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Asia and Latin America News Network focusing on Financial Markets, Energy, Environment, Commodity and Risk, Trading and Data Management

Kroll LATAM Risk Report December 2010: Brazil Land Ownership & Infrastructure Fraud, Private Banking KYC, Colombia Corruption

FRAUD – Brazil – Steering Clear of the Potholes
Brazil has committed to billions of dollars worth of infrastructure investments in preparation for the 2014 World Cup and the 2016 Olympic Games. The opportunities for international suppliers, contractors and investors are considerable. So, too, are the risks of fraud.

Vander Giordano, Sao Paulo & Allie Nichols, New York  GO TO FULL STORY

CORRUPTION – Colombia – Battling Fraud & Corruption
By leveraging public outrage, the new administration of President Juan Manuel Santos has an opportunity to change Colombia’s “anything goes” culture and attack the scourge of corruption with a new sense of purpose.

Andrés Otero, Miami & Ernesto Carrasco, Bogota GO TO FULL STORY

PRIVATE BANKING – The Good, the Bad & the Ugly
For private bankers, there’s nothing more enticing than the prospect of landing a wealthy foreign client, but the client’s background and source of funds must be carefully analyzed. Often, only an enhanced due diligence will identify the risks.

John Price, Miami GO TO FULL STORY

LAND RIGHTS – Brazil – Sending the Wrong Message
Turning back the clock, the Brazilian government tightens land rights legislation, restricting land purchases for foreign companies and individuals. Real Estated

Paulo Sérgio Franco & Scheila Santos São Paulo  GO TO FULL STORY

Source: Kroll, 14.12.2010

Filed under: Banking, Brazil, Colombia, Latin America, News, Risk Management, Services, Wealth Management, , , , , , , , , , , , , , ,

Online Stock Trading and Fraud have come a longway in the past 10 years

Online trading has definitely come a long way in the past decade.  Innovation and technology now allow you to follow and trade stocks from your phone or laptop, not to mention accessing advice and chart information at the same time.  However, our new online powers have lulled us into a false sense of security in today’s high paced electronic world.  The criminal element in our society is counting on that fact to ply their own online trade activity, that of deceiving you out of your hard earned cash.

Yes, the unscrupulous few among us had to spoil the fun for all investors.  Does $400 billion a year in securities related fraud losses get your attention?  The FBI believes it should, as does the SEC and CFTC.  The Internet has been the great enabler of our times, providing access to mountains of information and a dizzying array of applications to bring convenience to our hectic lives.  It also has brought anonymity, the cloak that hides the invisible swindler that may have tapped you as his next target of opportunity.

Does this mean that you should forgo buying an iPad and take a course in risk management instead?  Of course not!  Fraud mitigation starts and stops with you and your ability to be skeptical and use common sense.  Here are a few suggestions to help you avoid the most common pitfalls for the average investor:

Business Partners: Fraudulent brokers have stolen millions from investors.  Do your due diligence.  There are many review services for checking banks and choosing the best stockbroker or best forex broker.  Make sure your bank has a strong balance sheet, and that your broker is above board and onshore.  Consult your banker or broker for investment advice on every investment deal.

Warning Signs: Some signs, though obvious, need repeating.  Here are a few tell-tell signs:

  • Unsolicited offers should be questioned or avoided;
  • If it sounds too good to be true, it most likely is;
  • If there is little or no risk, then it isn’t for real;
  • If there is a sense of urgency, walk away;
  • Swindlers talk fast so you won’t ask questions;
  • If written explanations are not forthcoming, stop considering it;
  • If it sounds too complicated, don’t waste your time;
  • Con Artists always dress well to impress and deceive;
  • Ignore referrals from friends, until after doing your due diligence;
  • Be very skeptical when asked to send a check or wire funds.

