The Commodity Futures Trading Commision (CFTC) is seeking to increase enforcement in the carbon market and is turning towards its highly successful whistleblower program to aid in the effort. In June 2023, the agency both announced the creation of a new Environmental Fraud Task Force and posted a whistleblower alert calling on individuals to report fraud and manipulation in carbon markets.
Voluntary carbon markets involve the purchase and sale of carbon credits, also known as carbon offsets. These markets, part of a market-based shift towards a low-carbon economy, have high potential for fraud and manipulation according to the CFTC.
“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,” said CFTC Chairman Rostin Behnam. “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.”
The CFTC Whistleblower Program was created in 2010 alongside the SEC Whistleblower Program with the passage of the Dodd-Frank Act. Through the program, qualified whistleblowers, individuals who voluntarily report original information that leads to a successful enforcement action, are entitled to monetary awards of 10-30% of the funds collected by the government in the action.
Since the establishment of the CFTC Whistleblower Program, whistleblower tips have allowed the CFTC to recover over $1 billion from fraudsters. The program has in turn paid out over $330 million in whistleblower awards.
The CFTC’s whistleblower alert notes that “individuals can become eligible for both financial awards and certain protections by identifying potential Commodity Exchange Act (CEA) violations connected to fraud or manipulation in the carbon markets.”
Types of carbon market fraud highlighted by the alert include wash trading, ghost credits, double counting, misrepresentation in carbon credit terms and manipulation of tokenized carbon markets.
“The voluntary carbon credit market is currently estimated to be $2 billion and is forecasted to grow to $250 billion by 2050, according to the Morgan Stanley Research paper Carbon Offset Market Trends and Growth 2050,” the CFTC states in a press release. “Carbon credits are the underlying commodity for futures contracts that are listed on CFTC designated contract markets (DCMs). The CFTC has enforcement authority and regulatory oversight over DCMs and any trading in those markets. The CFTC also has anti-fraud and anti-manipulation enforcement authority over the related spot markets for carbon credits. The CFTC’s jurisdiction also applies to carbon allowances and other environmental commodities products that are linked to futures contracts.”
The CFTC’s new Environmental Fraud Task Force, announced on June 29, “examine, among other things, fraud with respect to the purported environmental benefits of purchased carbon credits, as well as registrants’ material misrepresentations regarding ESG products or strategies,” according the agency.
“As carbon credit markets continue to grow, we will act to foster the integrity of these markets by fighting fraud and manipulation,” said Ian McGinley, Director of the Division of Enforcement. “Whistleblowers are invaluable allies in these efforts. We will diligently investigate all credible tips and complaints from whistleblowers relating to carbon credit markets.”
The CFTC’s recent steps come as part of a broader shift of U.S. authorities looking to snuff out fraud in areas related to climate change and environmental, social, and governance (ESG) issues. In 2021, the Securities and Exchange Commission (SEC) announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The SEC stated that the Task Force will “evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues.”
Ex-SEC Commissioner Allison Herren Lee served as the Acting Chair of the SEC from January-April 2021 and helped propel ESG issues to the forefront of the agency’s agenda. Lee, who now serves as Of Counsel at the whistleblower defense firm Kohn, Kohn & Colapinto, was also a champion for stronger whistleblower protections during her time at the SEC.
“In recent times, it seems that nearly every day has provided us with an opportunity to appreciate the contributions of whistleblowers,” Lee said in 2020. “Often, they [whistleblowers] display extraordinary bravery to expose fraud and wrongdoing, and to shine light in some very dark places. In doing so, they reinforce our fundamental values – that the rule of law matters, and no one is, or should be, above the law. All too often, sometimes very publicly and sometimes in the shadows, those whistleblowers face retaliation from the powerful figures they expose. They help create transparency, and from transparency flows crucial accountability.”