Index

Illegal Trade in Natural Resources

Duncan Brack

“The major categories of natural resources traded illegally are wildlife, timber and fish. It is of course impossible to know for sure the total value of illegal trade in these products, but educated guesses put it at a minimum of US$20 billion a year…”

Over the last three decades, the national and international framework for the protection of the natural environment has evolved rapidly. As legislation has expanded, however, so too have opportunities to evade it. International environmental crime—i.e., deliberate evasion of environmental laws and regulations by individuals and companies in the pursuit of personal financial benefit, where the impacts are transboundary or global—is a serious and growing problem.

It has been made worse by the general trend towards trade liberalization and deregulation; wherever the legal movement of products across borders is facilitated, so too are illegal movements. Yet the topic has hardly ever been discussed at the World Trade Organization (WTO). In fact, those hostile to various measures proposed to control illegal trade have often cited WTO rules as an obstacle to their adoption; though whether WTO rules really would impede them is entirely speculative.

The major categories of natural resources traded illegally are wildlife, timber and fish. It is of course impossible to know for sure the total value of illegal trade in these products, but educated guesses put it at a minimum of US$20 billion a year, perhaps up to 25 per cent of the total legal trade and over five per cent of the size of the global drugs trade. Other natural resources, including oil, diamonds and other gemstones, and minerals such as coltan, are also traded illegally, but in general less extensively than the three main categories considered here. They are also more commonly associated with conflict, which raises slightly different questions.

Why does international environmental crime exist? In practice, there are a number of drivers behind the formation of environmental black markets:

• Enforcement failure. Where illegal activities exist because of problems with enforcement, including suitability of regulations, costs of compliance (detection of environmental contraband is often very difficult), lack of resources and expertise, corruption, and political and economic disruption.

• Regulatory failure. Where illegal activities result from a lack of appropriate regulation, including failures to determine and/or protect property rights.

• Differential costs or values. Where illegal activities are driven by regulations creating cost differentials between legal and illegal products, by differential compliance costs (or different consumer prices) in different countries, by demand for scarce products for which substitutes are not available or accepted, and by a lack of concern for the environment.

The reported incidence of illegal activities has undoubtedly grown in recent years, partly because the implementation of new multilateral environmental agreements (MEAs) has provided new opportunities for evasion, and partly because greater public and governmental awareness has led to more investigation of the issues.

Other contributory factors include the general trend towards trade liberalization, as noted, and increased regional economic integration, which both make enforcing border controls more difficult, and the growth of transnational corporations, amongst whom regulations are difficult to enforce. The transformation of the former Soviet bloc, and the difficulties of environmental law making and law enforcement and the rise of organized crime in many ex-Soviet economies, have also contributed to the problem, as has the growing involvement of developing countries in MEAs, but—in many of them—a lack of adequate resources to implement their provisions effectively.

Wildlife

The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) was agreed in Washington in 1973 and came into force in 1975. It has 169 parties, and is generally regarded as one of the more successful of the international conservation treaties.

The illegal trade in wildlife, in contravention of the controls established by CITES, is perhaps the highest-profile area of international environmental crime. The poaching and smuggling of commodities such as ivory, rhino horn, tiger bones, sturgeon eggs, bear galls, wild-caught parrots and other wildlife with a high commercial value directly threatens some or all of the populations of these species in the wild. Unfettered trade in derivatives from hundreds of other less charismatic species also serves to further deplete wild populations subject to many other pressures. Because of its diverse origins, multiplicity of products, broad consumer base and innately clandestine, high-value/low-volume nature, it may also be one of the hardest to control— though there are many instances where enforcement authorities have learnt to cooperate with some success.

The wildlife trade flows predominantly from less developed to more developed countries (i.e., South to North) and reflects consumption patterns ranging from medical need through to the frivolous. Major sources of demand are the exotic pet and flower trade, ingredients for traditional East Asian medicine, cultural materials (such as ivory for personal hanko seals in Japan and rhino horns for dagger handles in the Yemen) and exotic curios and accessories. The clandestine nature of the illegal trade means that live specimens are frequently transported in terrible conditions and many die en route; mortality levels of 80 per cent, for example, were associated with the wild-caught bird trade from Africa to Europe in the late 1980s.

