Daniel Butler is an American broker based in Prague in the Czech Republic broker, and in the period from 2004-2011 he traded carbon credits. All was fine. Business was good until a cold Winter day in January 2011.
By Tom Heinemann
“I came out here in 1996 and I worked in the emmerging markets. I have lived in Prague, Kiev, Athens and Belgrade trading with bonds and equities and then finally with carbon credits. In 2004 – in the early days of carbon trading in Europe, I would broker them from factories that had surplus carbon credits, and I would approach them and say why don’t you sell them to me so I could sell them to companies in the west who needed these carbon credits. So I was a broker in the east to a seller in the west – usually to a bank or a broker in Brussels and London for example”, says Daniel Butler in the filmed interview conducted back in September 2012
“So you were filling in the needs on both sides you might say. Was it a good business?”
“In the early days it was a good business, says Butler.
“There were wider spreads then and by that I mean I could for instance buy them for 15 € and 30 cents and sell them to someone in London for say 15 € and 80 cents. I could make something like half a € per carbon credit by brokering them to western buyers. Of course later on the spreads came in we would not make as much money as we did.
“How many credits did you sell at one time?”
“Typically we looked for companies who had something like between 25-100.000 credits to sell. These factories were normally into metallurgy, energy generation etc. that had these credits as surplus allocated to them from the national allocation plans.”
“And the transfer of credits, it’s 100 % computerized, so all you needed was to press some buttons. How fast could you do a deal like that?
“These carbon credits are what you called “dematerialized”. It’s a funny word but it really means that they are not on paper. And the dematerialized carbon credits only existed on a computer. So these carbon credits had serial numbers and they were issued to each of the carbon emitting companies in a certain amount with a certain segments of serial numbers.”
The fast trading
Daniel Butler: “The transactions would typically happen in just a matter of minutes. If I bought credits from a factory in Eastern Europe, that factory would go to his computer. He would login to his account – like his e-mail account – and he would say I’m transferring 25.000 thousand credits from my account to the buyers account. It could be done in less than five minutes. I might accept those credits and the deliver them to someone in Western Europe. And again it would only take five minutes.”
“And you could make say up to 50.000 € in just five minutes?”
“In the early days, that was true, I could roughly make around 50.000 € in five minutes for example, but there were not than many trades per day. It’s a very, very large business. I would have to say that there are a lot of people who would not get into this unless there was a profit to be made.”
The Mission Impossible stunt in Prague
Daniel Butler now tells the story that changed his life and that led to one of the most spectacular frauds seen in the carbon credit market.
“On January 18th 2011 someone called in a bomb threat to a building in Prague. The building had a lot business in it – but it also housed the carbon registry in of the Czech Republic. What I heard from friends walking by, was that everyone was evacuated from the building – they had bomb sniffer dogs going into the building and later on I heard that the people that worked in the registry went back to their offices they realized that something was wrong – something had happened to their computers”, says Butler.
“We learned the next day – when my client called me – and told me was that the computers in the registry had been hacked into and emission credits belonging to a number of companies in the Czech republic had been stolen. By stolen I mean that they had been transferred out of their accounts into places like Estonia, Poland, Lichtenstein and in Germany. In fact my client had worth 6,7 million € of carbon credits stolen from his account.”
“The hacking attack happened on the 18th of January 2011 – but I didn’t learn of it until next day – the 19th Of January 2011, when my client rang me up and told me: Daniel you have to help me. They have stolen my carbon credits. And I didn’t understand what my client meant, but soon I learned that these carbon credits had been stolen from a number of clients and transferred out of his their accounts to many different registries and finally sold in Germany.
So really he lost – within a matter of minutes – he lost 6,7 million € worth of carbon credits”, says Butler.
“But you just told me before that every single carbon credit has a unique serial number. One should think that it was possible to find them again?”
“These dematerialized carbon credits has unique serial numbers – where they were issued and in different countries. My understanding is that these can be filtered in each register and account. You can run a program looking for certain numbers and it can be done fairly quickly. I don’t believe that many different brokers and banks actually employed this type of technology – but I believe that the registries should have been doing this – especially after we learned that some of the credits had been stolen.”
“When they started investigation this what happened – they also found out that some of the stolen credits actually was were other credits stolen in another country the year before?
“Yes, on the 19th of January 2011, my client had his carbon credits stolen. On the 20th an article was written on Point Carbon’s Website in London (Leading market analysts in Carbon). Here they looked at the – now stolen – serial numbers and found that some of the credits that were in my clients account – they found out by matching these serial numbers that some of the credits my client was holding were actually stolen previously from the cement company, Holcim Cement, in Romania in November 2010.
Butler blew the whistle
“On the 19th January I went to the press and told that these credits had been stolen. Soon after I got a lot of phone calls from people from the carbon market throughout Europe.
People I had met at conferences were telling me: “Good job that you have done – great that you have told the story” – after asking me what had happened. So there was quite a bit of interest in this. Shortly after that I told the story that most spot market transactions in Europe were shut down for three days. I noticed that BlueNext (A carbon exchange in France) was shut down and I noticed that quite a few registries were shut down because they did want to receive or deliver any more credits – presumably because they did not want to be part of the credits that had been stolen”, says Daniel Butler to the camera.
