Aftermath of the VAT fraud on carbon emissions markets

Abstract

Purpose

The purpose of this paper is to recognize the effect of the VAT fraud upon the market prices and to assess the occurrence of money laundering on the carbon emissions market. The paper presents an analytic breakdown of the MTIC pocketed funds and estimates the bearish impact of the VAT trade on the carbon prices. The VAT carousel could also be used for all the steps of money laundering given the lack of control and surveillance of various trading firms.

Design/methodology/approach

In a previous work by Frunza and Guégan it was shown that the European carbon market is strongly influenced by fundamentals factors such as oil, energy, gas, coal and equities. Using public market prices and volumes for both futures and spot exchanges, the model allows us to assess and quantify the spread between the observed carbon prices and the theoretical fundamental prices. The dataset analysis reveals that the spot volumes remained abnormally high compared to an empirical economic level, even after the end of the VAT fraud on the organised exchange. These abnormal volumes could be explained by the occurrence of speculative trading linked to the money laundering.

Findings

Findings present an analytic breakdown of the MTIC pocketed funds and a bearish impact of 2‐3 euros upon the carbon prices. The paper also explains the origin of a relative persistence of high volumes on the spot market by proposing a model of placement, layering and integration steps on the carbon emissions market, similar to the VAT carousel.

Originality/value

This paper is the first study that quantifies the market manipulation effect due to VAT fraud. The work is also unique as it provides the first estimation of money laundered on the carbon emission market.

Citation

Frunza, M. (2013), "Aftermath of the VAT fraud on carbon emissions markets", Journal of Financial Crime, Vol. 20 No. 2, pp. 222-236. https://doi.org/10.1108/13590791311322382