Europol report ties mafia to renewable energy
This week, Europol released yet another report tying the financing, development and operation of renewable energy projects, particularly wind energy infrastructure projects, to organized crime in Europe.
The latest Europol report follows on the heels of an earlier one, the “Serious & Organized Crime Threat Assessment 2013”, which similarly found that organized crime is involved in, and in some instances controls, renewable energy financings and project developments for the purposes of laundering proceeds of crime.
Lord of the wind
The alleged mafia and kingpin of wind energy, the so-called “Lord of the Wind”, Vito Nicastri, is effectively under house arrest in Italy and €1.7 billion in corporate assets that he controlled were recently permanently forfeited to the state. Mr. Nicastri hasn’t been convicted of an offence in connection with the forfeited assets. The assets forfeited included shares in 40 companies, 100 properties, including wind farms and the assets thereon, 66 bank accounts, life insurance policies, seven exotic sports cars and luxury yachts.
According to an EU fraud report, Mr. Nicastri had a criminal record dating back to 1996 when he was convicted of wind farm fraud in connection with improper payments of €15 million and of bribing public officials to obtain contracts. That should have been a red flag in the transactional due diligence process and a bar to any EU or national procurements or approval of any government licenses. Mr. Nicastri is alleged to have ties to the Cosa Nostra.
The Camorra are also alleged to be involved in renewable energy to launder proceeds of crime. In Europe, the Camorra are alleged to have large and profitable criminal operations in France, Spain, Germany and the Netherlands (in addition to Italy). In the U.S., they are one of 4 designated “transnational criminal organizations”, having infiltrated the U.S. financial system to launder proceeds of crime from drug trafficking and other serious crimes.
Generous subsidies are attractive to organized crime
Organized crime is attracted to wind energy for three reasons: (a) generous government subsidies and feed-in tariffs; (b) corporate tax credits; and (c) the ease with which they can launder proceeds of crime as a result of the lack of knowledge of the mafia, money laundering and forfeiture risks on the part of financing and governments participants in the wind and renewable energy sectors.
According to the Europol Report, organized crime is uniquely situated in that they have an abundance of cash that they need to invest (hence, launder) at a time when credit is hard to come by for corporations. The renewable energy sector provides the perfect money laundering vehicle to legitimize criminal operations because of the multi-layered corporate and financing structuring required, and the lack of money laundering awareness within the sector. Given that renewable energy is expected to grow by at least 20% by 2020, the problem is expected to get worse not better.
Other countries affected
The problem of organized crime infiltrating and controlling the wind energy sector, and generally, renewable energy, is not limited to Italy.
According to reports from ISA Intel, organized crime in Greece is actively engaged in laundering proceeds of crime through wind and other renewable energy projects.
And the Financial Intelligence Directorate for Bulgaria’s Agency for National Security reported a few days ago that according to its studies, renewable energy companies in Bulgaria act as a front for money laundering. In the Bulgarian cases, offshore companies (usually in tax havens) are used by organized crime to build and operate energy projects and finance related entities that bid on, and build energy infrastructure projects.
Lax auditing of EU Structural Funds
Renewable energy and wind energy projects are funded in the EU from the Structural Funds through its European Regional Development Fund (“ERDF”), which has allocated €295 billion in grants for renewable energy. The ERDF is used to support regional development primarily through infrastructure projects, and in particular through public-private partnerships.
Regulation No 1080/2006 of the European Parliament and of the Council on the European Regional Development Fund requires that each member state have an audit authority in place to verify the legality and regularity of recipients of funding within three months. Unfortunately, the member state auditing function appears to have been left by the wayside. No one appears to have verified the legality or regularity of the mafia involvement in wind farms in Europe. An estimated 50% of the subsidies paid by the ERDF for wind energy related infrastructure projects involved fraud and other irregularities.
Mitigating the risks for governments and banks
The use of wind and renewable energy projects to launder proceeds of crime is a relatively new development in money laundering law. From a money laundering perspective, it may be appropriate to consider wind energy projects as high risk in some parts of the EU resulting from the Europol Report, and therefore subject to enhanced and independent due diligence.
Know your customer procedures
Financial institutions and other participants should have sound anti-money laundering procedures in place. They help flush out money laundering and protect the reputation and integrity of the participants in a project by reducing the likelihood of any one of them becoming a vehicle for financial crime and suffering the consequential reputational damage.
For banks and other funding groups, they constitute an essential part of sound risk management by providing the basis for identifying, limiting and controlling risk exposures in assets and liabilities, including assets under management.
Reputational and other risks
The inadequacy or absence of anti-money laundering law standards can subject participants in a project to serious customer and counterparty risks, especially reputational, operational, legal and concentration risks. All these risks are interrelated. However, any one of them can result in significant financial cost to an organization.
In respect of banks, law firms, or government agencies, reputational risk poses a major threat, since by their nature, they each must maintain the confidence of, as the case may be, shareholders, rating agencies, creditors, the marketplace, tax payers or the public.
In respect of legal risks, participants can become subject to lawsuits resulting from the failure to undertake due diligence commensurate with the project risks, and can suffer fines, criminal liabilities and special penalties.
And there is also the risk to the investment itself, namely of civil or criminal forfeiture of the asset, an outcome that is entirely avoidable by the exercise of due diligence.