INTERPOL report shows five criminal activities in carbon trading markets

INTERPOL report points out some of the inherent structural problems unique to carbon markets

Guest essay by Arkady Bukh, Esq

In 2009, Al Gore obfuscated and downplayed the role that CEOs played in crafting his Cap-and-Trade CO2 trading scheme and carbon swapping system. Gore failed to put a lid on his Congressional committee testimony about the global warming, carbon-tax debate — the derivatives bubble in the then emerging green-energy credit-swap.

Gore had good reason to be less than forthcoming. Despite his testimony, Enron’s Ken Lay played a large role in developing the plan.

Chris Horner, now a Senior Legal Fellow for the Energy and Environment Legal Institute, was Director of Federal Government Relations for Enron when Gore testified.

With Enron’s implosion two years later, any thought about the energy giant becoming involved in the carbon-tax market vaporized.

The fraud has since been pulled off to a greater degree by many of Kenneth Lay’s proteges.

Carousel Fraud

Early on a Friday morning in May, 2010, UK tax authorities raided homes and businesses believed to be involved in an organized gang suspected of Emissions Trading Scheme, ETS, carbon trade fraud worth about $35 million. As the authorities rounded up four men, piles of cash and a supply of weapons were uncovered. The EU Observer, an independent online newspaper from Brussels reported that the arrests, the men were between 29 and 53, were connected to raids that happened in August, 2009 when nine people were arrested. The ongoing operation is part of a complex, 15-month investigation.

The newspaper also talked about another raid centering on the same issue. In May, 2010, 25 arrests were made in the UK and German as authorities conducted a raid-blitz on hundreds of sites in the two countries. These raids, on Deutsche Bank and energy firm RWE, came as the result of an investigation into the theft of over $180 million in state revenues.

The raids focused on a particular type of white-collar crime that has become known as “carousel fraud,” according to The American Thinker. In a carousel fraud, white-collar criminals establish themselves in one European Union member state and open a trading account with the country’s national carbon credit registry. Then, buying carbon credits in a different country, the credits are re-sold to buyers in the original country. The scam happens when the fraudsters purchase carbon tax credits without a VAT (value added tax) and then resell, collect the VAT from the buyer and leave the country before the national tax authorities can target them. The VAT disappears with the criminals and never makes it into government treasuries.

In response, with mixed results, the UK government has reduced the VAT rate to zero when applied to emissions credits resulting in the credits being VAT-free. After all, criminals can’t steal revenue that the government has decided it won’t collect any longer.

Pay the Market

For over a decade, carbon trading, on an international scale, has been seen as an important weapon against climate change. Critics say the system is a failure with heavy emitters, and white-collar criminals, exploiting loopholes.

In 2004, the Suwung landfill outside Denpasar on Bali looked like any other dump in the third-world. Over 750 tons of solid waste were added daily and the dump was sliding into urban areas and destroying the mangroves that are featured on postcards sold to tourists. In late 2004, a new funding source allowed the people who had crawled over the waste looking for saleable scrap to be employed sorting organic waste. The organic waste, they sorted, was then tapped for methane and supplied local villages.

Financing came from the Clean Development Mechanism (CDM), the global scheme that allows developing countries to offset their carbon emissions by funding low-carbon projects. The CDM is one of the globe’s two largest carbon markets. The other large market, launched in the EU in 2005, is the Emissions Trading Scheme (ETS). When first reviewed, the ambitions of the schemes look noble: carbon trading sets a market price resulting in huge industrial polluters to include emissions projections into their plans. The planning makes the businesses more aware of the impact of pollution on their bottom line as well as the health of the planet.

That’s the way it was meant to work. Unfortunately, it hasn’t turned out that way. Trading in carbon emissions is complicated; bewildering regulations, unclear definitions of sustainable development and the weak prospects for carbon trading following the failed Copenhagen climate talks all have conspired to create loopholes for abuse.

“When ETS created a market, it created a commodity. But in terms of cutting back emissions, it isn’t working,” says Belen Balanya of Corporate Europe Observatory, a European environmental research group.

