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© ICIS HEREN - Stolen EUAs could re-trade from German and UK registries
2011-02-03

Germany and the UK will not freeze stolen emissions allowances (EUAs) allegedly held in accounts in their carbon registries once these re-open on Friday (4th February) morning, an official from the Czech registry told ICIS Heren. This means the stolen EUAs could re-enter the market on Friday
The Czech official confirmed that some of the allowances stolen from Czech accounts are currently held in the UK and Germany. "But at this moment they are not able to freeze them," Jiri Stastny, chairman of OTE, which operates the Czech registry, said in an email.
The German registry declined to confirm this, but underlined that German law means owners have the right to re-trade anything in their accounts. The UK registry does not comment on allegations from other registries.
OTE has told the European Commission, the UK and Germany that it is "totally opposed" to the planned reactivation of the German and UK registries on Friday morning (see separate story), and that the Czech police also expected the registries to remain shut.
But the European Commission is powerless to prevent companies from selling on stolen EUAs. Whether this is an offense or not is up to national law to define.
"No measures [to retrieve the allowances] are possible in the short term - national law applies," an official told ICIS Heren. This means that registries can reopen once they have proved they are equipped to fend off future hacker attacks, regardless of whether they are currently harbouring stolen allowances.
It also means that getting the allowances back will depend on German and UK law regarding the liability of transferring stolen assets bought in good faith - and whether good faith buyers are willing to take the legal risks of passing them on.

Germany
German emissions trading law provides extremely strong protection for good faith buyers, legal experts have told ICIS Heren. The law simply says that any transfer of EUAs into a registry account should be valid.
"In principle, if you buy from someone who is registered as the owner of an EUA in the German registry, a transfer of ownership is valid, and you are free to trade it or keep it. However, legal details for people acting in bad faith - because they stole something - may need some further clarification," Matthias Lang, a partner with the law firm Bird & Bird in Dusseldorf, Germany, said.
Even if German emissions trading law provides very strong protection for EUA transfers, there could still be a way through the courts to get back stolen allowances, Julia Pfeil, lawyer with Baker & McKenzie, explained.
"If this goes to court, a judge may decide that you acquired the EUAs with malicious intent, which in practice means you have to give back what you acquired," Pfeil said. "This kind of ruling happens on a case-by-case basis and depends on each judge - if a judge considers such conduct `immoral`, he can overturn the transaction and give the EUAs back [to the original owner]."
One of the victims of the Czech registry theft, Blackstone Global Ventures, has already told ICIS Heren it will sue unless it gets its allowances back in full. The company is targeting Czech registry operator OTE, rather than the good faith buyers in Germany.

UK
Under UK law, good faith buyers of stolen EUAs face more risks than in Germany. It can be very hard to prove the chain of transactions that led to ownership of EUAs - sources in UK law firms say they have not even started investigating how companies could be forced to disclose this information.
And UK law can also make it an offense to sell on EUAs bought in good faith, if the buyer is made aware of allegations they were actually stolen. "This could expose you to criminal liability", one legal source said.
Strong laws on money laundering in the UK aim to make sure the government can intervene, no matter how inventive the criminals get, he explained.
EU compliance
Even though European legislation does not cover the liability of re-trading stolen EUAs, it does cover what allowances are eligible for compliance.
If the Commission decides that companies cannot use stolen EUAs for compliance, no matter how many times they have re-traded since the theft, these allowances would become worthless.
So far, there are no signs of the Commission doing this. As it stands, these EUAs continue to be eligible for compliance.

(THE ICIS HEREN REPORTS - EDCM 6023 / 3 February 2011)

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