Factbox: Latest trial starts in $7 billion EU carbon fraud

LONDON Mon Aug 15, 2011 8:05am EDT

LONDON (Reuters) - A 5 billion euro tax fraud returned to haunt European Union's emissions trading scheme on Monday as six individuals faced tax evasion charges at a trial which starts in Frankfurt.

The case will haul the market's multiple scandals back into the spotlight but is unlikely to implicate investment banks following a similar case against small firms in Britain.

Following is a breakdown of the fraud:

WHAT HAPPENED?

* In an activity which peaked in May 2009, traders bought carbon emissions permits in one country and sold them in another, charging for and then keeping the value-added tax (VAT) which they should have handed to tax authorities

* The total value of the fraud was at least 5 billion euros ($7.1 bln) in lost tax receipts, according to Europol

WHO WAS IT?

* Charges have been brought against individuals at small firms. Europol said the fraud linked to criminal networks operating outside the EU including the Middle East

* The biggest swoop, initiated by Germany in early 2010, saw more than 2,500 officers involved across European and other countries

* In Germany, prosecutors said in March that in addition to the six individuals charged, a further 170 suspects including seven Deutsche Bank employees were still under investigation and could be charged later

* In Britain, the first trial of seven suspects risked delay as the investigation unearthed new evidence

WHY THE CARBON MARKET?

* It was easier to open an account on the carbon market registry than to open a bank account, allowing less reputable characters to participate

* As a new market, tax authorities in EU member states were slower to spot the fraud opportunity

* The fraud was carried out on an unregulated spot market. Participants in such markets do not have to register with financial authorities, unlike in futures markets

* As well as making it easier for fraudsters to gain entry, unregulated markets do not force strict know-your-client(KYC) rules on law-abiding participants meaning criminals escaped detection more easily

* Officials at Paris-based Bluenext have not denied that their spot exchange was used by tax evaders but have maintained that they acted to stop the practice

* French tax authorities are demanding 355 million euros ($505 million) from Bluenext, owned by NYSE Euronext, in unpaid VAT related to trades that occurred on the exchange

WHAT ARE COUNTRIES DOING TO STAMP IT OUT?

* In June this year EU states backed planned changes to emissions registry rules aimed at increasing security

* The EU's head of tax, Algirdas Semeta, and of climate change, Connie Hedegaard, in June sent letters to EU states urging them to apply reverse tax charges which would remove the opportunity to buy EUAs VAT-free and then pocket the tax

WHAT OTHER SCANDALS HAS THE CARBON MARKET SUFFERED?

* The carbon market has suffered scandals besides VAT fraud, including a phishing attack, the circulation of used emissions permits and cyber theft of EUAs

* The market has seen near-record low prices in recent weeks as the threat of a new downturn widens a glut in permits. Low carbon prices fail to tip competitiveness in favor of clean technologies, one of the aims of the scheme

($1 = 0.703 Euros)

(Compiled by Nina Chestney and Gerard Wynn; editing by Jason Neely)