CFTC seeks whistleblower tips on fraud and manipulation in carbon markets

What investors need to know

On June 20, the Commodity Futures Trading Commission’s (CFTC) Whistleblower Office issued an alert that individuals can become eligible for financial awards and certain protections by “blowing the whistle” and identifying potential fraud or market manipulation in the carbon markets. 

Although carbon offsets are expected to continue to play an important role in the energy transition and in companies’ ability to meet their net-zero commitments, concerns have been raised on the integrity, validity and quality of carbon offsets that are transacted in the voluntary carbon markets. This whistleblower alert is the CFTC’s latest affirmative step towards overseeing the voluntary carbon markets and exercising its enforcement authority over carbon offsets.

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The CFTC is tasked with promoting the integrity and resilience of the US derivatives markets, but it also has anti-fraud and anti-manipulation enforcement authority over both the derivatives markets and the underlying spot market. The Commodity Exchange Act prohibits manipulation and fraud in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery. Carbon offsets are the underlying commodity for futures contracts that are listed on CFTC designated contract markets, which brings carbon offsets and the voluntary carbon markets within the CFTC’s oversight authority. 

The CFTC’s Whistleblower Program, which was created by the Dodd-Frank Act, provides monetary awards to individuals who voluntarily provide original information about violations of the Commodity Exchange Act that leads the CFTC to bring a successful enforcement action resulting in monetary sanctions of over $1m. 

An individual may also be eligible for monetary awards if the voluntarily submitted original information leads to the successful enforcement of a related action brought by another governmental entity. The monetary award for an eligible enforcement action ranges between 10% and 30% of the monetary sanctions collected in the enforcement action. Since issuing the first whistleblower award in 2014, the CFTC has awarded approximately $330m to whistleblowers. The enforcement actions associated with the awards have resulted in monetary relief of more than $3bn.

The whistleblower alert identifies several types of misconduct that individuals should be on the lookout for, including:

  • Manipulative and wash trading or other violations of the Commodity Exchange Act in carbon market futures contracts;
  • Fraud in the underlying spot markets related to ghost (a/k/a illusory) offsets listed on carbon market registries;
  • Double counting or other fraud related to carbon offsets;
  • Fraudulent statements relating to material terms of the carbon offset, including but not limited to the quality, quantity, additionality, project type, methodology substantiating the emissions claim, environmental benefits, the permanence or duration, or the buffer pool; and
  • Manipulation of tokenized carbon markets.

These types of misconduct are similar to the concerns associated with carbon offset transactions that have previously been flagged as potentially constituting fraud. They also cover many of the concerns that have been raised with respect to carbon offsets that are transacted in the voluntary carbon markets, including the integrity, permanence, additionality, verification and validity of the carbon offsets. 

At a minimum, the CFTC’s whistleblower alert affirms the potential regulatory and enforcement exposure with transacting carbon offsets that has been looming since the CFTC convened its inaugural Voluntary Carbon Markets Convening in June 2022.

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With the issuance of the whistleblower alert, the CFTC’s chair commented the CFTC “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.” Information obtained from whistleblowers furthers these efforts and supplements the information the CFTC has collected through its request for information on climate-related financial risk.  That request for information sought information on several issues, including whether there are aspects of the voluntary carbon markets that are susceptible to fraud and manipulation and/or merit enhanced CFTC oversight and whether there are ways in which the CFTC could enhance the integrity of voluntary markets and foster transparency, fairness, and liquidity in those markets. 

Parties transacting carbon offsets will need to ensure that the carbon offsets they hold reflect the permanent reduction or removal of emissions of carbon dioxide or other greenhouse gases and that the carbon offset is permanent, verifiable, additional and otherwise unclaimed. They should evaluate whether they have contractual protections to mitigate against the commercial risks and potential regulatory and enforcement exposure associated with transacting carbon offsets and whether they have in hand supporting documentation if the carbon offsets are subject to review or verification or are later challenged.