CFTC Seeks Help on Carbon Frauds

Here’s a new twist on whistleblower award programs run by government agencies: the Commodity Futures Trading Commission just published a bulletin calling for tips from the public about potential fraud in the market for carbon offsets.

To the best of my recollection, that’s new. The CFTC and Securities and Exchange Commission have both encouraged tips from the public for years, of course; but both agencies have always framed their messages along more generalized lines of “We’re always looking for tips on anything, call us any time.” This is the first instance I’ve seen of either agency (or any other, for that matter) expressly looking for tips on a specific subject. 

The CFTC published its announcement on Tuesday. 

“Alongside the continued growth of CFTC regulated carbon offset derivatives contracts, the agency is building upon its expertise to ensure the utility and reliability of these markets, as well as its ability to identify and pursue any potential fraud or abusive practices,” chairman Rostin Behnam said in a statement. “Information from whistleblowers advances the Commission’s enforcement mission and, in turn, further builds integrity and trust in the carbon markets by rooting out fraud and manipulation.”

For those unfamiliar, carbon offsets are quasi-financial instruments that a company can buy to, as the name implies, offset its carbon emissions. For example, an airline might purchase carbon offsets so that it can keep flying and pumping out carbon dioxide as usual. The counter-party agrees to reduce its own carbon emission in exchange, or plant trees somewhere to suck up carbon dioxide, or undertake some other environmental make-good gesture.

The fraud risks around these arrangements are rather obvious. For example, if Company A purchases a carbon offset so it can keep polluting as usual, and then Company B fails to live up to its offset promises — what happens then? Do customers of Company A get to sue for false environmental promises? Do regulators impose a monetary penalty? Do the executives at Company A suck their company’s carbon emissions back into their lungs? 

Such fraud or manipulation qualifies as greenwashing, which is very much a thing on regulators’ radar. For example, the SEC’s proposed rules for disclosure of greenhouse gas emissions don’t allow a company to report net emissions after offsets are included; you’d need to report your absolute emissions too, regardless of offsets. Still, the practical questions around enforcement against greenwashing are many and mostly unanswered. So here we are, with the CFTC asking the public to help it strengthen its anti-greenwashing karate. 

The CFTC’s alert flagged five specific types of misconduct where it wants the public’s help: 

• Manipulative and wash trading or other violations of the CEA in CM futures contracts;     
• Fraud in the underlying spot markets related to ghost credits listed on carbon market registries;
• Double counting or other fraud related to carbon credits;
• Fraudulent statements relating to material terms of the carbon credit, including statements relating to the credit’s quality, quantity, additionality, environmental benefits, and duration; 
• Manipulation of tokenized carbon markets.

Industry analysts estimate the size of the carbon market today at roughly $2 billion, and expect that number to reach $250 billion by 2050. And since carbon credits are the underlying commodity for futures contracts listed on CFTC-designated contract markets, the CFTC does have jurisdiction here. (Although I wouldn’t be surprised to see the SEC or even the Justice Department pursue their own enforcement actions over fraudulent carbon emissions schemes in particularly egregious cases.) 

I’m just struck by the CFTC using its whistleblower rewards program in such a clear, specific way. Compliance officers would be wise to take the CFTC at its word that it wants to crack down on greenwashing, and then consider what precautions your own business might want to take to assure that you don’t fall into some greenwashing trap. For example:

• If your company purchases offsets, have you assessed the risks of fraud among your counter-parties to those purchases? Does your ESG or internal audit team understand how greenwashing might affect you? 
• If you tout offsets as something customers can purchase while conducting some other transaction with you, have you considered how you confirm and document that the offset is faithfully executed? 
• Do your internal controls account for carbon offsets accurately? 

Above all, do you have a strong speak-up culture that encourages employees to raise concerns internally first? Have you trained relevant employees on greenwashing, so that they can recognize these frauds when they see one? 

Because if you’re not doing that, the CFTC is. They’ll be happy to pick up the ball your internal compliance program might be fumbling.