Actual Scams Often Repeated:

The Ponzi Scheme: The swindler pays high returns from new client deposits to gain your trust and new referrals.  He takes what is left.  Bernie Madoff and Kenneth Starr are prime examples of the craft;

The “Pump-and-Dump”:  Mass communication of rumors is used to pump up a stock’s value.  The swindler unloads his shares at a huge profit only to leave unsuspecting Buyers holding the bag after the price plummets;

The “Tipster”:  The Tipster calls 100 people, passing along a “tip” to gain confidence.  He tells half that the stock will rise, and the other half that it will fall.  The next day, he now has 50 “marks” that believe.  He may continue his confidence game until he finally asks you for money.  Be sure to walk the other way.

Investment fraud generally happens to those people who never expect it or are easily tempted by greed.  Protect yourself by heeding these warning signs and being aware of the most typical scams that con artists love to use.

Source: FOREXFraud, 13.08.2010

Filed under: Banking, News, Risk Management, Wealth Management, , , , , , , , , , , ,

CSRC mops up mess in China’s fund rating industry

Compulsory registration and licensing will be required for fund advisory and rating providers. But a few innocent bystanders are likely to be affected.

The China Securities Regulatory Commission (CSRC) is proposing a new set of rules that will make registration and licensing compulsory for fund advisory, commentary and rating providers. The rules are written with the aim of cleaning up the chaotic process of fund rating in China, where currently a plethora of professional and amateur fund commentators operate.

While no-one has attempted a complete count, the sheer number of fund rating and advisory providers that are known to exist in the market is overwhelming. The most widely quoted three are Galaxy, Tianxian and Morningstar. But the universe also includes commentators from a diverse background ranging from academics, professional rating agencies, investment consultants, research houses, banks and IFAs to financial media, web portals and bloggers.

Some charge a fee for their ratings, and some such as Morningstar and Lipper clearly don’t. (Morningstar and Lipper derive the bulk of their revenue from selling their fund databases, research reports and analytic tools.) Yet a common problem is the ratings and commentaries tend to be short-term oriented. In China, fund managers are ranked daily, not quarterly or even yearly as in developed markets. The ratings and rankings are closely followed by investors and hugely influential to investors’ buy-sell decisions, which contributes to the high turnover and volatility in China’s fund industry.

Howhow Zhang, an analyst at Z-Ben Advisors, says the new rules from the CSRC have been brewing for years. The key is to align fund rating agencies’ business models with investors’ interests. It is common for fund managers to ‘buy’ favourable ratings, commentary and even awards from less professional providers to boost fund sales. The hotchpotch of ratings or awards is heavily featured in fund managers and distributors’ advertisements. Short of mutually agreed arrangements, fund commentators blackmailing fund managers with poor comments is not unheard of in the industry.

In the new licensing regime, the CSRC will enforce a compulsory accreditation programme that will be used to vet applications for fund rating agency status with the Securities Association of China. Under the programme fund rating and advisory providers are expected to submit a report explaining their business model, any conflicted interests, and their criteria, methodology and process used to arrive at ratings, rankings or comments. Fund rating and advisory providers are expected to fully disclose their methodology in public before they can publish their results to end users.

The rules will ban fund managers, distributors and media from quoting fund ratings or commentary from unlicensed fund rating or advisory providers. This can include communications both in public (through marketing materials or conferences or media) or through indirect or private means (in communications with distributors, intermediaries or recommendations to investors).

In the current draft, the CSRC does not differentiate between retail and institutional providers, onshore or offshore. Services provided by institutional investment consultants for offshore investments in China such as Mercer and Watson Wyatt, and even AsianInvestor‘s China awards, can be read to fall into the CSRC’s bracket as providers that recommend managers and succumb to compulsory registration. (Both Mercer and Watson Wyatt’s consultants say they are checking with their general counsels on their exact status as this story goes to press.)

Furthermore, the regulator intends to ban: comparisons between funds under categories; categories that are made up of less than 10 funds; ratings for funds that have been operating for less than 36 months; ratings for funds that are yet to be fully invested; ratings based on a performance period of less than 36 months; fund ratings that are updated more often than on a quarterly basis; performance rankings for an investment period of less than three months; and rankings that are updated more frequently than a monthly basis.

