Energy Tax Fraud Poses Risk to German Utilities, BDEW Says

German utilities can’t rule out becoming embroiled in tax fraud in the power and natural gas industries similar to the scams that hit the region’s emission market four years ago, the head of lobby group BDEW said.

The nation’s more than 1,800 power and gas companies won’t be able to eliminate the risk of becoming victims of fraudsters if a trading partner is acting with criminal intent, Hildegard Mueller, head of the managing board of the Berlin-based utility group, said in an interview. Tax regulators in states from Hamburg in the north to Baden-Wuerttemberg in the south have in the past two months said they’ve discovered indications of value-added-tax scams in energy trading.

“It is hard to take action against fraud,” said Mueller, whose members include EON SE and RWE AG, the country’s biggest utilities. “If someone acts with criminal intentions, it might be discovered too late.”

German tax authorities have found cases similar to an emissions market fraud that led to Europe-wide tax losses of at least 5 billion euros ($6.54 billion) in 2009, according to Europol, the region’s law enforcement agency. Fraudsters are damaging the legitimacy of Europe’s biggest energy market and are jeopardizing the nation’s security of supply, the German Federal Central Tax Office said last month in a letter to traders.

New Loopholes

Utilities can take precautions against fraud by checking if counterparts have been active long enough to be reliable and scrutinizing unusually attractive deals, Mueller said. BDEW’s members sell 90 percent of Germany’s power and gas, according to the group’s website.

Criminals will try to find new loopholes even as regulators are pushing for new laws to protect markets, Mueller said. European finance ministers last week agreed on a proposal to combat VAT fraud in the region. Brussels-based Eurelectric, which represents utility lobbies in 32 European countries, including BDEW, said the decision will help prevent crime.

“Sometimes one lags one step behind, unfortunately,” Mueller said on June 21. “But traders are experienced in that respect and do all they can.”

EON has not been involved in any fraudulent trading and wasn’t contacted by authorities after the May warning letter, Georg Oppermann, a company spokesman in Dusseldorf, said June 24 by e-mail.

Suspicious Traders

“We have in place one of the most stringent counterparty approval and compliance regimes in the industry,” he said. “We expect the same vigilance from all other market participants.”

Internal procedures at RWE’s trading unit have been effective so far, Michael Murphy, a company spokesman based in Essen, said June 24 by e-mail. The company reported 35 potentially suspicious emission trading firms between 2009 and April 2010, Murphy said.

The power producer’s measures to protect itself against fraud include “continuously checking and evaluating counterparties and working together with the authorities,” Murphy said.

Traders report “several dozens” of dishonest companies each year to the regional state offices of criminal investigation, said Barbara Lempp, head of EFET Deutschland, the nation’s energy trading association.

The German power and gas markets were liberalized in 1998 as companies that produced and distributed energy were broken up while also giving foreign producers and marketers access to grids and customers.

Role Model

German power trading last year accounted for about 45 percent of the European total and 7.1 times the nation’s annual consumption, according to data from London-based Prospex Research Ltd. That compares with an average European churn rate of 3.4.

“It is important to have a liquid market. It means one can choose from a large number of trading parties,” Mueller said. “And in that respect, Germany is a role model.”

Under German tax law, finance ministries in the federal states are responsible for collecting taxes and investigating cases of fraud.

One case of fraud in German power last year cost Baden-Wuerttemberg about 2.8 million euros, Frank Kupferschmidt, a spokesman for the state’s finance ministry, said June 3. There are probably other cases yet to be discovered, he said.