Written by Richard Cornelisse
59 percent of respondents (53 percent in 2014) expect the personal liability of compliance officers to increase in 2015, with 15 percent expecting a significant increase. Compliance officers or its Executives at firms as diverse as Swinton Insurance, Bank Leumi, Bank of Tokyo-Mitsubishi, Brown Brothers Harriman and Deutsche Bank (DB: VAT fraud) having been fined, banned or jailed (or a combination).
Criminal charges and jail time
More often tax and public prosecutors‘ offices file criminal charges for tax-related scenarios with consequences for nor only the businesses reputation wise but also the executives and employees that could be jailed.
Eight Deutsche Bank staff to be charged in carbon VAT fraud probe Prosecutors said they were investigating 25 bank staff on suspicion of severe tax evasion, money laundering and obstruction of justice, and searched the headquarters and private residences in Berlin, Duesseldorf and Frankfurt.
"Two of Deutsche Bank's Management Board members Juergen Fitschen and Stefan Krause are involved in the investigations as they signed the value-added tax statement for 2009," Deutsche Bank (DBKGn.DE) said in a statement.
VAT fraud - roadmap for an effective control framework
Control and anti-fraud
VAT fraud is high on the European Union's political agenda: though the exact amount of money involved is difficult to quantify, some Member States have estimated their losses at up to 10% of net VAT receipts.
Please find more information about VAT fraud and the EU's response on the following pages:
If a business charges you VAT it must be VAT registered and must declare any VAT it charges to HMRC. Some businesses deliberately avoid registering for VAT, thereby gaining an unfair advantage over their competitors. Others may either be bogus or may lie about the amount of VAT that they owe.
You might know that a business is not declaring all the VAT they’re charging, or you might think that they’re not because they:
- ask you to pay them in cash and are reluctant to provide an invoice
- request that payment is made to someone other than the business
- offer a discount for cash and are reluctant to accept cheques or credit cards
- offer goods for sale at substantially below market value
- put money into an open till drawer without ringing up a sale
Missing Trader Intra-Community VAT fraud
Missing trader ‘Missing trader’ fraud involves obtaining a VAT registration number in the UK for the purpose of purchasing goods free of VAT in another EU Member State. These goods are then sold in the UK at a VAT-inclusive price. After which, the trader will go missing or default, without paying the VAT due to HMRC.
Carousel fraud Another form of this type of fraud is called ‘carousel fraud’. This involves trading the same goods around contrived supply chains within and beyond the EU. The goods will re-enter the UK on a number of occasions with the aim of creating large unpaid VAT liabilities and fraudulent VAT repayment claims.
Estimated the amounts of fraud
€ 200 billion lost A recent European Union study (2013) says the bloc's 28 member nations may be losing almost 200 billion euros ($267 billion) annually in value-added tax revenues due to tax evasion and a lack of enforcement.
EU Tax Commissioner Algirdas Semeta said the amount of revenues slipping through the governments' nets is "unacceptable, particularly given the impact such sums could have in bolstering public finances."
The study for the European Commission, the bloc's executive arm, found member states lost an estimated 193 billion euros ($258 billion) in VAT revenues in 2011, or 1.5 percent of the EU's economic output.
Urgent measures to tackle the VAT Gap
The ’VAT gap’ between expected revenue and revenue actually collected by national authorities is estimated at around EUR 170 billion, which equates to 15.2% of revenue loss. This calls for urgent action on several fronts:
- Improving cooperation within the EU and with non-EU countries
- Towards more efficient tax administrations
- Improving voluntary compliance
- Tax collection
20 measures to tackle the VAT gap
Transaction network analysisPropose options to reinforce the role and impact of Eurofisc on tackling intra-Community VAT fraud. It includes making better use of the information available within the network, through an electronic transaction network analysis and ranking tool (TNA);
Evaluate Regulation (EU) No. 904/2010 on administrative cooperation and combating fraud in the field of value added tax, and propose legal and operational solutions to address the weaknesses of the current legislation, including by introducing joint audits;
VAT fraud spotted within days - No substantial change at tax authorities
Data system tested for Benelux countries will be rolled out within 1 year according to current EU Chairman Wiebes. The big data analysis started 1.5 years ago in the Benelux and that participation has already increased to 10 EU Member States amongs others Romania that faces substantial VAT fraud. (source: FD - in Dutch).