Huang Xiaoping, head of research at Morningstar China, applauds the CSRC’s move saying it will help correct the short-term mentality among investors that has long plagued the Chinese funds industry. But the benefits will depend on how the rules are executed.

Both Huang and Xav Feng, head of research for China and Taiwan at Lipper, believe the biggest difficulty in meeting the CSRC’s rules will be how to follow the requirements in fund categorisation and rating periods.

Because of the industry’s young age, when Morningstar and Lipper entered China they adjusted their ranking periods downward to one-year, two-year and five-year periods, instead of the usually longer time-frame they use in developed markets. (Huang received but turned down requests to produce daily or monthly rankings as requested by local users.)

Feng believes, given the young age of the Chinese fund industry, if the requirement of 36 months is strictly enforced, some 50% of funds in China could fall off rating agencies’ radars. In newer fund categories, such as QDII funds for example, fund rating agencies may stop rating such funds altogether. This could defeat the purpose of helping investors make informed decisions in choosing fund managers.

Huang and Feng expect after the rules come into force, they will first fall back to meet Morningstar and Lipper’s global methodologies, then perform tweaking and local adjustments to meet China’s regulatory and market needs. The move to harmonise the periods used in China with global standards would have been a step they would take when the industry further matures.

Meanwhile, the agencies also say they have unique problems in putting funds in clear categories. The problem has come from Chinese fund managers’ unique flexibility in adjusting asset allocation and loose limitations on cash holdings compared to foreign counterparts. This result in a scene that an equity fund is rarely a truly equity fund and bond funds can come with large equity holdings.

In this market, fund classification and risk profile can be expected to change over time. At Lipper, for example, Feng says he had to reclassify some 100 funds in a fund universe that currently hosts 500+ funds in China.

As seen in the financial crisis, an equity fund manager can be seen holding up to a quarter cash as he takes profit or ‘park’ his money as investor sentiments shift. In bull market days, bond fund managers can rely on chasing IPOs from their convertible bonds to push up rankings. Now the CSRC is advising fund rating agencies to stick to what the fund brochure says they are upon launching when classifying the funds.

On the other hand, while the rules help instil order in the chaotic retail fund universe, the rules can be problematic when applied to institutional use of fund rating agencies’ databases. Institutional investors such as insurance companies, pension funds or bank proprietary desks will need to monitor their outsourced portfolios or fund holdings more often than a quarterly basis. Without fund rating agencies’ advisory services, either fund managers with lesser track records will get discriminated against or investors will have to rely solely on their own due diligence.

Overall, most agree the rules are written with good intention. But judging from how wide the bracket can go, they will need more tweaking. The CSRC is open to public consultation until August 28.

Source:AsianInvestors.net: 17.08.2009 by Liz Mark

Filed under: Asia, China, Exchanges, News, Risk Management, , , , , , , , ,

Carbon Fraud hit by carousel fraud

Carousel fraud has found its way to the carbon market. The particularly European type of fraud entails setting up complicated import and export schemes between EU member countries, charging buyers for value-added tax in the country of destination, and then absconding with the tax rather than handing it over to the governments.

In 2006 the UK and German governments embarked on a series of raids in 2006, and the UK introduced ‘reverse charging’ for VAT on certain items prone to carousel fraud. At the time carousel fraud was mainly seen as confined to small electronic goods such as mobile phones and computer chips.

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A year later it was it was observed that fraudsters were simply moving away from those goods towards others that hadn’t yet been targeted by authorities. But it wasn’t until high volumes of trade were observed on France’s BlueNext carbon exchange this year that carousel fraud became an issue in the carbon markets.

France last month decided to exempt carbon permits from VAT without seeking the required approval from the EU, and the UK government yesterday applied a zero VAT rate to carbon credits, again without seeking EU approval. The Netherlands meanwhile has introduced rules so that the carbon permit buyer, rather than the seller, is responsible for paying tax. And Spain is reportedly considering what to do about the issue.

