Article by Chris Noble
In December 2009 Deloitte published a white paper entitled 'Carbon Credit Fraud - The White Collar Crime of the Future' in which it was noted that emission trading in the UK and Europe had already been subject to fraud, misstatement and the involvement of organised crime. Chris Noble, Deloitte Forensic Partner, warned Australian companies and regulators to prepare for the potential white collar crime risks that were likely to impact the Australian market with any new scheme.
Following the deferral of Australia's Carbon Pollution Reduction Scheme (CPRS) in April 2010, the Australian government announced on 10 July 2011, revised details of Australia's carbon pricing mechanism
From 1 July 2012, every tonne of carbon dioxide equivalent (CO2-e) produced by approximately 500 of Australia's largest direct emitters will be priced at $23/tonne. The carbon price will be fixed for three years from 2012 to 2015 (indexed annually by 2.5%). From 1 July 2015, a floating market-based Emissions Trading Scheme (ETS) will commence whereby the Government sets the emissions level cap for Australia and the market determines the price1.
In this article we discuss the regulatory activity since 2009 in connection with criminal activities associated with carbon credits and how the risk to Australian companies of fraud and corruption has not diminished as a result of the proposed Australian CPRS.
The Europol 2011 Organised Crime Threat Assessment, published in April 2011, states that "Activities such as carbon credit fraud, payment card fraud and commodity counterfeiting attract the increasing interest of groups due to the lower levels of perceived risk involved."
During 2010, there were a number of investigations within Europe with regards to carbon credit scams relating to VAT-fraud. We commented in our article, 'Carbon Credit Fraud – The White Collar Crime of the Future', on the reported carbon credit scams in five European countries and the UK that was estimated to be worth more than $1.5 billion and £38 million respectively. Since that article, Europol has reported that during 2010 hundreds of raids on European offices were undertaken and over a hundred people arrested in relation to organised VAT fraud within the EU Emission Trading System.
Australian companies will need to be vigilant to the possibility of similar scams relating to the non-remittance of GST.
Fraud has traditionally been driven by greed and opportunity. We have seen in Australia and elsewhere that the roll out of new government schemes (e.g. fiscal stimulus) are a draw for people and groups seeking to improperly benefit. The victims of such attacks are not limited to the government, but also extend to businesses and workers, who as a result of the fraud, are out of pocket. The opportunity arises as the scheme is new, controls are untested and often large monies are at stake. The issue here is not about the environment or the validity of carbon tax, but rather about providing another opportunity for criminals that needs to be carefully managed and policed.
It has been reported recently that the Department of Climate Change in Australia has said "overseas rorts highlight the potential threats to climate change registries in Australia and the need for effective security and anti-fraud measures"3. Further that Julia Gillard, the Australian Prime Minister has said that "Australia would not repeat the mistakes that had exposed European carbon registries to multi-million fraud. We'll have our own scheme. And we've learnt the lessons from emissions trading schemes overseas"4.
Jim Torr, Australian Federal Police Association president has said that "there was little doubt the [Australian Federal Police (AFP)] would be required to play a role in policing the scheme. 'Tax evasion is one of the big things the AFP works on,' he told The Australian Online. 'There has to be implications for our organisation, even in validating and monitoring. This will be another area of responsibility of the AFP. The potential for fraud is enormous and the scale of the fraud phenomenal.'"5
Bribery and corruption implications
In recent months we have seen Australian and UK regulators take steps that elevate awareness of the risk to companies posed by corrupt practices:
- The recent charges brought by Australian Federal Police (AFP) against executives of Securency International Ltd will be the first real test of Australia's anti-bribery and corruption laws in the courts ([insert link to our article not yet posted on the website])
- UK Bribery Act which came into effect on 1 July 2011 (read more about this in our recent article 'Revamped Bribery Act retains its teeth').
Kyoto-compliant Australian carbon credit units (ACCU) established under the Carbon-Farming Initiative (CFI) can be used in the fixed price period to meet up to 5% of an entity's carbon liability. Once the floating ETS commences there is no limit on the ability to use ACCUs to meet the carbon liability under the scheme. This is expected to present significant opportunity for organisations in the land-use and agricultural sectors6 . In doing so companies may also be exposed to improper dealings with public officials in their attempts to obtain carbon credits.
In our 2009 Carbon Credit Fraud article we highlighted the potential pressure within some organisations to misstate their carbon position to present a better financial position following the commencement of the CPRS. Under the proposed revised carbon pricing scheme this risk still remains.
It has been reported that the Australian government will spend at least $382 million on the implementation and regulation of the carbon tax policy and that, in anticipation of the carbon tax, staff numbers at the Department of Climate Change and Energy's Efficiency [Division/Department] has risen from 408 in July 2009 to 1,027 in July 20107 .
With the government's focus on the regulation and enforcement of emissions trading, companies will need to:
- Take the time to understand their carbon profile in order to be able to address regulator questions and requirements
- Assess the risk of financial misstatement and implement appropriate controls to prevent and detect errors.
No matter what your industry, all organisations should understand the potential impacts, risks and opportunities presented by the carbon pricing mechanism.
1. Deloitte report entitled "Australia's carbon pricing mechanism – what it means for business" issued 13 July 2011
6. Deloitte report entitled "Australia's carbon pricing mechanism – what it means for business" issued 13 July 2011
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.