Some examples of 2012
“Nasir Khan had a successful accessories business, a jet-set lifestyle and reputation as a pillar of the community. But all that vanished in December when he was jailed for his part in a £250m VAT fraud. Jasper Jackson discovers how a 10-year investigation by HMRC led to his downfall. By Jasper Jackson – Mobile News March, 2012
“Two men have been jailed for their role in a plot to smuggle nearly 24 million counterfeit cigarettes into the Midlands, following an investigation by HM Revenue & Customs (HMRC). The conspiracy would have seen nearly £4 million drained from the UK economy through duty evasion.” HM Revenue & Customs, March, 2012
“A 34-YEAR-OLD man was yesterday convicted of a €680,000 VAT fraud after a 10-day trial that heard he produced 141 bogus invoices on non-existent transactions with imaginary sub-contractors.” By Gordon Deegan – Irish Times.com, March 2012
“A 64-year-old man has been arrested in a dawn raid into a £1 million suspected VAT fraud involving a Workington business.” News & Star, January 2012
“Yacht broker jailed over VAT fraud – A Dorset yacht broker who charged £210,000 VAT on the sale of six luxury yachts and then pocketed the cash has been jailed. James Williams, 51 was found guilty on six counts of cheating the public revenue and one count of false accounting. He was sent to prison for three years. John Cooper, HMRC Assistant Director Criminal Investigation said: Williams used his position as director of a yacht brokers to commit VAT fraud. He sold boats which had previously been supplied VAT-free for export to the Channel Islands, but failed to account for the VAT on their subsequent sale in the UK. This blatant attack on the tax system not only robbed the Exchequer of public funds, but is also unfair to those businesses that diligently abide by the rules. Tackling VAT fraud is a priority for us and we will not hesitate to pursue those who commit this type of offence. Anyone who has information about suspected VAT fraud can call the Customs’ Hotline on 0800 59 5000” By Dick Durham of Yachting Monthly, March 23, 2012
“An antique jewellery trader who fraudulently claimed over £1.6 million in VAT repayments by creating fake invoices for expensive Rolex and Cartier watches has been jailed. Jonathan Uri Shohet (45) of Baldock, Herts, used stolen invoice books and fake invoices to claim back VAT from HM Revenue & Customs (HMRC) but had never purchased many of the watches he claimed repayments for.” HM Revenue & Customs, April 25, 2012
Combat VAT fraud
This complexity has led many countries to crackdown on VAT and GST fraud in an effort to discourage traders from taking advantage of unintended loopholes in indirect tax legislation or to commit more serious acts of fraud, especially those conducted in more than one state.
Again, this has been an increasingly visible trend in Europe, and has led to greater levels of cooperation and information-sharing on taxpayers between national revenue authorities.
For example, in January this year, it was announced that a Franco-Austrian partnership agreement designed to strengthen the exchange of information to uncover VAT fraud has proven to be highly effective in practice.
Also, much is being done at EU level by the European Commission to eradicate VAT fraud; in November 2010, EUROFISC was established to provide a network of national tax officials with the aim of detecting and preventing fraud before it occurs.
Dutch State Secretary for Finance Frans Weekers has recently unveiled details of plans to give a new boost to the international fight against value-added tax (VAT) fraud. During a keynote address to parliamentarians from the Benelux, Nordic, and Baltic countries, the Dutch state secretary underlined the fact that banks play a vital role in combating VAT fraud.
Weekers announced that he is currently in talks with the Dutch banks to examine ways in which to exchange information on possible fraudsters with the country’s tax authorities.
While conceding that amendments would undoubtedly need to be made to existing legislation, Weekers insisted that it is also in the banks’ interest to clamp down on fraudsters, particularly given that, for example, fake businesses could have a serious impact on the banks themselves.
