The intangible nature of the global carbon trading markets puts them at risk for exploitation by criminal networks, according to a new law enforcement guide produced by INTERPOL.
The INTERPOL Guide to Carbon Trading Crime examines the areas within the industry which have the potential to be manipulated by criminals, through securities fraud, insider trading, embezzlement, money laundering and cybercrime. It also assesses the current vulnerabilities of the carbon market and provides information to support national authorities in establishing adequate policing measures.
Carbon trading is the world’s fastest growing commodities market, with its current value estimated by the World Bank at around USD 176 billion. Differing from traditional markets in that there are no physical commodities, only ‘credits’ for offsetting the output of carbon dioxide, it is this unquantifiable market combined with the large amounts of money invested and a lack of oversight which make it vulnerable to criminal activity.
“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,” said Andrew Lauterback, Senior Criminal Enforcement Counsel at the US Environmental Protection Agency and Chair of the INTERPOL Environmental Crime Committee.
The guide includes several case studies from around the world where greenhouse gas accounting firms, national authorities operating in under-regulated jurisdictions, and individuals or companies claiming to offset emissions in return for investment have cut corners, falsified information or received bribes.
To address these concerns, INTERPOL recommends enhanced efforts to:
(i) raise awareness amongst law enforcement, including an investigative workshop bringing together regulators and experts to undertake strategic analysis of the existing and emerging carbon markets to identify the risk of criminal exploitation;
(ii) build and strengthen the capacity of government institutions responsible for regulating and policing the carbon markets;
(iii) engage the law enforcement and regulatory community in the design of carbon trading platforms, and advise on necessary law reforms to avoid loopholes and ensure that carbon trading regulations are consistent between different jurisdictions, practical and enforceable;
(iv) improve coordination and communication channels between law enforcement from different countries to share information on the trades in carbon credits;
(v) improve internet security of the carbon trading exchanges to prevent computer hacking;
(vi) improve transparency in the financial transactions conducted on carbon trading exchanges; and
(i) establish clear guidelines on determining additionality, and procedures to ensure the measurement process, methodologies and calculations of emissions reductions are conducted transparently and are easily verifiable, including use of indicators or types of data that are difficult to manipulate, clearly defined and easy to verify objectively.
“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.
“INTERPOL will continue to fight the criminal networks which endanger our precious environmental resources and use their ill-gotten proceeds to fund other criminal activities,” concluded the INTERPOL Chief.
With eight carbon credit trading companies operating on the European Union Emission Trading Scheme recently shut down for malpractice, the INTERPOL guide seeks to generate an international law enforcement response to these 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. 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,” said David Higgins, Manager of INTERPOL’s Environmental Crime Programme.
“INTERPOL is supporting governments which are in the process of establishing or regulating the carbon markets to put an end to these types of crimes,” he added.
INTERPOL also assists law enforcement agencies in policing the carbon market across borders and jurisdictions, in particular by identifying inconsistent regulations between countries and other legal loopholes which can be exploited by criminals.