By Leigh Phillips, EU Observer

EUOBSERVER / BRUSSELS - Traders involved in Europe’s flagship climate change programme, the Emissions Trading System - some of whom work at Germany’s biggest banks and energy firms - were the focus of a series of raids and arrests by British and German prosecutors in part of a massive pan-European crackdown on CO2-credit VAT fraud.

Fraud at the heart of the ETS has hurt the reputation of the EU’s flagship climate programme. A total of 25 people were arrested amid a blitz by authorities on hundreds of company offices in the two countries, including Deutsche Bank and energy firm RWE, in a case involving the theft of an estimated 180 miillion Euros from government coffers.

On Friday (30 April), it was revealed that UK tax authorities had raided 81 different offices and homes earlier in the week, arresting 22 individuals - 13 in England and further eight in Scotland.

The swoop, which occurred two days earlier, involved roughly 450 staff from Her Majesty’s Revenue and Customs.

German authorities simultaneously raided 230 premises, including the headquarters of Deutsche Bank in Frankfurt and the offices of RWE, one of the largest energy firms in Europe, according to the Bloomberg news agency.

Three individuals in Germany were arrested. Seven of the suspects were employees of Deutsche Bank, although none were among those taken into custody.

The operation, which targetted a total of 50 companies and some 150 suspects in Europe’s biggest economy, involved around a thousand investigators from Germany.

Authorities in eight other EU nations - Austria, Belgium, Cyprus, the Czech Republic, Denmark, Finland, the Netherlands and Portugal, as well as Norway, outside the bloc - were approached by Frankfurt prosecutors for their help in the investigation.

Computers, mobiles, memory sticks and business records were seized, as well as undisclosed sums of cash.

The criminal activity the raids focussed on relates to what is known as “carousel fraud.” Criminals establish themselves in one EU member state and open a trading account with the national carbon credit registry. They then buy carbon credits in a different country, which makes them exempt from VAT. These are then sold to buyers in the original country, but with VAT slapped on, although the VAT then just disappears along with the trader and the money never arrives in government coffers.

The raids come after Europol, the European criminal intelligence agency, last December issued a warning that ETS fraud had resulted in around €5 billion in lost revenues.

In announcing its investigations into the pan-European racket, the agency said that as much as 90 percent of the entire market volume on emissions exchanges was caused by fraudulent activity.

European Commission climate spokeswoman Maria Kokkonen told EUobserver that a new EU directive on reverse charges for emissions trading, which aims to close off this form of tax fraud, was implemented in February of this year specifically to deal with this problem.

Under the directive, EU member states may for a temporary period optionally apply a reverse charge to switch the responsibility of paying the government the VAT collected from the vendor to the customer.

Also in February, the EU toughened up the requirements for opening an account with national carbon registries. “Carbon emissions fraud is a very serious problem and the commission is working closely with member states to combat this problem,” said Ms Kokkonen. “In fact, the response to this problem has been very swift since it first came to light last summer.” “However, it should be underlined that this does not affect the overall functioning of the EU-ETS.”

Environmentalist critics of the ETS however said that such criminal activity is not the exception to the rule, but intrinsic to a carbon market. “Carbon markets are highly susceptible to fraud, given their complexity and the fact that it is not always clear what is being traded,” said Oscar Reyes of Carbon Trade Watch.

“It’s good that the commission and tax authorities are clamping down, but it is unlikely that this will be the last case of carousel fraud, but also unlikely that it will be the last type of fraud involved in emissions trading.” Read post here.

Investors Business Daily Editorial

Cap-And-Trade: While senators froth over Goldman Sachs and derivatives, a climate trading scheme being run out of the Chicago Climate Exchange would make Bernie Madoff blush. Its trail leads to the White House. Lost in the recent headlines was Al Gore’s appearance Monday in Denver at the annual meeting of the Council of Foundations, an association of the nation’s philanthropic leaders.

“Time’s running out (on climate change),” Gore told them. “We have to get our act together. You have a unique role in getting our act together.” Gore was right that foundations will play a key role in keeping the climate scam alive as evidence of outright climate fraud grows, just as they were critical in the beginning when the Joyce Foundation in 2000 and 2001 provided the seed money to start the Chicago Climate Exchange. It started trading in 2003, and what it trades is, essentially, air. More specifically perhaps, hot air.

The Chicago Climate Exchange (CCX) advertises itself as “North America’s only cap-and-trade system for all six greenhouse gases, with global affiliates and projects worldwide.” Barack Obama served on the board of the Joyce Foundation from 1994 to 2002 when the CCX startup grants were issued. As president, pushing cap-and-trade is one of his highest priorities. Now isn’t that special?

Few Americans have heard of either entity. The Joyce Foundation was originally the financial nest egg of a widow whose family had made millions in the now out-of-favor lumber industry. After her death, the foundation was run by philanthropists who increasingly dedicated their giving to liberal causes, including gun control, environmentalism and school changes.

Currently, CCX members agree to a voluntary but legally binding agreement to regulate greenhouse gases. The CCX provides the mechanism in trading the very pollution permits and carbon offsets the administration’s cap-and-trade proposals would impose by government mandate.

Thanks to Fox News’ Glenn Beck, we have learned a lot about CCX, not the least of which is that its founder, Richard Sandor, says he knew Obama well back in the day when the Joyce Foundation awarded money to the Kellogg Graduate School of Management at Northwestern University, where Sandor was a research professor. Sandor estimates that climate trading could be “a $10 trillion dollar market.” It could very well be, if cap-and-trade measures like Waxman-Markey and Kerry-Boxer are signed into law, making energy prices skyrocket, and as companies buy and sell permits to emit those six “greenhouse” gases.

So lucrative does this market appear, it attracted the attention of London-based Generation Investment Management, which purchased a stake in CCX and is now the fifth-largest shareholder. As we noted last year, Gore is co-founder of Generation Investment Management, which sells carbon offsets of dubious value that let rich polluters continue to pollute with a clear conscience. Other founders include former Goldman Sachs partner David Blood, as well as Mark Ferguson and Peter Harris, also of Goldman Sachs. In 2006, CCX received a big boost when another investor bought a 10% stake on the prospect of making a great deal of money for itself. That investor was Goldman Sachs, now under the gun for selling financial instruments it knew were doomed to fail.

The actual mechanism for trading on the exchange was purchased and patented by none other than Franklin Raines, who was CEO of Fannie Mae at the time. Raines profited handsomely to the tune of some $90 million by buying and bundling bad mortgages that led to the collapse of the American economy. His interest in climate trading is curious until one realizes cap-and-trade would make housing costlier as well.

Amazingly, none of these facts came up at Senate hearings on Goldman Sachs’ activities, which may be nothing more than Ross Perot’s famous “gorilla dust,” meant to distract us from the real issues.

The climate trading scheme being stitched together here will do more damage than Goldman Sachs, AIG and Fannie Mae combined. But it will bring power and money to its architects. Read more here.