CITES relies on a system of export and import permits issued by national management authorities for controlling the trade in some 34,000 species of wildlife; it does not seek to regulate habitat protection or control harvesting operations within countries. The most obvious way of circumventing these trade controls is through direct poaching and smuggling. Fraudulent applications for genuine CITES permits, faked certificates, making false declarations to customs or laundering illegal specimens as captive-bred or as pre-Convention stockpiles, have also been used to aid and abet illegal traffic.

Compiling data from various sources, the total global commercial exchange of wildlife has been estimated at between US$10–20 billion a year, of which some US$5 billion may be in contravention of CITES. Smuggling of wildlife species can be highly lucrative. An African grey parrot exported from the Ivory Coast, for example, may be worth US$20 at the time of capture, US$100 at the point of export, US$600 to an importer in the US or Europe and over US$1,100 to a specialist retailer.

Logging

Illegal logging takes place when timber is harvested, transported, bought or sold in violation of national laws. By logging in protected areas (such as national parks) or over the allowed quota, by processing the logs (into plywood, for example, or pulp for paper) without acquiring licenses, and by exporting the timber and wood products without paying export duties, companies may be able to generate much greater profits for themselves than by adhering to national laws and regulations. The extent of illegal logging in some countries is so large, and law enforcement is so poor, that the chances of detection and punishment may be very small—and the incentives to operate illegally correspondingly large.

The impacts of these illegal activities are multiple. Most obviously, these are environmental: illegal logging depletes forests, destroys the habitats of endangered species and impairs the ability of land to absorb carbon dioxide emissions. They are also economic: estimates from Indonesia suggest that the government is currently losing more than US$1 billion a year in unpaid taxes (out of a total budget, in 2003, of about $40 billion). World Bank studies in Cambodia in 1997 suggested that illegal extraction, worth US$0.5–1 billion, was over 4 million cubic meters a year, at least ten times the size of the legal harvest. If that level of extraction continues, the country will be logged out within ten years of the industry starting, removing a valuable source of employment and export revenues for the future.

Illegal logging also undermines respect for the rule of law and of government, and is frequently associated with corruption, particularly in the allocation of timber concessions. For example, Judge Barnett’s report on the timber industry in Papua New Guinea in 1989 described companies “roaming the countryside with the assurance of robber barons, bribing politicians and leaders, creating social disharmony and ignoring laws.”

The substantial revenues from illegal logging sometimes fund national and regional conflict. In Cambodia, Khmer Rouge forces were sustained primarily by the revenue from logging areas under their control for several years in the mid-1990s, until, under donor pressure, Thailand and the Cambodian government cooperated to close their joint border to log exports at the end of 1996, forcing the insurgents to open peace negotiations.

Finally, as illegally logged timber is invariably cheaper than legitimate products, it distorts global markets and undermines incentives for sustainable forest management. A U.S. industry study published in 2004 estimated that world prices were depressed by between 7 and 16 per cent (depending on product) by the prevalence of illegal products in the market, resulting in a loss to U.S. firms of at least US$460 million each year in foregone sales. As the World Bank observed in 1999, “widespread illegal extraction makes it pointless to invest in improved logging practices. This is a classic case of concurrent government and market failure.”

It is believed that more than half of all logging activities in the most vulnerable forest regions—Southeast Asia, Central Africa, South America and Russia—may be conducted illegally. Worldwide, estimates suggest that illegal activities may account for over a tenth of the total global timber trade, representing products worth at least US$15 billion a year.

Fishing

As with the illegal wildlife trade, illegal fishing poses threats to species survival (including other species caught alongside the fish, such as sea turtles or seabirds), but it also causes major economic costs through exhaustion of fish stocks, a problem in particular for developing countries, which often rely on fish as a major source of protein. UN terminology recognizes “illegal, unreported and unregulated” (IUU) fishing: illegal fishing takes place where fishing is against the law; unreported fishing takes place where legal instruments are in place to control fishing, but no requirements for reporting, or penalties for nonreporting, exist; and unregulated fishing occurs where legal instruments are not required, not applied, or not adequate.

A United Kingdom study of ten developing countries in Africa and Oceania in 2005 estimated that IUU fishing was worth an average 23 per cent of the total declared catch. The study showed a strong inverse relationship between the extent of IUU fishing and the level of fisheries monitoring, control and surveillance in the country, and also its general level of governance. Extrapolating these findings worldwide gave an estimated annual value of IUU fishing of US$4.2 billion to US$9.5 billion.