But just a few days he had told the story to the press his contract were terminated, and Daniel Butler lost his job a Carbon credit broker:
“I think anybody who is delivering stolen credits is showing to the world that they do not have a secure system and I think that that looks bad for anybody. That is only my opinion. And if someone inadvertently transferred stolen credits, I would not really blame them; no one was really aware that this could happen. I think that a lot of companies might have delivered stolen credits without knowing it. And I think that they all believed that the registries were protecting them. I think that it all falls to the registries that are most responsible for this.”
It was bound to happen
“Daniel Butler, this system was invented by the politicians. Have they done their job?”
“Well, I worked in the financial markets for 25 years – I worked in currencies, in bonds and equities – I have never heard about anyone stealing bonds, equities and currencies from an account. It might probably have happened – but I have never seen it
When they started trading carbon credits and they set up this carbon trading system where you log into a computer and deliver carbon credits within minutes. I have never seen anything like that. You know it just happens so quickly, so I think it is a product of the rush and the political support that a different kind of system of transferring carbon credits was put into place. I think that they just made it too easy. Too simple.
And with so many different weaknesses I think it was bound to happen that someone would hack into others account and steal credits.”
The VAT scam
Daniel Butler: “The VAT scam – also known as the missing trader scam – really is about that someone is buying credits from one country and deliver them to another country broker and then to another country’s broker. So what happens is that at some point in that delivery chain one of those companies just disappears – closes the shop
The reason that it earned so much money – is when you deliver between countries, you claim the VAT – roughly – let’s say it’s 20 % like in this country. You claim that from the government – and the government have to pay it, because they don’t make you pay when you transfer it to a different country – it’s hard to understand – but in practice it’s quite easy to do.
People would set a number of companies in different countries and then they trade the carbon credit transactions quickly between these entities in the different countries – and then they claim back the vat from the government.
“And like in the hacking scandal, the trading was done in minutes?”
“I have to say – claiming back the 20 % didn’t happen quickly – like other things working with governments, but I think that the most curious thing about this was that no one saw through this.
There was an exchange called BlueNext in France that had a huge volumes that nobody could figure out why and when people cracked down on the vat scam the volumes of the blue next went from 10 million credits a day to some 250.000 – 500.000 a day. I believe, and this is my opinion, that this proves that most volumes traded on the spot market on the Blue Next exchange during their most volumous days, were mostly fraudulent credits.”
“How did you find out about the fraudulent guys?”
“I have to admit that when someone called me and asked me to set up an account we were very happy and in the early days we set up accounts for clients who wanted to trade credits for whatever reason – it could be factory selling surpluses or it could be carbon managers that would buy and sell credits.”
The phony phone calls
“Luckily I never set up an account for someone who committed a VAT fraud, but I have to tell you I had a lot of phone calls from people who called me up and said we want to set up an account. We want to do it quickly. I asked him why —- ‘Ohhh, we want to invest in these carbon credits’.
I even had personal meetings with people coming into my office – really quite bizarre meetings were they had no experience in carbon – but suddenly wanted to trade in carbon credits..
The one thing that really gave them away, was when these VAT carbon fraud guys would never ask how much I would charge for the transactions – that’s got to be a giveaway. I worked too long in the financial markets to know that people forget to ask me how much I charge!.
Not anyone of these vat guys ever asked me how much I would charge them. They were just happy if we would open an account for them. But we never did make any accounts after we did a due diligence on them, and every one of them, we found that all of them was very odd.
You have to realize that when someone is trying to set up an account with you – you have a suspicion – you have a right – you have the responsibility – the obligation not to set up an account – you can’t just set up an account – because they want to set up an account.
When I heard the number 5 billion € in value of vat stolen – I really do believe it. When I saw the volumes being transacted at the spot exchanges. I could understand were the five billion come from. I’m not surprised if it was more and yes there must have been quite a few brokers that have made these transactions.”
The willing brokers
“Whenever you have excessive supply and access of liquidity in the market I believe yes, the price will come under pressure. If there is too many credits in the market, and if there is to many willing sellers and too many willing buyers – there is going to be a lot of transactions”.
“And to too many willing brokers?”
“Yes, and too many willing brokers.”
“So there must be a broker – a middleman – in all these transactions. Therefore there must have been brokers who have made fortunes in these VAT scams?”
“Yes, definitely. I guess if someone is coming to a less reputable broker and wants to set up an account quickly and they do not ask how much they will be charging. You can imagine that there are a lot of brokers who would be willing of that”.
The Danish connection
“In the early days when I set up a carbon credit desk in 2004 we were setting up – we were going to get a registry account in Czech republic once the carbon credits were allocated – before that we could set up a carbon registry account in Denmark and I was told by someone in London that it was good to have more than one registry account in case one is falling down due to technical reasons.
So I set up a carbon registry account in Denmark and I remember filling out the form – and I don’t like filling out forms, but this was very short.
It was very easy to get the registry account opened very, very quickly. All I had to do was to wait for the post to get a password name and then I was in. It was really like logging in to a Hotmail account
I don’t remember I was asked for any kind of identification. In these days you always are asked for id and power of attorneys and documents of ownership of the companies who I work for – it’s under the system called KYC – Know Your Client. But back then I only remember filling out a document and have my director of the company to sign it – and we send it into Denmark in paper form and waited for the post to get our passwords back.
I knew individuals who wanted to set up their own carbon credit account to see if they buy and sell carbon credits – and they were able to do through Denmark.
I’m not surprised. Dummy companies could be set up and maybe you need to register a company in one government regime, but as far as the carbon registry were concerned, you could do it as a private person under a false name.