EU carbon market fraudsters face heavy jail sentences

In the Republic of Cyprus, the Greek flag is seen more often than the national one. [James Crisp/Flickr]

Carbon market fraud reveals the vulnerability of the EU’s banking system. The speed of trading on the carbon market, coupled with lax enforcement in Cyprus and Lithuania, allowed French criminals to steal €283 million. EURACTIV France reports.

Two French prosecutors on Wednesday (25 May) called for severe punishments for a group of individuals suspected of having used the European carbon market to fraudulently withhold €283 million of VAT for the French state.

Jaroslaw Klapucki, the director of the Polish emissions broker Consus, Arnaud Mimran, a French trader, and their partner Marco Mouly, could each face up to ten years in prison. The prosecutor has also threatened to hand them a bill for the reimbursement of €263 million, as well as a €1 million fine.

Failures in financial cooperation both within the European Union and internationally have kept coming to light at the Paris tribunal, where the biggest ever case of VAT fraud on the carbon market is currently being judged. “Sometimes we get feedback from international rogatory commissions, sometimes we don’t,” the tribunal stated.  .

VAT fraud is a classic scam in the European Union. It consists of buying products abroad VAT free, then selling them on through shell companies at a price including VAT and withholding the tax from the state. Six companies are implicated in the case currently under examination.

The main company at the centre of the scam, called Ellease, bought carbon quotas VAT free in various European countries before selling them at a price including VAT in France, using the Bluenext market place, which advanced the VAT.

In one day, on 6 March 2009, the company sold 272,000 quotas in France for more than €5 million, pocketing €1 million that should have gone to the French state as tax.

The rapid exchange of quotas and their immaterial nature meant this scam blossomed very quickly. Europol even estimated the total fraud across Europe to be worth up to €5 billion, a figure now judged to be inaccurate.

A typical trading day at Ellease, 06/03/09

A typical trading day at Ellease, 06/03/09

Tens of millions of euros have been confiscated in Italy, Denmark, Germany and the United Kingdom and legal proceedings are taking place all over Europe, but the final sum has not changed.

“They say €1.6 billion, but it is at least €7 billion,” Mouly, one of the accused fraudsters, jokingly told the court. The Tunisian Jew from Paris’ Belleville district has worked in confectionary and telecommunications, but denies any links to CO2.

His profile could hardly be more different to Mimran’s, whom another defendant called a “daddy’s boy” and who has often made celebrity gossip headlines for his complicated love affairs, notably with the model Claudia Galanti.

Mimran is supposed to have raised the starting capital of at least €8 million for the scam. He is also known to have been close to two of the five people assassinated in connection with the fraud: Samy Souied, a childhood friend of Marco Mouly, who allegedly orchestrated the scam along with the three defendants, and his father-in-law Claude Dray, who was killed in mysterious circumstances in 2011.

On 23 May, Mimran also explained how he had given €1 million to Benjamin Netanyahu in 2001. “But it was straight to his personal account. Israeli law limits political donations to €4,000,” he added.

Trojan horse

The trial hinges on whether or not the Polish trading company Consus, represented by its director-general Jaroslaw Klapucki, deliberately defrauded the French state.

It is the first time that a financial intermediary has been tried in court for carbon market VAT fraud. In Belgium, Fortis, a bank that collaborated with the fraudsters, chose to settle its bill of €72 million directly with the state.

In Germany, a Frankfurt court has begun examining the case of Deutsche Bank, which is accused of having worked too closely with the fraudsters. The case will go to trial in 2017, and the United States extradited a suspect last year.

“Do you realise that this fraud casts you as a crook in front of the whole of Europe?” asked Peimane Ghaleh-Marzban, the president of Paris’ 32nd criminal court chamber.

The prosecutors have questioned the practices of the company and the fact that few measures have been taken since the scam to avoid a repeat of such an “industrial catastrophe”.

“Either you were complicit or you are an incompetent business leader,” the judge said during the hearing.

The company’s activity grew very quickly in 2008 and 2009, to the point where the six shell companies of the Ellease case represented 87% of its revenue in May 2009.

According to Olivier d’Antin, a lawyer for the French state, which is the plaintiff in the case, Consus is a “Trojan horse which delivered the poison of the fraud to the heart of the system.”

