Seven arrested in suspected carbon tax fraud

HMRC carbon credit carousel fraud surfaces as London raids target organized crime in EU ETS emissions trading, exposing VAT missing trader scams, unpaid tax risks, and carbon credit networks funding luxury lifestyles and vehicles.

The British tax office arrested seven people in London in a suspected 38 million pounds (US$62.6 million) value-added tax fraud in the European market in carbon allowances, it said.

Officers from Her Majesty’s Revenues and Customs (HMRC) searched 27 properties around London and arrested six men and one woman in early morning raids, the HMRC said in a statement.

"Those arrested are believed to be part of an organized crime group operating a network of companies trading large volumes of high-value carbon credits," it said.

"It is thought that the proceeds of this crime have then been used to finance lavish lifestyles and the purchase of prestige vehicles."

The HMRC said further arrests were likely but it could not give the names of those arrested or the companies involved, nor could it estimate the total scale of the suspected fraud or say if it was isolated to Britain.

Under the $90 billion European Union carbon emissions trading market, companies trade permits called EU Allowances that allow them to emit climate-warming greenhouse gases, and proposals for individual carbon quotas are being discussed across the bloc.

Britain said last month it would make carbon trading exempt from value-added tax (VAT) in response to a suspected trading scam called carousel fraud, and the UK carbon reduction plan is expected to impact 5,000 companies.

Through carousel fraud, also called missing trader fraud, fraudsters import goods VAT-free from other countries, then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the tax to the government.

France and the Netherlands have also taken similar measures in the past two months, and debate around the EU green plan has intensified, after rumors of fraudulent trade circled emissions exchanges in those countries.

Investment bank and broker sources told Reuters they were concerned that they may have to foot the unpaid tax bill, as the British carbon tax reshapes market incentives, or possibly face legal action for having traded with fraudsters unknowingly.

"As well as further arrests, we can expect VAT assessments to now be issued (and) HMRC may seek to recover missing VAT from parties unwittingly caught up in the fraud," said Sarah Donald of law firm Dundas & Wilson.

HMRC estimates it lost between 2-3 billion pounds in potential tax revenues between 2005-2006 due to carousel fraud, and some carbon traders have turned to other commodities amid the uncertainty.

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