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Carbon Credit Fraud

5 November 2013

Carbon credit fraud is a phenomenon that is on the rise. Rahman Ravelli’s Aziz Rahman was asked to write about the subject for “Environment’’ magazine. In a version of the article here, he explains the latest developments.

There can be little doubt that carbon credits were one of those ideas that was genuinely intended to make the world a better, greener place. With carbon credits, industry was supposed to become more conscious of its environmental footprint. Companies and organisations were given a mechanism by which they could make sure impact of their activities could at least be offset.

It started in 1997, in Kyoto, Japan, when a protocol to the United Nations Framework Convention on Climate Change (UNFCC) was initially adopted for use. This framework, usually referred to as the Kyoto Protocol, was created to reduce greenhouse gas (GHG) emissions. In short, the protocol allows industrialized nations to meet their GHG obligations by buying reduction credits from other countries. So if one country cannot meet its GHG reduction target, it can buy credits from other countries that have credits to spare. It seemed an idea dreamt up with the best of intentions…but it came to offer opportunities for those who were not concerned with saving the planet.

The signs that something was wrong started to appear roughly five years ago. In July 2009 the UK government announced it was making carbon emission trading ‘zero rated’ for VAT purposes, making it impossible to claim VAT on the sale of carbon credits in the UK. This was not an attempt to encourage trading in carbon credits. In fact, it was just the opposite – the government took the action because of a prosecution that saw carbon credits used in a £38 million VAT fraud. The carbon credit was now officially viewed as a tool being used to perpetrate VAT fraud.

I wrote in the Rahman Ravelli newsletter about carbon credit fraud last summer. The article was prompted by the City of London Police obtaining their first criminal convictions and prison sentences for carbon credit fraud. This was not a VAT fraud case – it was very much a traditional investment-type fraud. Two men were jailed for running an international boiler room operation that moved nearly £6M of investors’ money to bank accounts in Canada and the United States. Some of the money was used to fund lavish living in Marbella. On this occasion, however, police were able to trace much of it, recover it from the frozen bank accounts of the defendants and return it to the victims.

The court was told that the duo targeted thousands of people with offers of carbon credits and shares that they claimed were highly profitable. In reality, these were worth next to nothing. The men behind the operation had obtained the names of potential victims through the share lists of legitimate companies. They recruited staff to cold call people, telling their victims they were offering an unmissable opportunity and enticing them into parting with their money. By the time of the trial, police had found more than 1,800 victims. Many of these knew little or nothing about exactly what carbon credits are – or the fact that their resale value can be next to nothing. It was the type of investment operation that has been carried out for decades – only now carbon credits were the vehicle being used for it.

Since that summer article, carbon credits have repeatedly proved to be the weapon of choice in various criminal cases. Just last month, six men were charged over their involvement in an alleged £11M carbon credit fraud. Earlier this month, it was disclosed that the Insolvency Service had wound up 19 firms over the last 15 months that had attracted a total of almost £24M from investors by offering virtually worthless carbon credits. The 1,500 people convinced to hand over their money had no idea that carbon credits have little or no value when sold as shares or bonds. Consumer Minister Jo Swinson said these companies had led investors to believe they would gain huge returns by investing in trading permits that gave corporations the right to emit one tonne of carbon dioxide. What the investors did not know was that such permits were of little value because big companies usually trade in carbon credits on bulk. Unfortunately, they fell for sales talk that played heavily on the idea of would-be investors’ wish to invest their money ethically.

I have seen how carbon credits have emerged as a potential vehicle for fraud. The £38 million fraud case we mentioned earlier that prompted the government to rush through the closure of VAT loopholes. The case brought the issue of carbon credit fraud firmly into focus and highlighted how a chain of bogus companies could be created to trade carbon emission allowances and escape detection. The theory behind the Kyoto Protocol was quite clear: carbon credits would give companies an incentive to cut their carbon emissions and then sell any spare carbon credits that they had. The reality was that people soon became aware that they could buy them VAT-free in one EU country and then sell them on in the UK. They would add the VAT to the price they sold them for in the UK but then keep the VAT money instead of paying it to the government. The result? A clear illegal profit through VAT fraud. That route may now have been shut down by the government. But, as the Insolvency Service has shown, carbon credits are still a vehicle for large-scale investment-type fraud and VAT fraud.

Carbon credits are a relatively new concept compared to investments such as stocks and shares, jewellery, property or commodities. Yet they are very often being used in the same way that those involved in fraud have used many other such assets. There is no doubt that people looking to make fraudulent gains from carbon credits use the classic boiler room ruse of telephoning people to sell them something that is worth far less than they claim. It appears that many of them also resort to the odd spot of bribery and corruption to gain access to the carbon credits and the rights to sell them. When this is considered, it is clear that carbon credit fraud is simply a new twist on the old boiler room-style fraud. Carbon credit fraud ticks all the boxes of the classic boiler room model: the recruitment of staff to carry out the straightforward selling of shares of little or no value, charging massively inflated prices for them, attempting to portray an air of respectability and insider knowledge and sometimes operating abroad so as to be beyond the grasp of the Financial Conduct Authority (FCA).

Having handled many of the largest and most high-profile investment fraud and VAT fraud cases, I know the importance of the right legal advice for anyone who believes they may have lost out on a scheme. The correct legal guidance is equally vital for someone arrested for working in such a scheme who believes that they are innocent of any wrongdoing. Such an idea is not so far fetched as it seems. After all, carbon credits are quite clearly a legitimate trading commodity. They are recognised as a legal means of trying to control pollution and are acknowledged as such by governments, international trade bodies and the hugest and most high-profile corporations and organisations around the world.

Carbon credits are a new idea for this century – an attempt to put right some major wrongs. Unfortunately, it seems that they have created problems that their creators could never have envisaged.


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