Could there be a problem, however, with so many different approaches being taken?

Source: FT, 31.07.2009, by Kate Mackenzie

Filed under: Energy & Environment, News, Risk Management, , , , , , , ,

Is Carbon Trading the Next Big Thing?

The U.S. carbon credit trading business could take off if the Senate passes the Waxman-Markey climate change bill. Current environmental market players such as Citi, the CME, the Chicago Climate Exchange and BlueNext are preparing to capitalize on the expected surge.

The fledgling U.S. carbon credit market, currently a $100 million-plus business, is poised to skyrocket if The American Clean Energy and Security Act of 2009, which recently was passed by the House, makes it through the Senate. The bill would limit, or “cap,” the amount of carbon emissions that companies can produce each year.

Under the bill, sponsored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), firms that produce more greenhouse gases than they’re allowed would be able to buy credits from companies that have produced fewer emissions than they’re allotted, creating a large market for carbon credits. President Obama has estimated that more than a half-trillion dollars’ worth of carbon credits will be auctioned in the first seven years after the bill is enacted.

The United States was the first country to introduce a cap-and-trade scheme. The 1990 Clean Air Act Amendments established an emissions trading system to reduce emissions of sulfur dioxide (SO2) from fossil fuel-burning power plants. According to Randy Warsager, director of green products at CME Group, the SO2 market was challenged last year by an unfavorable court decision, but it has been rebuilding slowly.

A voluntary market currently exists for carbon credit trading, primarily through regional initiatives such as the Regional Greenhouse Gas Initiative (RGGI), which covers Maine, New Hampshire, Vermont, Connecticut, New York, New Jersey, Delaware, Massachusetts, Maryland and Rhode Island. In the RGGI’s latest auction in June, 30.8 million allowances were sold for $3.23 each, which raised more than $104 million for the 10 Northeastern states to invest in energy-efficiency and renewable energy programs. (Each allowance represents a ton of carbon that electric plants can release.)

Profiting From the Environment

Citi is among the investment banks that have been moving forward in the environmental products space. Garth Edward, the firm’s director of environmental markets, began trading environmental products with the introduction of the EPA’s NOx Budget Trading Program, a cap-and-trade program that the EPA created in 2003 to reduce emissions of nitrogen oxides (NOx) from power plants and other large combustion sources. For the past few years Citi has focused primarily on CO2 trading, which has been driven by the European Union’s emissions trading system. “This is where the bulk of liquidity is, most of the capital flow that drives emission reduction projects around the world,” Edward notes.

Growth in market activity and the capital deployed in environmental products has been strong, primarily because of cap-and-trade legislation, according to Edward. “Where you have a step forward in legislation such as the EU emissions trading system, the voluntary agreements in Japan and the Waxman-Markey legislation, that’s the kind of process that starts creating compliance requirements on end users and incentivizes service and technology providers to provide solutions,” he says.

Despite the projected growth in environmental markets, Credit Suisse recently cut back its New York-based carbon trading team; Carbon Finance, a newsletter dedicated to the global markets in greenhouse gas emissions, reported that half the team will depart early next year as part of a de-emphasizing of the business. According to the Carbon Finance report, going forward Credit Suisse will focus on environmental trading on behalf of its clients, which are mostly European. (Credit Suisse did not respond to Carbon Finance’s nor to Wall Street & Technology’s requests for an interview.)

Meanwhile the primary U.S. exchanges involved in carbon trading are the Chicago Climate Exchange (CCX) and the Chicago Mercantile Exchange (CME). The CCX trades allowance and offset contracts that each represent 100 metric tons of CO2 equivalent. The Chicago Climate Futures Exchange, a subsidiary of the CCX, trades RGGI futures and options contracts. The CCFE reported record trading volume for June 2009 — it traded 133,175 contracts versus its previous record of 132,319 in April.

