The Forest Mafia: How Scammers Steal Millions Through Carbon Markets

In the voluntary market, it's really the investor's responsibility to make the determination whether the operators they're dealing with are legitimate or not. Because they're making a feel-good purchase, many times, it seems, they don't evaluate the sellers with much scrutiny. "Anyone can set up a project and sell voluntary carbon credits to anyone who will buy them," Chris Lang, of redd-monitor.org, wrote in an email. "The price can be whatever they can get away with. A large number of companies have been selling carbon credits as investments to members of the public -- targeting pensioners. Some people have lost their life savings to this scam."

In one such case, City of London police arrested Ian Macdonald and David Downes at London's Heathrow airport after a three-year trans-Atlantic investigation revealed that the pair had sold $9 million in fake or worthless carbon credits and shares to investors in the U.K. They had recruited cronies to use the phone lists from real companies to cold-call and convince their mostly elderly victims to sign up. "Some victims were contacted again months later and told companies they had invested in were the subjects of hostile takeovers and that they needed to buy more shares to protect their original investment. Individual losses ran as high as $600,000," a press release announcing the convictions read. The duo, which deposited the cash in American and Canadian bank accounts, lived ostentatiously. "We know they traveled the world," Detective Constable Claire Armson-Smith told British journalists. "Traveled business class. They had nice cars. Jaguars. Porsches. Nice clothes. Rolex watches.”

Another Australian, Brett Goldsworthy, who operates the company Shift2Neutral, has set up what he claimed were huge forest carbon credit projects that helped Australian PGA and the Sydney Turf Club events go carbon neutral. But, again, according to reporting by the The Sydney Morning Herald in 2011, the carbon projects, which Goldsworthy claimed were based in the Philippines, Democratic Republic of Congo, and Malaysia, were not actually happening. Instead, Shift2Neutral, which claimed to have produced more than $1 billion worth of carbon offsets, had no employees besides Goldsworthy and was operating out of a small office in a Westleigh, Australia, shopping center. ''I realized there was something strange about Brett when we were negotiating with the tribes in the Philippines and he said he had a boatload of commandos waiting offshore in case he needed a 'hot extraction,''' Robert Hick, an investor who never received any compensation or returns from Goldsworthy, told the Herald. A website for Shift2Neutral is still active and has a list of press releases that outline its projects. 

***

Predictions of future deforestation from a Conservation International project description. (Conservation International)

Even forestry projects that receive certifications through independent auditors are surprisingly easy to manipulate, according to experts. In vast thickets of jungle, like the ones Nilsson was after, maps of the land are usually either poorly labeled or inaccurate, according to Stewart. Boundaries between forest parcels can often be in dispute. When a developer claims the rights to a particular section of forest, flaws in titling records may make it very difficult to prove fraud.

A British company’s overestimation of the amount of carbon stored in the forests of Liberia would have exposed the country to $2.2 billion of financial risk, an amount higher than its annual GDP.

Corrupt officials and tribal leaders may also claim the authority to make a deal they can't approve, according to Rainforest Foundation's Bewick, who also worked as a legitimate carbon credit developer in Colombia a few years ago. "They're just as likely to be part of the deal if they get something," he said. "The people that get screwed are the forest communities."

Even when there are clear collective titles over sparsely populated swathes of forest, there's still room for manipulation. 

"For a well-intentioned developer, such as we were, the collective title implies collective management and common pool resource distribution, which I would argue lends itself to great chance of sustainability," Bewick wrote later in an email. "For a fraudster, it can be an opportunity to manipulate the executive leadership into signing over the carbon rights to a massive land area. So, yes, a lot less people to deal with or defraud." 

The UN's guidelines for REDD projects are also easy to game. Developers are required to define an "imaginary" emissions baseline, or the rate at which logging and other forces would degrade the environment in the event that the proposed project didn't go into effect. "In essence, the purpose of this offset policy is to ensure that greenhouse gas reductions are 'in addition to what would have happened anyway,'" Martin and Walters wrote in the International Journal for Crime, Justice and Social Democracy article. While this might be easier to prove on a factory retrofit, by, for example, using an emissions device to measure how much carbon dioxide is released before modifications, determining how nature and markets will act on a forest in the future is a guessing game subject to significant corruption. "One can imagine situations where local collusion might occur in relation to future land use and, in establishing a baseline, propose … degradation activities that may never have been undertaken in reality," the authors continue. If developers imagined a scenario where half the forest was logged, for example, the carbon credits would be worth more and the returns on the market would be much higher, even if that amount of logging was unlikely.

When Nilsson was initially considering his carbon projects, the proposed baseline was already an area he planned on fudging. In an email dated September 21, 2010, he asked Pantone:

Are there any records of deforestation aerial or satellite photos showing the deforestation logging over the last 10 to 30 years this will give us an idea when the existing timber will be deleted thus endangering the Matses land and way of life[?]

Pantone replied two days later, offering the most accurate assessment of the difficulties in proving deforestation: 

There has been very little deforestation of Matses titled lands, with most being centered around the recently abandoned town of Buenas Lomas Antigua (the population moved to Buenas Lomas Nueva). I will send you links to the satellite images and other maps when I return from my trip next week.

Despite this information, Nilsson wrote back the same day: 

I note that there is very little deforestation on the Matses land Dan[.] [A]s long as we can demonstrate the rate of deforestation in Peru and how it can affect the Matses land in time [sic].

...we will have some work to do on this so the Matses land qualifies for a carbon credit project. Between all of us that is 1 American 2 Aussies 1 Irishwomen and team of experts I do not think it will not [sic] be a big problem.

Determining the amount of carbon actually stored in a forest may be more straightforward than predicting the future, but it, too, has several gaping holes where crooked operators can creep in. Satellite imagery, according to Stewart, does not, for instance, provide details on the different species of trees or how much carbon is stored in the soil. To do that, scientists hired by developers on the ground must survey the landscape. Due to the expense and difficulty in locating a parcel of forest in these remote areas, auditors rarely make the trip to evaluate their interpretations. 

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Ryan Jacobs is a former producer for TheAtlantic.com.

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