European taxpayers lose €5bn in carbon trading fraud

• Europol says EU's Emission Trading System in peril• Fraudsters could target gas and electricity markets next

Ashley Seager
guardian.co.uk, Monday 14 December 2009 17.06 GMT
The European Union has probably lost at least €5bn (£4.5bn) to VAT fraud related to carbon trading and there is a risk that the criminals will now shift their attention to Europe's electricity and gas markets, according to Europol.
The news will cause further embarrassment for European governments negotiating at the Copenhagen climate summit and trying to persuade other parts of the world to sign up to carbon trading as a way of reducing emissions.
The Guardian recently revealed that the Danish government had been forced, on the eve of the Copenhagen summit, to rush through an emergency law making it impossible for criminal gangs to reclaim huge amounts of VAT on fraudulent trades they were making on Europe's various carbon exchanges.
At the time, the Danes refused to estimate how much money the fraud cost them but now Europol, the EU's law enforcement operation, has estimated an approximate cost of the fraud on carbon trading. This was mainly carried out over the summer before Britain, France and the Netherlands – home to big exchanges – changed their VAT rules to stop criminal activity.
Europol has now set up a specific project to collect and analyse information to identify and disrupt the organised criminal structures behind these fraud schemes.
Rob Wainwright, Director of Europol, says "These criminal activities endanger the credibility of the European Union Emission Trading System and lead to the loss of significant tax revenue for governments. Europol is using its expertise and information capabilities to help target the organised crime groups involved".
"There are reasons to believe that fraudsters might soon migrate towards the gas and electricity branches of the energy sector," said Europol.
A spokesman added that the organisation had no specific evidence that Europe's huge markets for electricity and gas have yet been targeted, but said the markets were so similar to that for carbon that the link in the criminals' minds would be obvious.
The fraud involves a criminal registering to be able to trade carbon permits in the ETS. Most of these registrations have taken place in Denmark where the rules are slackest. The criminal then starts buying carbon permits in one EU country from another, free of VAT, then sells them on with the VAT added. But instead of passing the VAT on to the relevant tax authority, he disappears without trace, hence the name "missing trader" fraud.
In its more sophisticated form, groups of fraudsters in different countries will send carbon permits round a circuit between various countries, reclaiming VAT repeatedly before the ruse is discovered, by which time they are long gone.
This led to a big spike in trading volume last summer, particularly on exchanges in the UK, France and Netherlands, which subsequently moved to change their VAT laws so VAT was not payable along with the trading charge. Trading volumes have since fallen dramatically.
The French authorities last week arrested four people suspected of engaging in a €156m carbon carousel fraud on France's Bluenext exchange.