LONDON (Thomson Reuters Foundation) – Carbon markets are particularly vulnerable to criminal activity because the "commodity" being traded has no physical presence and is difficult to measure, INTERPOL has said.
Criminals can target the fast-growing market through securities fraud, insider trading, embezzlement, money laundering and cybercrime, the world’s biggest international police organisation shows in a new guide to carbon trading crime.
"The noteworthy potential for the carbon market to be exploited rests on a single significant vulnerability that distinguishes it from other markets – the intangible nature of carbon itself," says the guide.
The carbon market is different from traditional markets in that there is no physical commodity underlying the trade. Instead, credits are issued for how much energy, forestry or other green projects and investments lower output of the greenhouse gas carbon dioxide, compared with the estimated amount that would have been emitted without them.
Governments, companies and individuals purchase the credits to offset their own emissions – either to comply with international reduction targets or on a voluntary basis.
The World Bank estimated the value of carbon markets around the world at $176 billion in 2011, with the European Union's Emissions Trading Scheme (ETS) by far the largest regional market, according to the INTERPOL report.
The report says that carbon trading crime is a new and emerging type of environmental and financial crime, which requires "sufficient monitoring and robust legal enforcement" to keep it in check.
"It is imperative that the carbon trading markets remain secure from fraud, not just to protect financial investment, but also because the global environment depends upon it," Andrew Lauterback, senior criminal enforcement counsel at the U.S. Environmental Protection Agency and chair of the INTERPOL Environmental Crime Committee, said in a statement.
The guide – intended to help national authorities put in place adequate policing measures – identifies the types of crimes to which carbon markets are susceptible:
- fraudulent manipulation of measurements to claim more carbon credits from a project than are actually obtained
- sale of carbon credits that do not exist or belong to someone else
- false or misleading claims about the environmental or financial benefits of carbon market investments
- exploitation of weak regulations to commit financial crimes, such as money laundering, securities fraud or tax fraud
- computer hacking or phishing (sending fraudulent emails) to steal carbon credits and personal information
THREAT TO ENVIRONMENTAL INTEGRITY
The INTERPOL report also highlights some examples of where crimes have been committed, and in some cases successfully prosecuted. For example, in 2009 and 2010, an investment firm ran an aggressive telemarketing strategy in Australia, claiming connections to legitimate organisations and environmental standards and offering high returns from carbon credits. Its claims were found to be false, and it is estimated to have defrauded Australian victims of $3.2 million.
In June 2012, Southwark Crown Court in the UK found three defendants guilty of carbon-trading carousel fraud, in which they stole VAT, and jailed them for a combined total of 35 years.
And a hacking attack in November 2010 resulted in 1.6 million carbon credits being stolen from the Romanian registry account of Holcim Ltd, the world’s second largest cement-maker, only 600,000 of which were tracked down and returned.
INTERPOL noted in its statement that eight carbon-credit trading companies operating on the EU'S ETS have recently been shut down for malpractice and said its guide seeks to generate an international law enforcement response to such crimes.
"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."
The guide recommends steps to make it harder for carbon trading crimes to occur. They include raising awareness among law enforcement agencies and improving communication and information-sharing between them, strengthening government institutions responsible for policing the carbon markets and ensuring regulations are consistent across borders.
Other recommendations include tightening computer security, improving the financial transparency and design of carbon trading platforms, and establishing clear guidelines for measuring and verifying emissions reductions.
"Crimes that harm our environment have a wider impact on the health and safety of society as a whole, and therefore must be investigated and the perpetrators punished," said INTERPOL Secretary General Ronald K. Noble.