EU Emission VAT Fraud Investigation

Cap and trade just ended in a giant farce.  This is just too funny.  The whole trading system turns out to be driven almost solely by skimming taxes.

Let me make this crystal clear, which this article does not.  Customer A buys a credit from customer B and pays VAT on it which is included in the invoice from B.  B has in fact collected the tax.  B disappears with the tax.  Obviously if A and B just happen to be colluding, the only real money is the transfer of VAT tax from A’s balance sheet to B’s balance sheet.  Needless to say somewhere else the actual credit itself is unwound.  The only entity at risk and in fact the only loser is a government that finds it is not receiving VAT from customer A or worse is actually paying some out.

Obviously no one had a convincing reason to trade carbon credits at all but soon found this angle worked fine.  Most customers A would be wise enough to know better – some day the volume gets large enough for the government to get wise and you get this large bill in the mail.

There are a lot of former carbon traders out there that are now shaking in their boots waiting for the shoe to drop.

And for some reason Goldman Sachs is not involved this time around.  In the meantime, I can not wait for Al Gore to stand up in favor of cap and trade.

Anti-fraud investigators swoop on EU emissions traders

LEIGH PHILLIPS

03.05.2010

http://euobserver.com/22/29996

EUOBSERVER / BRUSSELS - Traders involved in Europe's flagship climate change programme, the Emissions Trading System - some of whom work at Germany's biggest banks and energy firms - were the focus of a series of raids and arrests by British and German prosecutors in part of a massive pan-European crackdown on CO2-credit VAT fraud.

A total of 25 people were arrested amid a blitz by authorities on hundreds of company offices in the two countries, including Deutsche Bank and energy firm RWE, in a case involving the theft of an estimated €180 miillion from government coffers.

On Friday (30 April), it was revealed that UK tax authorities had raided 81 different offices and homes earlier in the week, arresting 22 individuals - 13 in England and further eight in Scotland.

The swoop, which occurred two days earlier, involved roughly 450 staff from Her Majesty's Revenue and Customs.

German authorities simultaneously raided 230 premises, including the headquarters of Deutsche Bank in Frankfurt and the offices of RWE, one of the largest energy firms in Europe, according to the Bloomberg news agency.

Three individuals in Germany were arrested. Seven of the suspects were employees of Deutsche Bank, although none were among those taken into custody.

The operation, which targeted a total of 50 companies and some 150 suspects in Europe's biggest economy, involved around a thousand investigators from Germany.

Authorities in eight other EU nations - Austria, Belgium, Cyprus, the Czech Republic, Denmark, Finland, the Netherlands and Portugal, as well as Norway, outside the bloc - were approached by Frankfurt prosecutors for their help in the investigation.

Computers, mobiles, memory sticks and business records were seized, as well as undisclosed sums of cash.

The criminal activity the raids focussed on relates to what is known as "carousel fraud." Criminals establish themselves in one EU member state and open a trading account with the national carbon credit registry. They then buy carbon credits in a different country, which makes them exempt from VAT. These are then sold to buyers in the original country, but with VAT slapped on, although the VAT then just disappears along with the trader and the money never arrives in government coffers.

The raids come after Europol, the European criminal intelligence agency, last December issued a warning that ETS fraud had resulted in around €5 billion in lost revenues.

In announcing its investigations into the pan-European racket, the agency said that as much as 90 percent of the entire market volume on emissions exchanges was caused by fraudulent activity.

European Commission climate spokeswoman Maria Kokkonen told EUobserver that a new EU directive on reverse charges for emissions trading, which aims to close off this form of tax fraud, was implemented in February of this year specifically to deal with this problem.

Under the directive, EU member states may for a temporary period optionally apply a reverse charge to switch the responsibility of paying the government the VAT collected from the vendor to the customer.

The directive, which is still in the "experimental" phase, has so far only been applied by Denmark, France, the Netherlands, Spain and the UK. Germany however has not. Its application is optional because VAT is a domestic, not an EU responsiblity.

If the experimental directive turns out not to put an end to ETS fraud, "other options may be considered."

Also in February, the EU toughened up the requirements for opening an account with national carbon registries.

"Carbon emissions fraud is a very serious problem and the commission is working closely with member states to combat this problem," said Ms Kokkonen. "In fact, the response to this problem has been very swift since it first came to light last summer."

"However, it should be underlined that this does not affect the overall functioning of the EU-ETS."

Environmentalist critics of the ETS however said that such criminal activity is not the exception to the rule, but intrinsic to a carbon market.

"Carbon markets are highly susceptible to fraud, given their complexity and the fact that it is not always clear what is being traded," said Oscar Reyes of Carbon Trade Watch.

"It's good that the commission and tax authorities are clamping down, but it is unlikely that this will be the last case of carousel fraud, but also unlikely that it will be the last type of fraud involved in emissions trading."