The long read: Emissions trading was supposed to save the planet. But fraudsters quickly learned how to rip the system off, making themselves spectacularly rich. Then some of the major players started turning on each other
Emissions trading was supposed to save the planet. But fraudsters quickly learned how to rip the system off, making themselves spectacularly rich. Then some of the major players started turning on each other
When Daphne read the materials his lawyer provided him, he learned about Europe’s carbon-emissions trading system, the first of its kind in the world. It had grown out of the Kyoto protocol, the landmark international agreement to reduce global emissions. Sure enough, Daphne told me, he saw the blueprint for what would become his next illicit enterprise. As soon as he finished his time in prison, he began gaming the new emissions-trading system.
During my visit, Daphne took calls from his lawyers and asked favours of his wife and flirted with acquaintances over WhatsApp. He wore his Tom Ford sunglasses indoors and out. He showed me his art: a large Kandinsky painting in the foyer, a few Chagalls downstairs. The villa had some burly guys on staff and a cleaner from Sri Lanka who picked up after two fluffy indoor dogs that liked to avail themselves of the plush white carpets.
Zaoui is stout and broad-chinned, with thick eyebrows and a sweep of dark hair. When he was involved in the carbon scam, he took pains to remain understated. He favoured dress shirts in pale blue or white. Even when he was photographed alongside some of the highest-ranking politicians in France, he looked withdrawn. When he spent money, he did it quietly. Journalists described him as discreet, cerebral, analytical.
As Daphne tells it, he was minding his own business when law enforcement came for him. He was accused of providing the traffickers with insurance certificates for items that weren’t covered by real policies and given a three-year sentence. While proceedings were still under way, he lost all his clients and his company fell apart. He swears that he was innocent, that the certificates had come from someone else, yet the government blew up his whole life. He wasn’t even 30.
The groundwork for their participation in carbon fraud was laid behind bars. While Zaoui was waiting for bail money, he shared a cell with a man who installed solar panels in the south of France. The man told Zaoui to get out of mobile phones; the future was in businesses that protected the environment. Solar panels, heat pumps, geothermal energy.
What made the market interesting to scammers was the potential for VAT fraud. To understand the scheme they cooked up, it’s important to know two things: because economic policies in Europe are aimed at facilitating trade across borders, VAT is waived on sales between EU member states. Also, since governments only want to tax the value added at each stage of the economic process, they credit or reimburse the buyers of certain products for the VAT paid to suppliers.
Every time an allowance changed hands in France, the seller was supposed to collect VAT. Because there was no value added in the process, the buyer would get a VAT reimbursement. To defraud the system, then, someone could set up a carousel: buy EUAs VAT-free from outside France, sell them on Powernext with VAT tacked on, and get reimbursed.
They agreed to work together, and Daphne’s new partner hired some accountants and registered three companies on Powernext. But these weren’t Daphne’s old fronts.nce Zaoui had confirmed that the EUAs were subject to VAT, he made an experimental trade, buying €30,000 of VAT-free EUAs from the Netherlands, then selling them with VAT included. It worked exactly as he had hoped. Just like that, he was €6,000 richer. He couldn’t believe how easy it was – and how dumb.
Zaoui and El Ghazouani agreed to split the profits evenly, and got to work. Zaoui told me that they established one new trading company together and made Crépuscule a brokerage that could trade directly and make trades on behalf of the other entities on the Powernext platform. Their companies were registered in France and abroad, allowing the men to take advantage of VAT-free cross-border trades.
They agreed to speak in person. According to Zaoui, at the meeting El Ghazouani divulged that he had overinvested. “I’m up to €300,000,” he said. “I can’t keep it up any more.” Without telling Zaoui, El Ghazouani had made a deal with someone else, giving them control of the companies. He made it sound as if he needed the money the deal would generate so badly that he didn’t have a choice.
The two men knew each other in passing from the world of mobile phone VAT fraud. They moved in the same circles, knew the same people. El Ghazouani had talked to Zaoui about Daphne, rhapsodising about his business acumen. What politicians had yet to realise was that the market was rife with fraud. As word spread through criminal networks about the easy money to be made from allowances, scammers all over Europe – and in some cases outside it – flocked to carbon-trading platforms. One of Zaoui’s old business partners did, too, bringing along a glamorous Parisian playboy named Arnaud Mimran, who was laterrelated to his carbon dealings.
But there were other things that Zaoui didn’t know. Daphne told me that when Zaoui asked him for money in 2008, he had already set up a small apartment as an office in Tel Aviv and recruited a team of guys he knew to orchestrate carbon trades and funnel the stolen VAT to overseas accounts. Daphne was also using at least some of the companies Zaoui thought only he and El Ghazouani were running. “He was calling me, but he didn’t know I was already in,” Daphne said of Zaoui.
Tracfin decided to take the matter to the customs police, who began to tease apart the carbon market’s layers of shell companies and straw managers, preparing cases they could take to court. In prison, Zaoui could only shower three times a week, and the cell he shared with three other men was tiny, less than 100 sq ft. One of the men, also suspected of being a carbon scammer, knew Daphne. Zaoui asked the man if he had a phone number for Daphne, and one Friday night Zaoui called him.
“Listen, you son of a bitch. First of all, you call me from jail? It’s not very nice,” said Daphne. “Second of all, you can go as far as you want. If you want to push, I can find a lot of things against you beyond this case. So cool down.” But the authorities wanted him for more than his parole violation. Daphne was also a target of an investigation focused on Crépuscule, and there was a warrant for his arrest. He stood accused of running the brokerage’s carbon scheme and being its main beneficiary. El Ghazouani and a handful of intermediaries and straw managers were also investigated and arrested. Zaoui was indicted, too.
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