It’s this creation of a commodity that opens the door to white-collar criminals. But major businesses also benefit from the tax laws surrounding carbon markets.

Tax Avoidance

Most people would consider Apple, Coca-Cola, General Electric, Google and Nike responsible corporate citizens. At least that’s the way these corporations like to portray themselves. Apple and Nike deserve credit for their leadership in human rights; GE has done good work on climate change and Coca-Cola has embraced clean water as a cause.

However, when it comes to paying corporate taxes, they fall short.

A report on tax avoidance titled Offshore Shell Games, published in June 2014 by Citizens for Tax Justice cast the light on US firms that move their headquarters overseas, for tax purposes, in a game called “inversion.”

As people from across the globe clamor to get into America, why are some of America’s richest companies trying to leave?

Simple. They don’t want to pay US taxes.

By moving off-shore, corporations not only can avoid taxes on profits made outside of the US, but under United Nations protocols, they may, depending on the situation, qualify for a 2:1 return on their carbon-tax dollar: for every carbon-tax credit dollar they invest, they can receive two.

Even when corporations maintain their headquarters on US soil, there is room for fraud.

Carbon Offset Fraud

The damage to confidence in the emissions permits and allowances within the carbon market has paralleled the market segment which deals with carbon offset projects. Three examples show what this looks like.

1. Nadine Ghourie chronicles the situation in India at Gujarat Flurochemicals, the firm that trades on the European Climate Exchange (ECS). In The Great Carbon Con, explores the firm as it trades on the ECS despite grave abuses and hypocrisy of the company that has been exposed by other investigative reporters. With one of the worst environmental and human rights records internationally, the firm is still being rewarded financially for perpetuating business as usual within the European Climate Exchange.

2. The Washington Post exposed the NoelKampffMercadoClimateActionProject in Bolivia. A forest carbon offsets projects involving utilities in the US colluding with NGOs and the Bolivian government. The project mandated the establishment of a forest preserve of over 5500 square miles designed to keep 50 million tons of CO2 out of the atmosphere. The project, which came under significant fire for abuse, has been lowered to one-tenth of its original target.

3. Anne Scholtz, a carbon trader, established a Ponzi scheme which utilized the California pollution trading program, which often made use of overseas programs, “Regional Clean Air Incentives Market.” Scholtz would pay off old investors by recruiting new investors and create a facade of huge returns. Scholtz was indicted in 2004 on six counts of wire fraud as investors filed claims for $80 million.

Interpol

ArecentreportfromINTERPOL reviews the crimes that have already occurred in global carbon markets. The report’s introduction says, “The intangible nature of the global carbon trading markets puts them [the market] at risk for exploitation.”

Certainly, any market is susceptible to crime, but the INTERPOL report points out some of the inherent structural problems unique to carbon markets. Traditional commodities, which at some time in the marketplace, must be physically delivered to someone, carbon credits don’t represent a tangible commodity. Many sellers, buyers and traders do not clearly understand the carbon market and the lack of understanding makes carbon trading particularly vulnerable to fraud. Like other financial markets, carbon markets are at risk of exploitation due to the huge amount of money surrounding it, the immature regulation and lack of oversight.

According to the report, there are five categories of criminal activities in carbon markets:

Fraudulent Manipulation

Fraudulent manipulation of measurements to claim more credits from a project than were received.

Carbon Credit Sales

Sale of carbon credits that either do not exist, or if existing, belong to someone else.

False Claims

Misleading claims regarding the environmental and/or financial benefits of market investments.

Computer Hacking

Computer hacking and phishing to steal carbon credits and theft of personal information.

Had Enron not imploded and Ken Lay lived, he and Jeff Skilling might at this moment be getting creative on their accounting over climate change.

The history is different. Enron imploded in a glorious flame-out that lost billions for investors, Ken Lay is dead and Jeff Skilling is just about in the middle of his prison sentence.

As it is, there are plenty of people willing to fill the gap and plunder governments for as much cash as they can get. As long as the rules stay convoluted, complicated and twisted, there will be plenty of naive, unsophisticated buyers, sellers and traders that make an easy mark for white-collar crime.