The CME — along with partners Evolution Markets, Morgan Stanley, Credit Suisse, Goldman Sachs, J.P. Morgan, Merrill Lynch, Tudor Investment, Constellation Energy, Vitol, RNK Capital, ICAP and TFS Energy — has applied for CFTC approval for a Green Exchange, on which it will trade all the environmental products it already trades on its commodities exchange. (For more on the CME’s carbon credit trading efforts, see “CME Revs Up for Surge in Carbon Credit Trading“.)

Europe’s BlueNext, an environmental exchange that’s 60 percent owned by NYSE Euronext, plans to open an office in New York “very shortly,” according to Keiron Allen, the exchange’s marketing and communications director. It plans to start trading contracts within the RGGI market by the end of the year, Allen reports, adding that the exchange intends to compete with the U.S. environmental exchanges. “It will be a race to see who gains critical mass first,” he says.

The European Experience

In Europe, cap-and-trade rules similar to those outlined in the Waxman-Markey bill have been in effect since 2005; carbon credits are traded on the European Climate Exchange (ECX), BlueNext, Nord Pool (the Nordic Power Exchange) and the European Energy Exchange (EEX).

BlueNext trades European Union Allowances, the carbon emission allowances used in the European Union Emissions Trading Scheme, and Certified Emission Reductions, which are carbon credits issued under the rules of the Kyoto Protocol, which is part of the United Nations Framework Convention on Climate Change, an international environmental treaty with the goal of reducing greenhouse gas concentrations in the atmosphere. BlueNext trades an average of 5 million tons’ worth of carbon emissions a day. Its 100 members (buyers and sellers on the exchange) are carbon-emitting companies, financial firms with their own trading desks and carbon credit aggregators that act as brokers.

BlueNext’s model is different than most other carbon exchanges, Allen says, because it uses a delivery-versus-payment system rather than a clearing system. “In a delivery-versus-payment system, there’s zero counterparty risk,” he contends. “If you sell contracts, you’ve got to put them into your account on the exchange first. And if you want to buy something, you have to put money in your exchange account first. Each party knows the other’s got the right amount of money or contracts.” Allen adds that in BlueNext, trades are physically settled within 10 or 15 minutes, versus the more typical T+1, T+2 or T+3 for commodities settlement.

The European carbon market has been growing quickly; the U.S. market still is in its infancy. Trading activity in the European Emissions Trading Scheme grew by 54 percent in the first quarter of 2009 compared to Q4 2008, reaching $28 billion, according to Carbon Finance. This represented 84 percent of the world’s carbon market in terms of value and 78 percent of its volume. Carbon trading in the U.S., on the other hand, made up only 3.7 percent of the trading volume and 1 percent of the value of the global carbon market. According to CME’s Warsager, though, “We’re hoping to build some market share [in the U.S.] as we move forward with the Green Exchange.”

The CME isn’t the only institution hoping to capitalize on carbon credit trading in the U.S. But what are the barriers to entry to this new market? At Evolution Markets, a White Plains, N.Y.-based voice brokerage for environment and energy products, the trading floor is as noisy and chaotic as any commodities trading room. According to firm spokesman Evan A. Ard, the technology required for carbon credit trading is no different from the technology required to trade other commodities.

Jubin Pejman, VP, Americas, for Trayport, whose energy commodities trading and order matching software is used by 13,000 traders and many investment banks and utilities in Europe and the U.S., agrees that carbon futures trade like any other type of futures contract. “You have hedge funds speculating, you have industrials buying them, you have brokers,” he says. “At any futures exchange around the world, it’s the same type of breakup. From a technology standpoint, there’s a matching engine, there’s risk management, there’s margin management, there are counterparties, there’s clearing. BlueNext, for example, looks very much like other futures exchanges.”

BlueNext’s Allen, however, points out one big difference between carbon emissions contracts and other commodities: “If you’ve got a spot market for oil or grain, you physically deliver that oil or grain to the buyer,” he explains. “You don’t roll up in a giant truck and deliver 15,000 tons of carbon dioxide.”

