Though Nilsson's cons were extreme, international law enforcement authorities and environmental advocates say that the carbon markets are extremely vulnerable to financial fraudsters like him, especially when it comes to forest projects. Their shell games can also be hard to spot. As William Magrath, the World Bank's lead natural resource economist for rural development in Asia, once put it in a pun in a memo to his colleagues: "It's a jungle out there." In a meeting he attended with Interpol officials a few years ago, Magrath recalled, one man leaned back in his chair and called carbon "a con man's dream." The product is invisible, poorly understood, and regulation is extremely limited.
Despite the risks, carbon is the "world's fastest growing commodities market" valued at about $176 billion in 2011, according to the World Bank. The European Union Emissions Trading System (EU ETS), the highest volume compliance market, accounts for $148 billion of that. Countries in Europe legally require top polluters to remain under certain government-issued emissions allowances, but companies who emit less can trade those credits to those who need more. Beyond those allowances, companies can purchase carbon credits, or offsets, which are linked to emissions reductions projects, like factory retrofits or other energy efficiency projects. If the U.S. decided to establish its own cap-and-trade market, the value of the trades could reach as high as $2 to $3 trillion. Credits from forest projects, like Nilsson's would have been, have not yet been approved for the compliance markets, but they are actively sold on a second kind of market for voluntary buyers interested in offsets.
Unlike the mandatory compliance credits, voluntary offsets aren't required, but they essentially allow big companies to claim they're more sustainable because they're financially supporting environmental projects, like forest conservation. Though much, much smaller, the $576 million voluntary offsets market, which includes credits from REDD projects, will likely expand as the formal compliance market grows. Many of the sales in this market are linked to corporate social responsibility efforts and are often meant to offset airline travel, large conferences and events, and manufacturing. A remote forest community, surrounded by carbon-storing trees, might offer their credits to say, a major retailer who wants an annual report that boasts a "green-friendly" initiative, or the like.
But without legally "binding targets" or formal regulatory bodies designed to verify the credits, voluntary offsets are also the area that’s ripest for exploitation. Already, many projects that don’t meet the UN’s environmental requirements end up eventually being sold on the voluntary carbon market, according to a June report from Interpol. Other projects offer carbon credits that are inflated in number based on misleading methodologies, do not exist on anything but paper, or, like Nilsson’s, may serve as a front for other illicit activities.
As the only international law enforcement agency "with a trans-boundary mandate, with designed units addressing both environmental and financial crimes," Interpol is one of the only agencies fully equipped to parse the data and identify carbon fraud at both the project and market levels. About a year ago, it began expanding and developing its intelligence on the emerging markets so that it could eventually advise and assist its 190 member countries in dismantling scams as new ones came online.
"Police speculate that the bomb scare provided a diversion so that employees wouldn't see phantom cursors moving across unattended screens."
Its recent report intended to put its member countries "on notice about the potential pitfalls" of the trading systems, according to Davyth Stewart, a criminal intelligence officer with Interpol’s environmental crime unit. It highlighted the types of financial fraud the EU-ETS has already become accustomed to in hopes of forestalling similar schemes abroad. “The experience we've had with Europe was that it was often the case of chasing their tail," Stewart said. "You know, constantly on the backfoot, and having to plug holes that were being exploited. By the time they get around to discovering the fraud, a number of billions of dollars have already gone missing."
On Tuesday, June 2, 2009, carbon traders on the Paris-based BlueNext exchange noticed “a terrifically high level of activity” on their system, according to Chris Perryman, Europol’s project manager for organized and economic crimes. A record total of 19.8 million credits swept across the market, a volume “160 percent higher than … average daily trading volume for the first five months of the year (7.4 million),” according to a recent article by Queensland University of Technology professors Peter Martin and Reece Walters in the International Journal for Crime, Justice, and Social Democracy. The next day, activity plummeted to 2.5 million trades. The brokers communicated their concerns about the transactions to the government, and French police shut down the market to investigate the possibility of fraud.
The crime that the authorities uncovered was a simple and elegant manipulation of the European value-added tax (VAT) system, called “missing trader fraud,” according to Europol. The strategy had been used in various scams since the 1990s, particularly with small, high-value products like computer chips and mobile phones, according to Perryman. In the European Union, when products and commodities are sold across borders, the buyers are not required to pay taxes to the seller, but they are when those purchases occur within one member state. In the case of the “missing trader” scheme, a seller uses shell brokers to sell the carbon credits and pocket the taxes from the buyer, and then disappears.