One of the best-known examples of IUU fishing is that of the Patagonian toothfish, a large, long-lived and slow-growing deepwater fish increasingly in demand as a replacement for over-exploited whitefish such as cod. Systematic commercial exploitation started only in the late 1980s, but rapidly exhausted stocks off Argentina and South Africa. In 1996–97, authorized catches under the Convention on the Conservation of Antarctic Marine Living Resources (CCAMLR) amounted to 10,370 tonnes (with an additional 22,386 tonnes in catches in exclusive economic zones), but estimates from port landings and trade data suggested that an additional 42,800 tonnes were caught illegally. The price of the toothfish fell drastically, and illegal fishing in 1997–98 was estimated to have reached the lower figure of 33,500 tonnes.

Extensive exploitation of toothfish stocks was undertaken by ships operating out of non- CCAMLR states. As Convention member states gradually closed their ports to unlicensed landings, the pirate ships switched to transshipping their haul directly to freighters at sea; the catch was then processed on land, often passing through free trade zones. This demonstrates many of the problems connected with controlling IUU fishing: non-signatory states to the relevant convention, ships flying flags of convenience to escape domestic controls, and the enormous difficulty of tracking illegal activities across a huge area of ocean.

Even in comparatively well-regulated European waters, illegal fishing is rife, created largely by the shrinking quotas—including those set under the European Union’s Common Fisheries Policy—for commercially valuable human consumption stocks. Misreporting of catches and retention of undersized fish or fish caught over the allowed quotas is common; recent estimates suggest that up to 40 per cent of the total catch of the Scottish fleet, for example, may be illegal. Financial and contractual pressure from retailers (usually supermarket chains) to supply regular quantities of fresh fish often forces the processors to buy from the black market, which in turn undercuts legitimate sales.

Interests and Fault Lines

Everyone is opposed to international environmental crime; at least ostensibly. In reality, of course, many private individuals, companies and government officials benefit from illegal trade, either directly, or indirectly, through bribery and corruption.

In the long run, it will be difficult to address the root causes of illegal trade without dealing with many other issues, including the legal and regulatory structure (sometimes laws are so complicated and contradictory that it is impossible—or at least uneconomic— to operate legally), government budgetary policy (in some countries the armed forces operate logging concessions to generate the income they need), and corruption. This is why illegal trade is increasingly being seen more broadly as an issue of governance.

It is nevertheless clear that when resources and political will are focused on the issue, enforcement operations can have dramatic effects. In response to international pressure stimulated by non-governmental organizations (NGOs), in spring 2005, Indonesia launched a huge crackdown on the illegal trade in merbau logs from West Papua to China. 400,000 cubic meters of logs were seized in just two months (equivalent to 3 per cent of the annual global tropical log trade), and 173 arrests were made; shortages of merbau and price rises were reported in both Indonesia and China, and almost a quarter of a billion dollars of revenue losses to the Indonesian government were prevented. However, this is far from the usual story. Enforcement agencies are generally understaffed and under-resourced and often lack political backing.

In recent years, attention has focused on the role of consumers in fuelling illegal trade through providing markets for illegal products. The Group of Eight (G8), for example, which includes all of the biggest consuming countries of natural resources apart from China, expressed concern over environmental crime in general, and illegal logging in particular, in 1998 and 2005. Most attention in recent years has focused on the debate over the control of illegal logging, with a series of World Bank-coordinated Forest Law Enforcement and Governance conferences bringing together consumer and producer country governments, industry and civil society in East Asia (2001), Africa (2003) and Europe & North Asia (2005). In 2003 the EU launched its Forest Law Enforcement, Governance and Trade (FLEGT) initiative, of which the centerpiece is a new licensing system designed to exclude imports of illegal timber and timber products from cooperating producer countries.

Trade control mechanisms like this are becoming more common, often learning from thirty years’ experience with CITES export and import permits. CITES has had considerable success, though it is hampered by the lack of a financial mechanism to provide assistance with compliance and enforcement. Most of the species it protects are not of significant commercial importance, which means that important trading interests have not, in general, been threatened, but this is beginning to change, with the gradual introduction of more widely traded timber and fish species to the CITES appendices.