Regional carbon futures contracts in the U.S. tend to be processed manually or through voice trading. “Europe is about 10 years ahead of the curve as far as technology for energy emissions trading,” Trayport’s Pejman says. He explains that large European financial firms have their own carbon trading platforms; smaller entities turn to third-party solutions such as Trayport’s platform.

But, Citi’s Edward says, in terms of technology and compliance, carbon trading should not be difficult for many U.S. firms because emissions trading in the U.S. has been around for more than a decade. The same IT processes, management systems, accounting systems, and even risk management and hedging systems will work under the new carbon credit trading scheme, he points out. “We’re not introducing something that’s conceptually dramatically new and untried in the U.S.,” Edward notes.

BlueNext’s Allen says the exchange will publish a how-to book by the fourth quarter to help small and medium-size firms get involved in carbon trading. (Hearing this, Trayport’s Pejman jokes that the book will be made out of Styrofoam.)

The Future of U.S. Carbon Trading

Even as firms build out their carbon credit trading capabilities, the market is expected to reach significant levels fairly quickly. President Obama has predicted that about $646 billion worth of carbon credits will be auctioned in the first seven years of the mandatory cap-and-trade system in the U.S.; others have suggested the number could be two or three times that. To the novice onlooker, this would suggest a healthy rate of carbon credit market growth.

But Citi’s Edward demurs. “The actual volume of allowances issued is not necessarily what drives liquidity and price,” he says. “It is the ambition of the target that drives activity.”

According to Edward, the U.S. experience may mirror the EU’s emissions trading system, which, he says, is similar in size in terms of covered installations and required emission reductions. “The EU turns over close to a half-billion dollars’ worth of allowance transactions a day, so that may be a reasonable expectation for the U.S.,” Edward comments.

The Waxman-Markey bill currently would take effect in 2012; the Senate may postpone this start time to 2013. Still, “We’d expect trading to take place far in advance of that first compliance year,” Edward says. “That’s the normal case with environmental trading systems — companies that dispatch power generation or refineries need to hedge in advance their emissions exposure; they need to lock in the margins around running their plant, and that requires them to buy the allowances in advance.” If the first compliance year is 2013, Edward says, he would expect early trading to begin in 2010.

Trayport’s Pejman notes that once the legislation is passed, there will be a race to the market. “Whoever is already in production will have a tremendous advantage over those that are scrambling to get ready,” he asserts.

But what if the Senate doesn’t pass this bill? “That would change everybody’s plans,” BlueNext’s Allen concedes. “I like the Woody Allen joke: ‘How do you make God laugh? Write down your plans.’ “

Source: Wallstreet & Technology, 19.07.2009 By Penny Crosman

Filed under: Energy & Environment, News, Risk Management, Services, Trading Technology, , , , , , , , , , , , , , ,

A New Growth Industry: Carbon Fraud

As the U.S. Congress gears up to begin debate on a cap-and-trade system aimed at reducing emissions of carbon dioxide and other global warming gases, fraudsters are licking their lips at the multi-billion dollar potential for gaming the system.

As honey attracts bees, money draws thieves. Such is human nature. So if you create a new multi-billion dollar market, it won’t take long for the bad guys to find a way to get in on the game. The new game is called cap-and-trade and the new currency is the carbon credit. The federal budget put forth by the Obama administration earlier this year forecast revenues of $650 billion over 10 years from the sale of carbon credits. And worldwide, the global carbon trading market is expected to grow to $700 billion annually by 2013 and as much as $3 trillion by 2020 – a fraudster’s dream come true.                                                                                                                  Read orignal article by Kroll  Tendencias May 2009
Cap-and-trade is a market-based system that aims to decrease greenhouse gases in the atmosphere by capping the emissions of polluting companies and reducing those caps over time. If polluters produce emissions below their legal limit, they earn carbon credits which they can sell to companies that do not meet their targets. These credits can be bought and sold on regulated exchanges.

