Unveiling the Potential Scam and Fraud of Carbon Credit Schemes
The world is facing an existential crisis in the form of climate change, and combating it has become an urgent priority for governments, organizations, as well as individuals. One approach that has gained prominence in recent years is the concept of carbon credits or carbon offsetting, designed to allow entities to mitigate their carbon emissions by investing in projects that reduce or remove an equivalent amount of carbon from the atmosphere.
Carbon offsetting has been hailed as a way for major polluters, including oil giants like She*l, to compensate for their emissions by supporting projects that ostensibly contribute to environmental protection, such as reforestation efforts in far-flung countries like Burundi or Cambodia. While the idea appears noble on the surface, critics argue that carbon offsetting merely provides a convenient loophole for polluters to continue their harmful practices unabated. Governments have largely remained passive on this issue, allowing billions of dollars to flow into carbon offset programs worldwide with little to no oversight.
The voluntary carbon offset market has seen significant growth, with more companies in the United States pledging to zero out their greenhouse gas emissions using these credits. The market, expected to be worth up to $100 billion by 2030, has been criticized for its failure to deliver on promised emission reductions. Experts have even labeled it a “climate scam” and likened it to the “Wild West.” To address these concerns, the Commodity Futures Trading Commission (CFTC), an independent government body responsible for overseeing derivatives markets, has taken steps to assume a more proactive regulatory role in the voluntary carbon market.
The CFTC’s involvement in regulating carbon offsets is significant because it has the expertise to ensure the stability and integrity of derivative markets. While it has traditionally overseen financial derivatives, its expanded role in carbon offsets reflects the need for greater oversight in this growing market. The CFTC has initiated a whistleblower alert to solicit tips about fraud and manipulation in voluntary carbon markets, indicating its readiness to take enforcement actions against wrongdoers. This move is a positive step toward addressing the widespread concerns regarding fraudulent practices within the carbon offset industry.
According Deloitte Forensic Australia report “Carbon credit fraud: The white collar crime of the future” there ar 5 types of the potential fraud in the cardon credit as follows:
Financial misstatement
Some organizations may be under pressure to misstate their carbon position to present a better financial position. The Australian government has committed to closely monitoring emissions reporting, with a new 300-strong regulatory authority to monitor the Carbon Disclosure Reporting System (CPRS). If liable entities do not report or have reason to believe the report is false, the authority may investigate and assess liability under the CPRS.
Bribery and Corruption
Companies entering the carbon offset market face risks of bribery and corruption, particularly in developing large parcels of land for wind farms. Investigations have been conducted in the US for alleged improper deals with public officials in securing land for wind farms. Companies must implement effective compliance programs to mitigate these risks and avoid investigations by regulators and law enforcement. Companies should be aware of potential violations of the USA Foreign Corrupt Practices Act and the Commonwealth Criminal Code Act, which prohibit companies from corruptly offering money or value to foreign officials for business advantage or retention. Carbon offset projects are being developed in Central and South America, Southeast Asia, and the Asia-Pacific region, which have high levels of corruption. Companies should design, implement, and monitor anti-corruption controls and perform due diligence before entering such projects to prevent funds from being diverted to third parties.
Money Laundering
Companies should be aware of potential bribery and corruption violations in carbon offset projects. Third parties may use these projects to filter illegally obtained funds, such as money launderers who use illegal funds to purchase wind turbines for carbon offset projects in developing nations. They then seek reimbursement for the turbines from companies seeking carbon offsets, remonetizing the investment through a legitimate business purpose. Companies should perform investigative due diligence on carbon offset projects to determine if to pursue the investment and avoid damage to their corporate reputation.
Intentional Round-Trip Transactions
Companies should be aware of the risk of revenue manipulation and intentional ‘round-tripping’ transactions in carbon offset projects. A roundtrip transaction involves selling an unused asset to a third party and agreeing to buy back the same or similar asset for the same price. For instance, a company may contribute $90 million to a third party for a rural electricity project using solar panels. However, there is a risk that the company and third party will collude to artificially inflate the cost to $100 million, with the $10 million difference being refunded back to the company and recorded as revenue. Companies should be aware of this risk and design, implement, and monitor controls to mitigate the potential for intentional round-trip transactions.
Consumer Fraud
Many companies, particularly in the tourism, hospitality, and leisure industries, have partnered with third-party partners to offer customers carbon offsets to reduce environmental impact. These programs pose a risk of fraud, as factors like fuel consumption, flight patterns, and plane weight can be manipulated. Regulators may scrutinize these arrangements for potential collusion, potentially leading to excess money being split for corporate purposes. Companies should implement controls on estimates to mitigate fraud and avoid class-action lawsuits.
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