ETS still vulnerable to fraud – report

Carbon trading is the world’s fastest growing commodity market, but Interpol says it is still underregulated.

A report by international policing organisation Interpol has warned that global carbon trading markets remain highly vulnerable to being manipulated by criminals through securities fraud, insider trading, embezzlement, money laundering and cybercrime.

The report, released by the intergovernmental agency on Friday (2 August), pays particular focus to the EU’s Emissions Trading Scheme (ETS) – the first and largest carbon trading system in the world. Its findings echo previous conclusions of European policing agency Europol.

The expansion of ETS systems throughout the world, for instance Australia’s new scheme and China’s pilot projects, will increase the potential for fraud, the report concludes. Regulation of the sector is still developing, leaving the system vulnerable to those who want to maximise profit.

The report includes global case studies where greenhouse gas accounting firms, national authorities operating in under-regulated jurisdictions, and individuals or companies claiming to offset emissions in return for investment have cut corners, falsified information or received bribes. It also includes guidance for best practice.

The EU ETS has been plagued by fraudulent activity in the past. In early 2011 officials found that cyber-criminals had stolen around €30 million worth of carbon emissions permits, forcing the European Commission to suspend trading for two weeks. The scheme has also been plagued by VAT fraud since 2008. Many of the problems were solved by transferring the 27 national registries to a single union registry.

At the end of 2011 the Commission put forward a proposal to fully include emission allowances within the scope of revised rules governing financial markets. The new rules would prevent the use of inside information, increase transparency and put in place anti-money-laundering safeguards. Negotiations between the European Parliament and member states on the proposal began last month.

Eight companies operating in the ETS were recently shut down for malpractice.

“It is sad to see criminals using fraud and other crimes to make profit out of a commodity that was created to protect the environment,” said David Higgins, Manager of Interpol’s Environmental Crime Programme. “It is not just the financial harm it causes investors, but this criminal activity risks seriously undermining the environmental integrity of the carbon markets globally.”

Carbon trading is the world’s fastest growing commodities market, with its current value estimated by the World Bank at around $176 billion (€132 billion). Interpol warns that the fact that these are not physical commodities but rather credits make it an unquantifiable market with large amounts of money invested and a lack of oversight – a dangerous cocktail for criminal vulnerability.

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