As the United States enters the uncharted waters of cap-and-trade, much of the debate will revolve around the impact of imposing such a quota system for polluters on the cost of doing business. Will cap-and-trade unfairly burden US industry? Will it lead to protectionist policies aimed at emerging markets where emissions are not likely to be capped for many years to come? These discussions are sure to overshadow the issue of fraud. But the artificial restraints of cap-and-trade are certain to propel a new generation of malefactors to quickly learn the art of concealing and trading  not stolen art or African ivory  but emissions credits.

While new in the US and Latin America, carbon markets have been operational elsewhere since 2005. London-based consultancy New Carbon Finance estimates that the global carbon trading market increased from $64 billion in 2007 to $116 billion in 2008, based mostly in the European Union. Globally, the carbon market could reach $669 billion by 2013, according to a report last month by market research firm SBI. That figure includes an estimated $117 billion generated by the proposed cap-and-trade system in the US. In Latin America, Mexican officials have already expressed interest in bringing large polluters, such as Pemex and Cemex, into a cap-and-trade market.

With such huge sums at stake, there is a growing recognition of the potential for fraud. A recent report by accounting firm Deloitte warns that fraud in carbon markets “may be especially prevalent during the early stages of regulation by those looking to take advantage of naive market participants.”

Although still in its infancy, a few of the possibilities for fraud in a cap-and-trade system include:

Pumping Up the Baseline – A baseline scenario is an estimate of greenhouse gas emissions that would occur in the absence of a proposed project. If a project, once completed, produces fewer emissions than its pre-established baseline, the difference can be sold for credits. This gives project owners an incentive to exaggerate a baseline in order to receive more credits than they deserve. In the absence of proper oversight, there is enormous potential for abuse.

Potemkin Factories – Jim Lane, Miami-based editor of Biofuels Digest, a daily online compendium of news stories and commentary on renewable energy projects around the globe, refers to a Potemkin factory as a project built specifically for the sake of generating emissions credits. Like the Soviet Union’s Potemkin villages built to show off a phony communal paradise to naïve foreigner visitors, new emissions reduction projects could be contrived in a similar manner. The Potemkin factory charge has been used in connection with plans to build refrigerant gas plants in China. Critics alleged that the plants, which produce the harmful greenhouse gas HFC23, could potentially generate more revenue from the sale of emissions credits than from their core business.

Outsmarting the Auditors – Clever crooks (think Enron) have been outsmarting even the most conscientious auditors for as long as they have been around. No matter how tight the controls are on carbon production and carbon reduction, the urge to cheat, especially with wildly fluctuating prices of carbon per ton, will be great. For example, highly sophisticated meters and other equipment will need to be installed at companies that claim to be sequestering carbon dioxide emissions. But, as one carbon credit expert recently observed, sometimes gaming the system is as easy as sending air through the meter instead of gas.

Good Old Corruption – Given the amount of money in play, there always remains the possibility that an agent whose job it is to monitor and verify emissions reductions could be bribed. It is worth noting that the auditors that are currently empowered to verify emissions reductions programs around the world are all certified by the United Nations. If the oil-for-food program is any guide, that kind of certification program is far from foolproof.

Controls to prevent such fraudulent activity have been debated and will continue to be discussed during and following the December 2009 Copenhagen Climate Conference, where environment ministers from 192 countries aim to craft an agreement to replace the United Nations Kyoto Protocol, which ushered in the era of cap-and-trade and will expire in 2012. Much practical experience has already been gained from the European Union Emission Trading Scheme, the world’s first operational cap-and-trade system, which went into effect in 2005. Nonetheless, the risks will remain.

While a simpler alternative to cap-and-trade, such as a carbon tax, would be less attractive to fraudsters, some form of carbon trading will likely come into effect in the US and eventually in parts of Latin America. Governments and companies wishing to play the game of carbon credits need to have their eyes open about the real risks of fraud. As Yuda Saydun, founder and CEO of Florida-based carbon operations consultancy ClimeCo, notes, “tight, frequent, ongoing monitoring will be fundamental to the integrity of any cap-and-trade system.”

Source: Kroll Tendencias May 2009 – The author: Shanti Salas (shsalas@kroll.com)  is an Associate Director with Kroll in Miami.

