Businesses unaware of sustainability fraud risk

Businesses are now recognising the benefits of making their operations more sustainable, but leaving themselves open to fraud by not applying due care and attention to their sustainable activities.

This is the view taken by PwC in a recent report, How to assess your green fraud risks, which issues a warning to businesses not to engage in the sustainability game without considering the fraud risks. The report cautions that “the potential for fraud tends to be greater in new markets, when information is imperfect, standards of measurement and verification are not harmonised and governance is weak. The sustainability marketplace, taken as a whole, is all of these things.” It also highlights a “surge” in green fraud, citing emissions trading, including voluntary offsetting, project-based fraud and non-financial reporting as being particularly problematic for many companies.

A spate of cyber attacks on the European Union’s carbon market earlier this year first drew attention to green fraud. Carbon credits worth an estimated €30m (£25m) were stolen, forcing carbon registries across Europe to close their doors to business. The registries cannot reopen until they have provided guarantees of their levels of protection to the European Commission, but fears over the resale of stolen credits have kept the market sluggish even as the registries have started trading again. In February, thousands of companies were sent emails from fake emissions registries in a phishing scheme that saw credits worth more than €3m (£2.5m) transferred into fraudsters’ accounts.

In the past, the market has also suffered due to widespread carousel fraud, whereby traders use front companies to sell carbon credits, before pocketing the VAT charged on those trades and closing down the companies. This practice cost European Union member states up to €5bn in lost tax revenue before a crackdown last year.

This should be enough to put any company off sustainability efforts. But PwC forensic services’ Jonathan Holmes tells Financial Director that it is relatively simple to protect a business against these schemes.

“The scams are not new - just being applied to a fresh market,” says Holmes. “So knowing your customer and applying the same due diligence and data security a business would to any financial transaction should be sufficient protection.”