* No one under investigation yet-prosecutor's office
* BlueNext unaware of an investigation related to exchange
* BlueNext reiterates no evidence of fraud on exchange
* Observers question legality of VAT-exemption under EU law
(Adds details, KPMG quotes, European Commission quotes)
By Muriel Boselli and Michael Szabo
PARIS/LONDON, June 11 (Reuters) - The Paris prosecutor's office confirmed on Thursday a probe was under way into a suspected multi-million euros value-added tax (VAT) fraud in the French carbon emissions market.
"An inquiry is under way but we are not yet about to place people under official investigation," a source at the Paris prosecutor's office said.
The French Budget Ministry has made carbon permits exempt from VAT in order to prevent a potential scam linked to a French emissions exchange, a government source said on Monday.
A ministry source said there had been no evidence of a VAT fraud, despite rumours circulating that a recent surge in volumes in the European Union emissions permits traded over BlueNext, Europe's main exchange for spot permit trading, was suspicious.
Through carousel fraud, also called missing trader fraud, fraudsters import goods VAT-free from other countries, and then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the collected tax to the government collection authorities.
A BlueNext spokesman told Reuters on Thursday there was no evidence VAT fraud was occurring over its exchange and that the rumours were "unsubstantiated", adding he was unaware of any investigation relating specifically to the exchange.
He said he had not been contacted by any authorities, including the Paris prosecutor's office, about the matter.
BlueNext is a joint venture between NYSE Euronext and Caisse des Depots.
LEGAL?
EU tax experts said France's move could be illegal.
"They've really gone out a limb here because you can't operate unilaterally as a member state on things like this," said Sandy Nicolson of KPMG's Carbon Advisory Group.
"There is no obvious part of the European VAT directive that would give them the right to exempt these transactions ... These types of frauds are not particular only to carbon trading."
Nicolson said the exemption means companies trading carbon in France, like investment banks and brokers, now cannot charge VAT when they sell credits and thus are not able to recover it on their overhead costs.
"It's not a popular development. There are other, perhaps more effective ways to ameliorate the risk of fraud without harming this developing market," he said, adding that the EU's other 26 member states would likely have to agree the move for it to become legal, a process which he said could take months.
A spokeswoman for the European Commission would not comment on the French Budget Ministry's move, but told Reuters it had not received formal notification from the French government on its decision or the reasons behind it.
"We've seen this reported in the press ... We don't know if it's illegal or not because we've not received any formal information," she said.
BlueNext halted spot trading on Monday after the French national emissions registry closed last Thursday and Friday for what it called "technical reasons."
BlueNext resumed trade on Wednesday, with the spot contracts exempt from France's 19.6 percent VAT.
Some 2.5 million carbon credits were traded on Wednesday versus a record 20 million credits traded on June 2 and a daily average of 9.4 million in the past 4 weeks. (Reporting by Muriel Boselli in Paris and Michael Szabo in London; editing by William Hardy)