Filed under: Energy & Environment, Latin America, News, Risk Management, , , , , , , , , , ,

Chinese regulator says US lending was ‘ridiculous’

TIANJIN, China – U.S. lending standards before the global credit crisis were “ridiculous” and the world can learn from China’s more cautious system as it considers financial reforms, the top Chinese bank regulator said Saturday.

Beijing curbed mortgage lending in 2003 and 2006 to keep debt manageable amid a real estate boom, while American regulators responded to a similar situation by letting credit grow, said Liu Mingkang, chairman of the Chinese Banking Regulatory Commission.

“When U.S. regulators were reducing the down payment to zero, or they created so-called ‘reverse mortgages,’ we thought that was ridiculous,” Liu said at a World Economic Forum conference in the eastern Chinese city of Tianjin.

He said debt in the United States and elsewhere rose to “dangerous and indefensible” levels.

Liu’s comments were unusually pointed criticism of U.S. financial regulation for a Chinese official. They added to suggestions by countries that are under U.S. pressure to liberalize their financial markets that Washington’s model might not be ideal.

China has based its reforms on the U.S. system but has moved gradually. It has kept its financial markets isolated from global capital flows, prompting complaints by its trading partners.

As China made changes, “a lot of the time, we learned that what we had learned from our teacher the day before was wrong,” Liu said, referring to the U.S.

China’s state-owned banks have avoided the turmoil roiling Western markets. Chinese banks hold bonds from failed Wall Street house Lehman Brothers, but they are a tiny fraction of their vast assets.

Liu compared Washington’s proposed US$700 billion plan to revive credit markets to fast food and said the world needed to look at longer-term solutions.

“Fast food is convenient. This US$700 billion package must ease the concerns and build up confidence. But if you only take this, it doesn’t agree with your stomach. You should think about Chinese slow cooking and slow food,” he said.

Liu called for governments to create international standards and regulatory systems for globalized financial markets. He said Beijing has signed information-exchange agreements on financial regulation with 32 other countries since the turmoil began.

Liu pointed to China’s experience with real estate and the collapse of a stock market boom.

As stock prices in China soared, banks were ordered to make sure customers were not using loans or credit cards to finance speculation. As a result, Liu said banks have suffered no rise in loan defaults even though stock prices have plummeted 63 percent since the October 2007 peak.

“We Chinese can share our own experiences with all the market practitioners,” Liu said. “Maybe our experience cannot be applicable to developed markets fully. But still, I think it might be useful and helpful to those in emerging markets.”

Chinese and foreign businesspeople at the World Economic Forum, the Chinese leg of the forum based in Davos, Switzerland, said the credit crisis is likely to increase the influence of China and other emerging economies in the world financial system, though Wall Street will retain its leading role.

“I believe this kind of regional financial strength will play a bigger and more important role,” said Jiang Jianqing, chairman of state-owned Industrial & Commercial Bank of China Ltd., the world’s biggest commercial lender by market capitalization.

“Right now the market is very unitary,” with U.S. bonds dominating global holdings, Jiang said. “This kind of a unitary, overcentralized market is something we need to change.”

Still, he said, Wall Street’s “dominance will continue.”

The European Union trade commissioner, Peter Mandelson, defended the global capital markets structure, warning that drastic change might hurt prosperity.

“The capital market system, fundamentally, is not flawed,” Mandelson said. “We are not looking for some alternative, and I hope that people in the emerging markets, in China for example, are not looking for an alternative to properly functioning capital markets.”

The crisis is likely to reduce resistance in the West to investments by government funds as companies urgently seek capital, said Thomas Enders, CEO of the European aircraft producer Airbus Industrie.

Critics have questioned the possible political motives of state-run funds and an EU official warned last year they might face restrictions if they fail to disclose more information about their goals and tactics.

“I would dare to predict that, yes, one of the big changes we will see is greater acceptance of sovereign wealth funds,” Enders said.

Source: AP 26.09.2008 JOE McDONALD,AP Business Writer

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