CFTC Files First Charges For Fraud in the Voluntary Carbon Markets

The Morgan Lewis firm reports that the Commodity Futures Trading Commission (CFTC) recently took its first enforcement actions against fraud in voluntary carbon markets (VCMs). It targets a carbon credit project developer for issuing inflated voluntary carbon credits (VCCs) by falsifying energy-saving data.

The CFTC issued consent orders against the developer and its former chief operating officer, requiring a $1 million penalty, and filed a federal complaint against the former CEO for orchestrating the fraud.

The case underscores the CFTC’s focus on maintaining the integrity of voluntary carbon markets and preventing fraudulent practices within the carbon credits industry. It stems from the developer’s fraudulent reporting of energy savings in cookstove and lightbulb projects across sub-Saharan Africa, Central America, and Southeast Asia.

The CFTC found intentional deception by both the developer and its former executives. The developer’s false data inflated the number of VCCs issued and misled carbon credit registries and verification bodies. The company is required to cancel the fraudulently issued credits and implement corrective measures, including leadership changes and compliance improvements.

The former CEO faces additional legal actions, with the CFTC seeking penalties, injunctions, and compensation for damages.

According to Morgan Lewis, more investigations are likely underway. The CFTC, through the exercise of its anti-fraud and anti-manipulation enforcement authority, can probe manipulative trading in futures contracts, the validity and credibility of VCCs issued, and fraudulent statements on the material terms of a VCC.

The firm cautions that companies transacting VCCs must ensure that they reflect a permanent and verifiable reduction or removal of greenhouse gas emissions.