FOREST PROTECTION: MISSING THE BIG PICTURE? STEPHANIE FRIED `ULU FOUNDATION OCTOBER 11, 2013

SAFEGUARD THE PROCESS  Retain Bank responsibility (ADB example);  Responsibility not devolved to client self- reporting regime;  Mandatory and detailed safeguards, not vague principles;  Legally, contractually binding, to sub- contract/sub-project level

SAFEGUARD THE PROCESS Transparency Access to information Participation Self-selection Land rights Consent – this also includes the right to say “no”;

SAFEGUARD THE CONTENT Industrial logging IEG report – failure “countries with weak governance”

OFFSETS IEG findings about projects in protected areas: 75% of protected area projects involved forced resettlement; 75% of protected area projects, environmental sustainability “at risk” Offsets allow violation of environmental social protections set up national infrastructure but claim “last resort” use?

SAFEGUARD THE DEFINITIONS Forests vs. Plantations Critical Habitat: critical for communities “Degraded” habitat / land rights

ADDRESS POWERFUL DRIVERS OF DEFORESTATION Illegal and destructive logging associated with Paper and Pulp Oil Palm Associated logging operations Not tackled in FIP - Indonesia

SAFEGUARD THE ARCHITECTURE Push towards IFC Performance Standards IFC not a viable model Indonesian example CAO findings

CAO AUDIT OF IFC INVESTMENTS IN FINANCIAL INTERMEDIARIES: OVER 40% OF IFC PORTFOLIO “Getting an investment classified as FI was a free card on E&S requirements.” —IFC Investment Officer, commenting on the Environmental and Social Review Procedure before 2007, Cited in CAO Audit Report

NO INFORMATION ABOUT ENVIRONMENTAL & SOCIAL IMPACTS “The IFC approach, which is based on achieving change through the application of a management system, does not generate information about actual Environmental & Social results at the subclient level.” Pg 35 …. IFC does not have the tools to measure E&S performance at the subclient level to confirm that there has been no harm.. “ pg 35

SMALL, MEDIUM, LARGE? FIP makes reference to support for “small” and “medium” enterprises. It is our understanding that IFC definitions are as follows: Microenterprises: <10 people, total assets or turnover < US$100,000 per year Small enterprises: 10 to 50 employees and total assets and/or annual sales between US$100,000 and US$3 million Medium enterprises: 50 to 300 people, with total assets and/or annual sales between US$3 million and US$15 million

SAFEGUARD THE “BACK DOOR” Look beyond the forest, follow the money

FOREST SECTOR: HIGH RISK, HIGH CRIME, MONEY LAUNDERING INTERPOL and World Bank have Identified forest sector, and specifically Indonesia’s forest sector as high risk, high crime, high money laundering sector. See: WB, Justice for Forests, 2012 INTERPOL, WB: Project Chainsaw, 2010

ILLEGAL LOGGING Not something that just happens in the forest Profit-motivated global business Potentially best addressed with financial tools allowing identification and seizure of assets Anti-Money Laundering Statute, Tax Laws

INTERPOL: SOUTHEAST ASIA “In Southeast Asia, illegal logging is often perpetuated or facilitated by military groups and corrupt government officials. Both are able to exert a high level of control over access to natural resources and have a strong presence throughout the whole process of illegal logging and timber trafficking.”

INTERPOL: “They exert influence on the granting of forest concessions, harvesting and transporting of the logs, and processing and timber trade. Opportunities for corruption multiply and initiatives of good governance and capacity building are annulled. “

WB JUSTICE FOR FORESTS REPORT CALLS FOR: A more targeted, punitive approach, through more effective use of the criminal justice system. Criminal justice system should form an integral part of any balanced and organized strategy for fighting forest crime. `ULU FOUNDATION

Enforce anti-money laundering and due diligence requirements Strictly enforcment of know your customer and due diligence requirements— particularly those for enhanced due diligence in the case of transactions of Politically Exposed Persons and suspicious transactions within the forestry sector.  (Citation: WB Justice for Forests Report) `ULU FOUNDATION

GROUNDBREAKING TAX EVASION CASE Asian Agri Group – one of largest palm oil conglomerates in Asia Indonesian Supreme Court 2012 Guilty of tax evasion First corporate conviction Owe $130M + fined $230M

ASIAN AGRI GROUP CASE Auditors Ernst & Young and Indonesian audit company gave AAG clean bill of health despite their knowledge of significant problems; National Court and Supreme Court documents provide details of tax evasion and money laundering processes and demonstrate the type of due diligence needed to identify this; fairly simple series of steps, questions.

AAG CASE AAG is sister company of APRIL, one of Indonesia’s largest paper and pulp conglomerates AAG case reinforces concerns that this type of practice is rampant in Indonesian forest sector companies

IFC - FIP Proposes to “partner” with large-scale private sector forest companies in Indonesia; This is a fairly small universe of companies. Fairly uncritial plan for support of plantations, logging concessions and use of financial intermediaries; Lack of details for how, exactly, they will screen corporate partners, including with respect to AML due diligence; self reporting by clients?

DUE DILIGENCE IN HIGH RISK FOREST SECTOR Identify declared profit levels vs taxes paid to GOI vs logging / plantation area held; Identify prices declared for sales vs market price; Examine secrecy jurisdiction holdings and identify their purpose; If not, can’t claim AML due diligence.

RECOMMENDATIONS Safeguard the process Safeguard the content Industrial logging Offsets Safeguard the architecture – IFC inappropriate Follow the money – Require private sector due diligence appropriate to high risk high crime sector