The defence argues that the surge of CO2 quotas on the market was down to the late delivery of quotas in 2008. Not only were they delivered in October rather than in March, but the delay was also combined with an economic slow-down caused by the financial crisis.

Negative influence on the markets

But for d’Antin, this argument does not stack up. Consus knew the companies potentially affected by this influx of quotas and chose not to work with them. But, with a number of small companies that appeared from nowhere, and contrary to good trading sense, Consus did not balk at selling below the market price.

Fraud grew very quickly during spring 2009

Fraud grew very quickly during spring 2009

This is one of the common characteristics of VAT fraud: with a margin of around 20% at each transaction, the fraudsters can afford to sell at a price that would otherwise see them make a loss.

Consus claims it did not know its clients in person as all contact was made by fax or phone, and that it was also duped by the scam. The defence also claims the French state should have reacted earlier, because in March 2009 Consus declared a turnover of €1.3 billion.  “The tax authorities did not worry about recovering this sum,” the defendants told the courtroom.

But this argument was reversed by the prosecution: having filed its tax declaration, the company should have known that there was an issue with the VAT.

Cyprus, the black sheep of banking

The European Union itself is not seen as a guilty party in the VAT scam, even if its “naive” approach to applying the Kyoto Protocol has been brought up. But the behaviour of some member states has drawn serious questions.

First among these black sheep is Cyprus. “It was not difficult in Cyprus. The bankers were trying to tempt us in, like waiters who want you to eat in their restaurants,” said Mouly. The Parisian opened several accounts used for the scam on the Mediterranean island, including at Alpha Bank.

In the Ellease case, money was sent directly to several accounts in Cyprus by the French public financial organisation Caisse des Dépôts, making the Cypriot banks complicit in laundering the proceeds of fraud.

In France, a branch of the bank Société Générale, where the fraudsters had an account at the start of their scam, sounded the alarm after seeing tens of millions of euros passing through the small financial structure.

“Cyprus joined the European Union in 2005, at the same time as Poland. Why is it suspicious to have had accounts in Cyprus?” Klapucki asked the court.

“Unknown territory”

The Polish broker Consus passed the profits of its French branch, estimated at around €100 million, through its Cypriot holding.

The Polish company now faces a fine of €3.8 million, according to the prosecutors.  “But we are moving in unknown territory regarding European judicial cooperation, in the case of the prosecution of a Polish company by a French court,” the prosecutor, Bruno Nataf, said.

French prosecutors have also asked for permission to bring the Israeli stockbroker Albercom to trial in France, “in the same way that an American jurisdiction can prosecute a French bank for questionable transactions in third countries”, they said.

But the company’s council rejected the request, pleading the foreignness of the alleged infringement, in this case money laundering.

Lithuania, a launderer’s paradise?

The carbon market fraudsters also opened several bank accounts and registered companies in Lithuania, presumably for the sake of discretion, if not money laundering.

Another judicial inquiry into a French citizen and his company Offshore France, which offered ready-to-use shell companies in Lithuania, with the blessing of the Lithuanian embassy whose logo appeared on the commercial paperwork, has recently been closed and will go to trial by the end of the year.

The judgement in the Ellease case is due at the end of June.

In 2008 and 2009, the EU carbon market was hit by VAT fraud. Two types of fraudsters were identified in dozens of investigations launched all over Europe and beyond.

Northern Europe was hit by gangs of Indian and Pakistani origin, while France and the South were defrauded by French-Israeli gangs.

The fraud consisted of establishing fake companies to buy and sell carbon quotas, then moving the quotas in question from one country to another. In France, the scam was made easier by the presence of the EU’s biggest trading platform Bluenet, which advanced the VAT directly.

Two cases of fraud have already been judged in France, concerning the companies Nathanael in 2012 and Keslassy in 2013. In 2012, the United Kingdom sentenced three individuals to prison for 9 to 15 years of time, for the so-called ‘Tulipbox’ affair.

VAT fraud is a major challenge for European states, and costs them €160 billion every year in lost tax revenue, according to the European Commission. The fraud is not a question of lost earnings, but of direct theft from taxpayers.

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