'Carousel' frauds plague European carbon trading markets

Why are mysterious UK businesses registering to trade carbon in Europe?

By Rowena Mason, City ReporterPublished: 6:07PM GMT 30 Dec 2009

It is a building site, formerly a derelict car park, in a deprived part of West London, where the neon glow of curry houses and late-night grocery stores could not be further from the wealth and glamour of London's financial markets.
Described as a "consulting" business, this is the address of a UK company that has signed up to trade carbon permits under the European Emissions Trading Scheme in Copenhagen. But there is no trace of its existence on the Companies House database.

At the newsagent next door, nobody has ever even heard of emissions trading – the system where companies buy and sell the right to emit carbon dioxide – and there has not been a building there for many years.
It is not the only oddity to emerge from the Danish Carbon Registry. All the expected big players are on the list – utilities, oil and heavy industry – the only sectors obliged by law to own permits to cover emissions.
Quite a few investment banks are also signed up, on behalf of industry or trading to make a profit.
But outnumbering these familiar names, hundreds of UK companies selling anything from hair loss treatments to electronics have mysteriously registered to buy and sell carbon permits in the Scandinavian nation – mostly in the last 18 months.
Many give addresses in the regions such as Yorkshire, Lancashire, Essex and other places not known for their links to the world of finance.
The appearance of these obscure British companies – among them businesses with unreachable addresses and Hotmail, Gmail or Yahoo email accounts for company representatives – has recently come to the attention of the Danish authorities.
While many are bound to be genuine individual private traders playing the carbon markets, investigators are examining the possibility that some of these unknown UK-based companies have used the system to commit "carousel" fraud linked to VAT.
As the Copenhagen summit on global warming began this month, Denmark, the host nation, was bringing in an emergency ban to halt VAT on carbon. This followed similar suspensions in Britain, France, Spain and Holland.
According to sources, the Danish registry may be at the heart of Europe's problems with carbon trading fraud. Local media has repeatedly raised the fact that few, if any, checks are done on new traders and approval can be much quicker than in other countries.
Criminals profit by importing goods VAT-free, selling them through a series of companies, each liable to VAT, before exporting them again. Then, the first link in the chain often goes missing without accounting for the VAT and the final link reclaims the VAT it has paid from the state before disappearing.
It might sound like the tinpot scheme of local small-time crooks, but fleecing the tax man can bring in big money.
Just a few weeks ago, Europol, the cross-border police force, said that carbon trading fraudsters may have accounted for up to 90pc of all market activity in some European countries, with criminals mainly from Britain, France, Spain, Denmark and Holland pocketing an estimated €5bn (£4.5bn).
"It is estimated that in some countries, up to 90pc of the whole market volume was caused by fraudulent activities," Europol said.
Figures from New Energy Finance show the value of the global market falling from $38bn (£23bn) in the second quarter to $30bn in the three months to the end of September after several countries cracked down.
The London platform, the European Climate Exchange, where banks and energy companies tend to trade, is not affected by the fraud because it does not offer the spot contracts on which VAT was payable. But British traders can still defraud authorities by buying and selling permits on other European exchanges.
This organised criminal activity has even "endangered the credibility" of the current carbon trading system, according to Rob Wainwright, the director of Europol.
So why have fraudsters particularly targeted carbon trading? And what is being done to iron out problems in Europe before other areas – such as the US – start to trade carbon in the next few years?
Carousel fraud has been a known scam for years among mobile commodities, such as phones, computer chips and cigarettes.
But the attraction of carbon permits is their intangible nature, so there is no need physically to ship goods across borders. All is done at the click of a mouse.
It now looks like Europe will start a so-called "reverse charge" mechanism, which would remove the need for VAT to change hands between carbon traders every time permits are sold.
But will this remove all problems from the system? It should certainly eradicate VAT fraud, but the very nature of carbon credits makes them "an incredibly lucrative target for criminals", Rafael Rondelez, who was involved with the Europol investigation, has warned.
His message is clear: other types of carbon fraud could soon spring up because there are "no strong regulations or checking principles as there is in banking to prevent such activities as money laundering."