At international level, Weekers underscored the importance of the Benelux parliament (which only has an advisory role), the Baltic Assembly and the Nordic Council working together and collaborating in projects, in particular in combating carousel fraud.
The name carousel fraud derives from the typical circular chain of transactions set up by the criminals to maximise profits, and often entails sham paperwork and temporary companies to engage in the trades. In order to hide the fraud, the circle sometimes involves compliant honest traders.
Weekers stated that the speed at which legislation is implemented is another key factor. Highlighting the need for greater speed at European Union (EU) level, Weekers alluded to the fact that he has urged the European Commission to swiftly implement the necessary changes to EU legislation.
Concluding his remarks, Weekers emphasized that in addition to intensive cooperation at international level, there are now also many possibilities as regards new investigative techniques specifically designed to combat VAT fraud. Outlining his intention to use these new techniques as quickly as possible, Weekers explained that it is now possible to extensively monitor and to analyze the behaviour of individuals who have registered their VAT number.
According to the Dutch finance ministry, these issues pertaining to VAT fraud were also discussed during a recent meeting between Weekers and the Belgian State Secretary responsible for combating social and fiscal fraud, John Crombez. Both ministers have agreed to work together in the fight against social and tax fraud, the ministry confirmed.
Presidency paper – VAT-fraud
Ten Reasons Frauds Occur
- Greed – good old fashioned human nature intervenes when an individual, or group of individuals, sees a chance to make “a fast buck”. A good example being those cases where people “adjust” their expense claims upwards.
- Lack of transparency - complex financial transactions that are difficult to understand are an ideal method to hide a fraud. The Barings fraud was perpetrated by use of an accounting “dump account” that no one understood.
- Poor management information – where a company’s management information system does not produce results that are timely, accurate, sufficiently detailed and relevant; the warning signals of a fraud, such as ongoing theft from the bank account, can be obscured.
- Excessively generous performance bonus payments – the more generous the bonus, when coupled to a demanding target; the more temptation there is to manipulate results, such as year end sales figures, to reach that target.
- Non independent internal audit department – where an organisation’s internal audit department is not independent, eg the where it does not report to a truly independent audit committee but to the Finance Director, the more likely that when there are signals that a fraud is occurring the more likely they will be ignored. It is indeed interesting to note that Cynthia Cooper (Head of Internal Audit at WorldCom) had to bypass her boss (the CFO) and go directly to the audit committee to report the discovery of the capital expenditure fraud.
- Lack of clear moral direction from senior management – leadership comes from the top. Where the senior management indulge themselves in “semi corrupt” behaviour, eg adjusting their expense claims upwards, others will follow adopting the well worn mantra “everyone’s at it”.
- Excessively complex organisational structure - designed to obfuscate the revenue streams; and so hide reality from third parties, such as the Internal Revenue Service. Enron, with its complex off balance sheet structure and transactions, is a textbook example of this.
- Poor accounting controls– where the accounting controls, such as a monthly reconciliation of the bank account, are lapse the signals that a fraud has occurred will be missed.
- Arrogance – some people believe that they are better than “the system”, and that they can get away anything. The late Robert Maxwell (of the Mirror Group) plundered his company pension scheme, arrogantly assuming that since he was chairman of the company he could get away with it; he almost did!
- Complacency – I have met many a manager who has an almost childlike faith, based in part on the “old boy” network, in the probity of their colleagues; believing that fraud “is not the sort of thing that could happen here”. Others will, and do, take advantage of that trust. From: Ten Reasons Frauds Occur
Read more in the article 'Auditors Anticipate Finding Fraud At Clients '
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became a partner in EY where I led the indirect tax performance team for Netherlands and Belgium. Currently he is a senior managing director of Phenix Consulting.
Richard has over 20 years’ experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service centre migration, and post merger integration work. Richard is also somewhat of a mentor, giving back to the profession. If you are interested in conversation and discussion, please feel free to contact him.
Fast adoption of technology
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