Corruption often relies on banks to thrive. With the right tools, banks are an important part of the fight against corruption. wikicommons

It was the US$100 million in his bank account that gave him away.

There was no legitimate reason why Labora Sitorus, a low ranking police officer in Sorong in Indonesia’s West Papua province, should be quite so wealthy.

As it turned out, Sitorus had a nice little earner on the side – illegal logging.

In 2013, police seized 115 containers of the protected, rare tropical hardwood merbau – logged illegally, shipped from Sorong, and bound for China – where it’s estimated it would have sold for $US20 million.

They also found 400,000 litres of smuggled gasoline in a boat registered in his name.

And then, investigations by Indonesia’s Financial Investigation Unit (PPTAK) revealed Labora had paid up to US$1 million in bribes to various local, regional and national police officials in just three months – and that more than US$127 million in suspicious transactions had passed through his bank accounts in the previous five years.

Sitorus was originally sentenced to 2 years in jail and fined $US4000. But a Supreme Court retrial last year found him guilty of illegal logging, fuel smuggling and money laundering, and sent him to prison for 15 years.

The case is an example of the integral role banks and other financial service providers play in facilitating environmental crime – and shows how diligent monitoring can help stop it, according to a new study.

FINANCING, ORGANISATION AND CORRUPTION

“There is a pervasive problem within the forestry sector: the worst offences often involve actors that regularly get away with them,” says Jacob Phelps, a scientist from the Center for International Forestry Research (CIFOR) and one of the authors of the study.

“Laws tend to be enforced against the small guy who’s found with the axe or match in hand, but not against those that stand to benefit most from illegality – not his boss, not the person who put up the money or the politician that gave out the illegal timber or agricultural concession.”

These ‘intellectual actors’ – those responsible for the financing, organisation or corruption that enable illegal environmental activities – rely on the services provided by the financial sector to deposit their profits, make and receive payments, and launder money.

“The persistent land clearing, illegal logging and wildlife trafficking we see today could not happen without the financial sector,” says Phelps.

There is increasing momentum in the global banking sector towards voluntary sustainability commitments – as seen at the recent London conference CIFOR organised on the topic, says Sophia Gnych, a CIFOR researcher who also worked on the paper.

READ THE RESEARCH:

• Forests, financial services and customer due diligence: Efforts to target illegality, money laundering and corruption in Indonesia

But voluntary measures lack impact if a bank then allows those perpetrating environmental crimes to continue using its services.

“Legal structures give voluntary policies more teeth and give sustainable investors a solid framework to build on,” Gnych says.

“Ultimately voluntary initiatives will struggle to succeed and scale-up without legal backing behind them – you need both the carrot and the stick.”

LESSONS FROM DRUG DEALERS AND TERRORISTS

So what can banks – and the governments regulating them – do to crack down on the ‘big fish’ benefitting from illegal logging and other forest crimes?

Jacob Phelps says that a number of useful tools already exist such as ‘customer due diligence’ protocols designed to tackle money laundering as part of ‘know your customer’ regulations that many countries already have in place.

They require financial service providers to independently verify the identity of their customers in order to target terrorism financing and the illegal drug trade.

Similar regulations are needed, Phelps says, to detect money laundering associated with illegal forest activities.

“If a bank cannot help in funding terrorism, why can a bank help an illegal logger to log illegally, or help an oil palm investor to clear land for agriculture illegally, or pay a bribe for an illegal concession?” he asks.

“This doesn’t require creating new tools – it’s just about extending their scope to environmental issues.”

Indonesia does already have some of the institutional arrangements to do this, he says, and there are some isolated examples of them being used.

Critically, the country also has a new independent regulator, the Financial Service Authority (OJK) that is taking sustainability seriously.

But the challenges are many.

WILLING AND ABLE. BUT CAPABLE?

To do the checks required by due diligence protocols, financial service providers need up-to-date information on permits, concession boundaries, and land ownership – information that’s not always readily available from Indonesia’s government agencies or the decentralised regional authorities on the fringes of the archipelago.

And investigating wrong-doing in the forestry sector requires specialised knowledge – from permit systems to money laundering monitoring to the GIS technology used to track illegal deforestation.

“One of the biggest barriers to the implementation of these tools isn’t the willingness to do it, or the acknowledgement that it’s a legal requirement – but it’s actually the banks’ capacity in terms of human resources training to understand these tools, and collect the data needed,” Gnych says.

“Capacity is a huge stumbling block.”

And there are political barriers too.

“We’re asking powerful elites to make choices that impact powerful elites – so it’s not going to be easy,” says Phelps.

But he’s confident in Indonesia at least, there remains a strong public appetite to tackle corruption of all forms.

And that’s a solid starting point for efforts to stop forest criminals like Labora Sitorus and his associates making multiple millions from illegal logging.

“The point is we can’t just rely on voluntary standards for the financial services industry,” Phelps says.

“At the end of the day there is very little motivation for a bank to adopt very stringent guidelines on who it can do business with. Banks tend not to be great regulators of themselves – and that really highlights the role of the banking regulator.”

“We can support banks with their voluntary environmental commitments – but we also need to hold their feet to the fire if we want them to adopt meaningful standards.”

“We need to use all the tools in the tool kit rather than just one or two.”

For more information on the banking sector’s involvement in the fight against corruption please contact Jacob Phelps at J.Phelps@cgiar.org or Sophia Gnych at S.Gnych@cgiar.org

This research was carried out by CIFOR as part of the CGIAR Research Program on Forests, Trees and Agroforestry.