No single global agreement governs fisheries management, though a number of regional fisheries agreements have introduced trade controls to tackle IUU fishing. The Catch Documentation Scheme for the Patagonian toothfish, introduced under CCAMLR in 2000, is designed to exclude illegally caught toothfish from international markets. The Scheme has had a clear impact on the price of toothfish, with legal fish able to command a 20-30 per cent price premium—overcoming, at least to an extent, the problem of legal harvesting being undercut by cheaper illegal activities. In 2003, a number of governments established the High Seas Task Force, with the objective of defining practical solutions to the problem of IUU fishing.

As noted above, the EU FLEGT initiative introduces a timber licensing scheme, similar in principle to the CCAMLR Catch Documentation Scheme; it came into force in December 2005. Producer countries with whom the EU will negotiate bilateral “voluntary partnership agreements” will ensure that all exports destined for the EU have been legally produced and processed at every stage of their chain of custody; some form of independent verification of the licenses is likely. Building up the scheme through a series of bilateral agreements—a necessity given the lack of a multilateral framework for the timber trade—does, of course, render it vulnerable to evasion by shipping products via nonpartner countries, but the EU is hopeful of reaching regional agreements. A number of EU governments have also started to use public procurement policy to source only legal (and, where possible, sustainable) timber and timber products, and several private certification schemes—such as the Forest Stewardship Council—exist which can guarantee this. In some countries, particularly the United Kingdom, this combination of policy measures is beginning to have a clear market impact.

The use of trade controls such as licensing and public procurement has raised concerns amongst some major timber-exporting countries, which fear the emergence of potential barriers to markets for their exports. Most developing countries, however, seem ready to accept the EU licensing scheme (it also contains a promise of capacity-building assistance), and the main antagonist at present is the U.S., whose timber industry is based on a large number of small forest owners amongst whom certification systems are difficult to promote. During the G8 discussions on illegal logging in 2005, the U.S., while content to support enforcement assistance (particularly of the high-tech variety) to timber-producing countries, was notably less enthusiastic about procurement and licensing systems.

Trends and Future Directions

Despite the increasing attention paid to these areas in recent years, and despite some individual success stories, there is little evidence as yet of systematic progress in reducing illegal trade in natural resources. Mechanisms designed to exclude illegal products from international markets, however, seem likely to grow in scope and size. Trade controls of this type bring about at least the potential for conflict with WTO rules, and opponents have sometime raised the specter of a clash as an argument against their adoption.

There has never been a WTO dispute involving CITES or CCAMLR, and the application of permit and license systems within a multilateral framework makes it unlikely. The Kimberley Process, which is designed to exclude conflict diamonds from world markets and therefore shares a number of characteristics with trade controls aimed at illegal products, has, however been discussed explicitly within the WTO. In late 2002, a number of participating states applied to the WTO General Council for a waiver from their WTO obligations in this regard, and the waiver was duly granted in February 2003. Most Kimberley Process signatories, however, did not support this move, implying as it did that the Process contravenes basic WTO disciplines, which they did not accept.

The potential interaction of the EU’s FLEGT timber licensing scheme with the WTO has also been discussed, though mostly outside the WTO. Japan has raised the general issue of illegal logging and the possibility of trade controls within the WTO Committee on Trade and Environment (CTE), but without generating any debate or conclusions. The introduction of the EU scheme through a series of bilateral agreements rather than as part of a multilateral framework raises rather different questions from those around licensing systems in MEAs, but it seems highly unlikely that any of the countries involved in the agreements (which will be the only ones affected by the trade restrictions) would open a dispute within the WTO. WTO rules will, however, constrain the EU’s adoption of additional measures to control imports of illegal timber from non-partner countries (currently under discussion). However, the most likely outcome—the adoption of legislation to make the possession or handling of timber produced illegally overseas illegal in the EU—is not a border measure and should not raise any WTO problems.

In theory, the general topic of illegal trade and how to control it could usefully be discussed within the WTO. WTO negotiators’ inbuilt bias towards trade liberalization, however, and hostility towards any discussion of trade restrictions, and their limited knowledge about environmental policy in general and environmental crime in particular, must create doubt over whether such a discussion would generate any useful outcome. As long as the measures adopted to control flows of illegal trade in natural resources abide by the general WTO principles of non-discrimination, transparency and predictability—and there is no reason why they should not—the matter of their interaction with the WTO should remain, as it now is, entirely speculative.