Investigating VAT fraud in connection with cross-border trade within the European Union

Transcription

1 1 Dan Magnusson, Professor Jönköping International Business School, Sweden Investigating VAT fraud in connection with cross-border trade within the European Union A further developed routine activities theory can be a suitable theoretical starting point to discuss counter measures against VAT fraud (Magnusson 1999). The routine activities theory was constructed by Cohen, L. E. & Felson, M. (1979). The model seeks to explain a crime by applying three causal variables motivated offenders, the crime opportunity structure and the absence of effective guardians of law and order, or in other words, effective control structure. The further developed routine activities theory which I will present here has been adjusted to analysing economic crime. Routine activities theory in its original form says nothing about which factors bring about changes in the creation of values or, expressed more exactly, in the offender s motive formation. In the adjusted analysis, the variables in the routine activities theory are seen as dynamic elements where the crime opportunity structure and control activities as well as norms, values and attitudes affect the motive formation of the individuals in a socialpsychological process. With regard to economic crime, the motive formation of individuals is also affected - directly or indirectly - by changes in the surrounding society, by the economic development in the society and by political and technical changes. The model is described below in diagram 1. Diagram 1 Factors that affect economic crime SURROUNDING SOCIETY Norms and Values Technical, Crime Opportunity Attitudes Control Economic Political Motive formation Development Economic Crime Effects

2 2 When we from a Swedish point of view look at the opportunity structure it is easy to notice that it must be the high VAT rate, normally 25 percent, that is shaping the opportunity to commit VAT crime. What actions could be taken to make the opportunity less attractive? Of course theoretically you can lower the VAT rate or you can abolish the VAT system and create a better tax system. Today this does not seem to be a politically realistic approach. By harmonising national levels of VAT within the EU, there would at least be a weakening of incentive for criminal parties to commit VAT fraud in special countries with the highest VAT rates. There is an ongoing effort to harmonise the VAT levels within the EU but we are still far from a harmonised VAT within EU. The control structure changed dramatically then the inner market was formed in 1993 (1995 for Sweden the year Sweden joined the EU). It is the destination principle that opens for VAT fraud in connection with cross-border trade. The purchasing company can buy goods without paying VAT in another EU country and the goods are received without VAT being charged. It then becomes possible for the purchasing companies to avoid declare and pay VAT in their own country. Another factor that impedes an effective control is that the Swedish legislation permits VAT to be declared and paid once a year if a company has a turnover that is less than one million SEK, about Euros. The normal VAT levy in Sweden is every month. It is also a problem that it is not possible to monitor VAT in connection with cross-border trade as quickly as in connection with trade within a country. It is the VIES system that contains the most important information about transactions between EU countries. However, the VIES system functions with a delay of several months, which impedes control between the member states. The VIES system has only information about goods and no information about services. Since long ago a work is going on to improve the VIES system but we have not seen those improvements yet. The effective use of the VAT system is in practice also impeded by a lot of faults in the quarterly reports to VIES, caused by lack of knowledge and carelessness. The fact that the refunding of excess input VAT normally has to be carried out quickly impedes supervision. On the other hand, delayed repayments would create major liquidity problems for legitimate companies. The work of government agencies combating VAT fraud is characterised and impeded by the lack of an integrated strategy, badly targeted investment and insufficient resources, at the inter-agency, national and interstate levels. There is an inner market within which there is full cross-border mobility for persons and goods. Paradoxically, however, government agencies, which are assigned to administer and monitor this market continue to experience serious restrictions in their operations because of national borders. In practice, there is a market for economic crime but not for combating it.

3 3 Extended co-operation between regulatory authorities in the EU s member states would in all likelihood result in more effective control. I will in my presentation give some Swedish examples of control methods against VAT fraud in connection with cross-border trade that has turned out to be effective and which I can recommend. Before that, let me just make a short comment about norms, values and attitudes in the model. It is highly improbable that information and endeavours to influence the attitudes and motive formation of the people who are committing the VAT fraud in connection with cross-border trade within the EU will be effective. This criminality can be characterised as organised crime and I do not think that those criminals are open to influences that make them bother about what is right or wrong. In this context we must not forget the consumers. The consumers are very often accessory to the VAT fraud and they are consciously buying goods and services without VAT and taking favour of a lower price. In the long run it could be worth thinking about strategies against the consumers in order to lower their motivation to buy cheap without VAT. To sum up what I have said so far. I think we must concentrate upon the control structure in combating VAT fraud and now I will give some examples of what can be effective. My presentation is mainly based upon two large-scale projects which the Swedish National Economic Crimes Bureau and the Swedish Tax Agency have been responsible for and which they have carried out since One project is dealing with VAT fraud in connection with carousel trade, Carousel 2000, and another with VAT fraud in connection with cross-border trade with food within the Community, the so called Food stuff project. The Swedish National Economic Crimes Bureau and the Swedish National Tax Board started the 1 st of April 1999 a project to combat VAT fraud in connection with carousel trade. Together with a person from the Tax Board I was leading the project. We had a project group where a number of other agencies involved in combating economic crime also were represented. The project took place between the 1 st of April 1999 and the 31 st of December During that period about 40 officials at the engaged agencies worked full time in the project. I will present two modus operandi which were and still are commonly used: o The simple model of VAT fraud in connection with carousel trade o The more complicated model with intermediate links The simple model of VAT fraud in connection with carousel trade Carousel fraud is normally based on cross-border deliveries and invoicing of goods. Company 1 buys goods without VAT from company A/S in another EU country and then sells them, in turn, to a domestic VAT-registered company 2. Company 2, in its turn, sells the goods back to company A/S in the other EU country. The procedure can be repeated with the same goods until the goods must actually be sold, as is the case with mobile telephones which would

