Carbon Credit Trading

Frequent cross-border buying and selling of carbon credits leverages their intangible nature and complex brokerage arrangements to explicitly create multiple transaction layers that obscure the true origin of illicit funds.

The intangible nature of carbon credits enables criminals to rapidly buy and sell these specialized instruments, obscuring transaction trails and exploiting inconsistent AML controls. This inherent property facilitates advanced layering, including carousel fraud schemes, as carbon credits can be traded multiple times with minimal disclosure requirements.

Criminals exploit the cross-border nature of carbon credit trades and the fragmented or lax AML oversight in multiple jurisdictions to layer illicit funds. By taking advantage of inconsistent regulations across different carbon markets, they obscure beneficial ownership, complicate investigators’ efforts, and protect the illicit proceeds from detection and confiscation.

• Highlights jurisdictions with weak AML frameworks or incomplete carbon market regulations.
• Supports risk assessment of carbon credit trades that involve brokers or platforms in high-risk regions, enabling targeted investigations of questionable cross-border activity.

• Offers insight into declared revenues, tax filings, and corporate financial statements.
• Assists in detecting inconsistent VAT returns or questionable tax refund claims associated with carbon credit carousel schemes and advanced layering techniques.

• Captures detailed records of all financial transactions, including carbon credit payments, rapid cross-border fund transfers, and subsequent outflows to high-value purchases or offshore accounts.
• Facilitates tracing the frequency, volume, and timing of transactions to identify anomalies, such as unusually large or frequent carbon credit trades lacking commercial rationale.

• Contains verified details of customers, including beneficial ownership, declared business activities, and investment backgrounds.
• Helps identify potential mismatches between a customer’s stated knowledge of carbon credit markets and their significant investment behaviors, indicating possible money laundering or misuse of accounts.

• Documents purchases and transfers of real estate, luxury goods, and other high-value assets.
• Helps trace the rapid redeployment of illicit carbon credit proceeds into tangible assets, a common layering method in money laundering schemes.

• Provides granular records of carbon credit trades, including timestamps, volumes, counterparties, and transaction values.
• Enables cross-referencing trade data with financial transaction logs to detect discrepancies, high-velocity trades, or patterns indicative of layering and tax fraud.

• Contains details of cross-border transactions, including amounts, currencies, involved financial institutions, and beneficiary jurisdictions.
• Crucial for detecting rapid, complex fund flows across multiple countries linked to carbon credit payments and immediate transfers through special-purpose vehicles.

• Provides official information on corporate structures, shareholders, directors, and ownership hierarchies.
• Helps uncover shell entities or special-purpose vehicles used to mask beneficial ownership in complex carbon credit arrangements and cross-border layering schemes.

Incorporate carbon market-specific risk factors into country assessments, assigning higher AML risk scores to jurisdictions with lax oversight or known VAT fraud incidents in carbon credit trading. Apply enhanced controls, such as higher EDD thresholds and more frequent transaction reviews, for cross-border carbon credit transactions linked to these regions.

Conduct in-depth background checks on parties involved in carbon credit trading, including verification of beneficial owners behind special-purpose vehicles and brokers claiming to trade carbon credits. Cross-check VAT registration, carbon credit registry data, and taxation records to detect mismatches that may indicate tax fraud or illicit layering efforts.

Implement scenario-based monitoring rules specifically for carbon credit transactions, focusing on flagging sudden high-value trades, rapid layering across multiple jurisdictions, and frequent transfers through special-purpose vehicles. Institutions should track VAT details in real-time and investigate anomalies, such as inconsistent or missing tax documentation, to identify carousel fraud and layering schemes tied to carbon credit trades.

Continuously evaluate and monitor brokers, carbon credit platforms, and special-purpose vehicles that offer or facilitate carbon credit deals. Require comprehensive AML clauses in service agreements, verify regulatory licensing, and prioritize scrutiny of intermediaries operating in high-risk or loosely regulated jurisdictions where carbon credit tax fraud is prevalent.

Provide specialized training on carbon credit laundering typologies, including hallmark signs of carousel VAT fraud, the use of intangible carbon credits for layering, and the role of special-purpose vehicles. Frontline staff and compliance teams should learn to recognize irregular broker relationships, unusual transaction flows, and repeated short-term high-value trades without clear commercial rationale.

Leverage public carbon credit registries and external data sources to confirm the legitimacy of carbon credit projects and associated brokers. Investigate any reported fraud, tax violations, or negative media regarding the intermediaries, and verify stated beneficial ownership structures to expose shell entities posing as legitimate carbon credit companies.

