CFTC Charges Project Developer in Carbon Credit Fraud
Commentary by Steven Lofchie
A carbon credit project developer and the company's former Chief Operating Officer ("COO") settled CFTC charges for misrepresenting the effectiveness of emissions-reduction projects to obtain carbon credits that exceeded their actual entitlements.
According to the findings, (see Order 1 and Order 2), the company and its COO "engaged in a fraudulent scheme of reporting false and misleading data to at least one carbon credit registry, third-party reviewers, and others, ... with the goal of obtaining carbon credits far beyond what [the company] was entitled to receive and to increase the company's revenue by millions of dollars." The CFTC found that the fraudulent conduct included (i) inflating reported efficiency and usage metrics for projects involving cookstoves and LED light bulbs, leading to the issuance of millions of excess carbon credits, and (ii) providing inaccurate information that misled stakeholders about the actual environmental impact of these projects, facilitating the sale of these inflated credits in the voluntary carbon market.
The CFTC charged each party with violating CEA Section 6(c)(1) ("Prohibition regarding manipulation and false information") and 9(a)(2) ("Violations generally; punishment; costs of prosecution") and CFTC Rule 180.1(a) ("Prohibition on the employment, or attempted employment, of manipulative and deceptive devices").
To settle the charges, the company agreed to (i) pay a $1 million civil monetary penalty, (ii) cease and desist from violating the applicable provisions of the CEA and CFTC regulations and (iii) comply with certain conditions and undertakings, including the cancelation or retirement of voluntary carbon credits sufficient to address the violative conduct.
In addition, the CFTC sued the former CEO of the company. According to the Complaint, filed in the US District Court for the Southern District of New York, the former CEO orchestrated a scheme that involved submitting false and misleading information to a carbon credit registry and third-party validation bodies. The CFTC alleged that this misrepresentation was intended to create a deceptive impression of the quality and effectiveness of emissions-reduction projects, allowing the company to obtain carbon credits far beyond its legitimate entitlements and significantly inflate its revenues. The CFTC alleged that the defendant misled stakeholders by (i) inflating the reported efficiency and usage metrics of projects designed to implement cleaner cookstoves, and (ii) manipulating survey results to present a falsely favorable picture of project performance. The CFTC alleged that this fraudulent activity led to the issuance of millions of excess carbon credits, which the company sold in the voluntary carbon market.
The CFTC is seeking (i) civil monetary penalties, (ii) disgorgement of ill-gotten gains, restitution, permanent trading and registrations bans and (iii) a permanent injunction against further violations of the CEA.
Commentary
That the CFTC permits trading on carbon credits notwithstanding the difficulty of policing fraud in the underlying market (see e.g. The warring conmen at the heart of a €5bn carbon trading scam), while attempting to prohibit trading on Congressional control contracts allegedly out of a fear of fraud, is illustrative of the extent to which regulatory decisions that are supposed to be made on the basis of terms set out in the relevant statutes are instead based on political considerations. (See also, CFTC Seeks Comment on Election Futures Contracts.) In the case of the CFTC's refusing to allow the listing of election contracts, the DC Circuit Court found the regulator's actions improper.