions. Drawbacks to this approach include:

· Existing legislation requires close co-operation with enforcement authorities in the producing and exporting countries, which may not always be forthcoming, for lack of capacity, corruption, intimidation, etc.;

· Existing legislation requires the co-operation of enforcement and other authorities in the importing countries, which, similarly, may not always be forthcoming under the current framework, given other priorities such as the fight against terrorism and the drugs trade;

· Action that relies on judicial enforcement may take several years to show results, if a case is ever brought.

While new legislation may suffer from similar difficulties, it can target the issue more directly. Therefore, further options for legislation directly targeted at the problem of imports of illegal timber should be considered. This new legislation could take two forms:

1) sanctions could be taken against goods that can be identified as illegal;

2) sanctions could be taken against goods that cannot be positively identified as legal, thereby closing markets to all imports that are not proven to be legal (including those of ‘unknown legality’).

The first option is an EU version of the US Lacey Act