Collaborate with peers, regulators, and carbon credit exchanges to exchange intelligence on suspicious carbon trading tactics and new fraudulent typologies, such as evolving carousel schemes or multi-layered SPV structures. Pooling such information helps institutions better detect cross-institutional patterns indicative of larger-scale carbon credit laundering and tax fraud.

Restrict or suspend carbon credit trading services when clients fail to provide valid VAT documentation, show no legitimate commercial justification for repetitive high-value trades, or engage solely through opaque special-purpose vehicles. Limit or freeze suspicious carbon credit transactions pending in-depth investigation to prevent ongoing illicit layering.

Regularly review and update risk assessments of clients engaged in carbon credit trading, focusing on changes in broker relationships, sudden expansions into new jurisdictions, or unexplained spikes in transaction volumes. Require up-to-date VAT documentation and confirmations of carbon credit authenticity with each new transaction to identify evolving layering patterns and tax evasion tactics.

Analyze the legitimacy of carbon credit positions and trade documents (e.g., purchase agreements or carbon offset certifications) to detect manufactured credits, over-invoicing, or misinvoicing. Compare trade volumes, prices, and broker declarations against recognized carbon registries and market rates to uncover suspicious spikes or artificially manipulated pricing consistent with layering or VAT fraud.

• Multiple bank accounts, including offshore ones, receive proceeds from carbon credit sales, compartmentalizing funds and obfuscating their origin.
• Rapid cross-border transfers between these accounts add layers of complexity, diminishing the effectiveness of AML controls.
• Criminals exploit bank secrecy laws in certain jurisdictions, making it harder for authorities to trace ultimate beneficiaries and disrupt the flow of illicit funds.

• Criminals exploit lax or fragmented carbon credit regulations by purchasing bulk credits in one jurisdiction and rapidly reselling them across multiple brokers or shell entities in other regions, generating complex transactional trails.
• They leverage carousel fraud techniques, repeatedly trading the same credits to claim non-existent VAT rebates, thus inflating illicit gains.
• The intangible nature of carbon credits hinders effective AML oversight, allowing criminals to move funds swiftly through layering and obscure the illicit origin of proceeds.

• Fraudulent invoices for carbon credit trades support VAT carousel schemes, enabling the creation of fictitious tax rebates.
• These bogus receivables obscure actual transaction values and inflate profits, amplifying laundered sums.
• The resulting paper trail complicates AML efforts, as legitimate carbon credit trades are intermingled with fraudulent invoices.

• Criminals use proceeds from carbon credit scams to acquire high-value luxury assets (e.g., vehicles, watches), integrating illicit funds into tangible property.
• These goods can be purchased through shell companies in jurisdictions with minimal reporting requirements, further obscuring the money trail.
• High-value assets are easily resold or transferred, making them an attractive conduit for converting and hiding criminal proceeds.

• Enables rapid international fund transfers linked to carbon credit trades, moving illicit proceeds into multiple jurisdictions.
• The cross-border nature of these payments adds layers of complexity, reducing transparency and impeding law enforcement efforts.

• Criminals can trade carbon credits as intangible commodities, using quick buy/sell cycles to layer illicit funds.
• Fragmented oversight across jurisdictions for carbon credit transactions hampers AML checks, obscuring beneficial owners and transaction flows.

• Criminals establish shell entities in foreign jurisdictions to purchase and sell carbon credits, hiding the real owners behind corporate veils.
• These offshore structures circumvent stricter AML regulations and facilitate tax fraud schemes like VAT carousel fraud.

• Facilitates the formation of special-purpose vehicles (SPVs) that layer proceeds from carbon credit deals across multiple jurisdictions.
• Complex corporate structures hinder identification of ultimate beneficial owners, complicating AML investigations.

Organized crime groups knowingly manipulate carbon credit trading markets by:

• Orchestrating large-scale VAT carousel fraud, exploiting cross-border carbon credit trades.
• Rapidly moving illicit proceeds into offshore or shell accounts.

These activities obscure the funds’ origins, posing significant challenges for financial institutions attempting to trace suspicious transactions.

Brokers facilitate carbon credit trades by connecting buyers and sellers, often operating in multiple jurisdictions with inconsistent AML regulations.

• Criminals exploit these intermediaries, who may unknowingly overlook red flags or fail to fully vet counterparties.
• Fragmented oversight allows illicit funds to move through different brokers, complicating financial institutions' efforts to identify suspicious trading patterns.

Shell companies are established or acquired in jurisdictions like Hong Kong to:

• Receive and launder proceeds from fraudulent carbon credit trades.
• Obscure beneficial ownership and transactional flows.

This hampers financial institutions' ability to detect ultimate beneficiaries and disrupt illicit fund movements.