Scams exist in every industry, from dodgy builders to multi-billion real estate fraud, and the timber investment industry is no exception. One country that was particularly affected by timberland scams is the Netherlands, the country of origin of two of Silva Tree’s Directors; Maurice Sjerps and Patrick Visser. Having set up a number of timber plantations in a climate that was very negative towards forestry as an investment helped to make sure that Silva Tree’s timber investments would be safeguarded from being mistaken as a scam.
Although the majority of the scams that were suffered in Holland were timber funds, the entire timber investment industry has been affected by the media hype surrounding the timber scams and the industry has become regulated by the Dutch authorities as a result. During Silva Tree’s recent biomass fund set-up, several regulatory issues had to be addressed and many of these are similar to those put in place by the Dutch authorities for timber investments: Tighter regulation was developed and implemented in Holland as of 2006. In early 2007, financial legislation changed again. Many of the problems in Holland stemmed from the fact that most of the funds were investments in Teak timber requiring 20 years to reach maturity. Such a long period allowed for management practices to slip, for companies to run out of funds and for some bad apples to commit fraud unnoticed. Many of the Teak plantations have over time been neglected and have been left poorly managed. This first issue was eliminated by Silva Tree when designing the Princess Project Panama, as the fast growing Paulownia tree takes just 5 years to reach maturity, as opposed to 20-30 years required by Teak. Management fees are held in Escrow by Citadel Trustees, management is performed by 3rd party companies and Paulownia is significantly less labour-intensive than Teak.
One very successful solution to the timber investment scams was Forest Stewardship Council (FSC) certification. The FSC certificate is based on a few principles: compliance with laws and council principles, tenure and use rights and responsibilities, indigenous peoples’ rights, community relations and worker’s rights, benefits from the forest, environmental impacts, management plans, monitoring and assessment and the maintenance of natural forests and plantations. These main principles are very successful at ensuring ethical and non-fraudulent practices within the forestry industry. Although the FSC certification is very popular, many other standards and certificates are equally successful.
Silva Tree’s Princess Project Panama is applying for VCS certification, whose principles are very similar to the FSC but also includes the issuance of Carbon offset credits. Timber plantations do not require both certifications and Silva Tree considered VCS to be a more productive standard to adhere to. Both certifications must be awarded by an official verifier, in Silva Tree’s case the Rainforest Alliance. Silva Tree believe that VCS certification not only provides Carbon offset credits but also ensures investors that the Princess Project adheres to ethical and moral practices, and is most definitely excluded from being a scam. An particular requirement that the Carbon standard demands is called “permanence”; it requires that the project does not stop before it is supposed to and that it is financially able to continue. This is because Carbon emission reductions need to be permanent. Silva Tree believe this to be a particularly relevant VCS requirement for investors, as it essentially requires a third party to certify that he project will not go bust, a major concern when investing in timber.
Other certification requirements are things such as proof of land ownership and compliance with local laws, both ensuring that the certified projects are not scams. Finally, the certification requires a level of environmental responsibility- an issue which does not directly relate to fraudulent activity but which none-the-less would imply the good nature of those behind the project and make them less likely to be behind a scam.
It is Silva Tree’s opinion that communication is key in all business. Silva Tree feel that with a 20 year, closed-ended fund, it was too easy for those Dutch fund managers to forget about investors’ monies and allow them to go unmonitored. It seems that there was little communication between the actual investors, the fund managers and the plantation managers in the timber scams mentioned previously. Silva tree believe that if more information was shared, perhaps the fraudulent activity would have been picked up sooner. This is why Silva Tree have invested in our online photo diary, bi-monthly newsletters, active communication with investors as well as local communities. We try to keep our investors involved in the project by feeding data via the many communication channels now available to us. Moreover, the Princess Project is not a collective investment scheme, meaning that an investor is free to take over the management of his/her plot at any time, can visit the plantation or sell his/her unit. Indeed, according to Dutch law since 2006, all funds are obliged to provide a ‘financiële bijsluiter’, which is a description of the investment product, highlighting for example risks of losing the initial investment and the costs involved with the investment. Silva Tree provide comprehensive transparent information about all our products, including a risk assessment document.
Although forestry remains the victim of a bad reputation in some countries due to past scams which are hard to forget, it is important to remember why they were so successful to start with. The high returns and environmental benefits that timber investments provide are still an underlying attraction of these products. Provided good management and communication is in place and the project developer is willing to be open and share information, timber investments are still very attractive propositions. In order to avoid a scam, all one has to do is check out the land ownership, the certification status of the project and the management structure. Although scams have tainted the reputation of this industry, the past fraud has also done investors a favour, as timber investment now have to be squeaky clean to be allowed to go ahead, with great amounts of regulation and due diligence procedures.