4 4 otherwise become out-of-date or unfashionable. An alternative to this is that carousel dealers buy a lot of old useless mobile telephones and then let them circulate. Company 2 avoids charging VAT in connection with the export of goods to company A/S and instead gets back the invoiced supplier VAT from the tax authority. Company 1 goes bankrupt or disappears in some other way without declaring and paying the VAT. The result is that the taxpayers who already have paid in VAT to the state have to pay the money which comprises the profit of the carousel trade. The simplest form of VAT fraud in carousel fraud is illustrated in diagram 2. Diagram 2 Simplest form of VAT fraud in carousel fraud Missing trader SEK 90+ VAT = SEK Final link The more complicated model with intermediate links To impede the implementation of an investigation, the acquisition of evidence and the creation of opportunities to recover the VAT amounts for the state, the carousel designers place one or more companies, the intermediate links, between company B, which is called the missing trader, and company C, which is called the final link or broker. The companies which make up the intermediate link, company D, often report their VAT, and then based upon just a small additional amount. The purchasing companies, that is company B, or the so called missing trader firms, have a short lifespan and are constantly discarded and replaced. These companies have so called dummies or strawmen who often cannot reply to enquire about business operations and no bookkeeping is carried out.

5 5 In practice, these kinds of fraud often are involving transactions between several EU countries. A model with intermediate link is shown in figure 2. Diagram 3 Model with intermediate link Member State 1 Company D Intermediate Link COMPANY B Missing trader Receives VAT from Company D but does not pay it to the Treasury COMPANY C Final link or Broker Deducts VAT or claims a refund for VAT not paid by Company B Member State 2 Company A Conduit company Sells goods without charging VAT The flow of invoices does not have to correspond with the flow of goods. There do not actually have to be any goods circulating in a VAT carousel fraud. The deliveries of goods are sometimes fictitious and the invoices can be seen as false. Measures taken to detect carousel fraud in the Swedish carousel project The Tax authority used a lot of sources of information to disclose VAT fraud in connection with carousel trade: Comparing information in VAT Information Exchange System (VIES) with VAT returns Auditing wholesalers who were suspected to act as so called Final Link companies in order to find out which suppliers they had Asking for information about foreign companies through Central Liaison Office (CLO) at the National Tax Board External information from for example trade associations Other sources of information:

6 6 Knowledge within Economic Crimes Bureau based upon cases going on Information from the FIU about money transactions and exchanges Information from The Customs department Information from tax authorities and crime investigating agencies in other countries. Forwarding shipping agents and transportation companies informed the authorities about suspected shipments. The most important method to disclose carousel fraud in the project was the co-operation with forwarding shipping agents and transportation companies in order to use their observations to detect the carousels. The criminals who are committing VAT fraud in connection with carousel trade are dependent upon the serious transportation enterprises for the transportation of the goods but also in order to be sure to receive payments in a safe way. Another reason why the criminals are dependent upon the forwarding shipping agents and the transportation companies is that they want their business to look like a serious business. The investigation method meant that the authorities in co-operation with the shipping agents and the transporting companies found such goods that were sent from one supplier within the EU to a Missing trader in Sweden. After that they directly started a pre-trial investigation and confiscated the goods before the purchaser in Sweden was informed by the shipping agent that the goods had arrived to Sweden. The advantage of this method was that the investigation started under ongoing criminality, which made it almost impossible for the dummies to pretend that they did not remember anything. After having confiscated the goods the chain of companies were investigated with the aim of finding out if the companies had been acting actively or passively. It was rather easy to find out if a company had been acting actively or passively, because a representative of a passive company could not explain anything about the businesses. The aim of dividing the companies into these two categories was to prosecute the representatives of the first found active company for tax crime and then prosecute the representatives of all the other companies involved for complicity in tax crime. The forwarding shipping agents who had handled the goods of the carousel companies had a good knowledge a bout the persons involved in the carousel fraud and they had felt that something was wrong, but at the beginning of the project they had not had knowledge enough to understand that it was carousel fraud they were involved in. Through a solid network with the forwarding shipping agents and the transportation firms it was possible for the authorities to receive information about suspicious transports already the day before the goods were arriving to the purchaser in Sweden. This made it easy for the authorities to confiscate the goods and arrest the criminals (EBM Rapport 2001:1).

7 7 The result of Carousel 2000 The investigations, which were carried out within the project Carousel 2000, can be characterised as successful. One positive experience was the model for co-operation between authorities that was established. The results achieved had not been possible without this cooperation. The co-operating authorities were the Swedish National Economic Crimes Bureau, the Swedish Tax Agency, and the Financial Intelligence Unit within the National Criminal Investigation Department, the Enforcement Service and the Swedish Customs. From the start the 1 st of April very large investigations have been carried out. Each of them was involving a large number of companies. The total of VAT that was evaded amounted to 1,5 billion Swedish crowns. The method of using the forwarding shipping agents and the transportation companies as informants turned to be so effective that after the project ended the 31 st of December 2000 carousel fraud had almost disappeared from Sweden. Unfortunately after the project ended the authorities stopped to look for new carousels and today they are back again. I can recommend this investigation method involving the forwarding shipping agents and the transportation companies. However, I will not recommend as in the Swedish case to start a big project and when it is finished stop the monitoring activities. It is much better to act like in the Netherlands where they have a special authority FIOD which is continuously controlling VAT fraud in connection with carousel trade. Now I have discussed remedies against VAT fraud in connection with carousel trade. Those methods are specific to carousel trade. Other types of VAT fraud in connection with cross-border trade require other types of remedies and I will now give some other examples from the so called Foodstuff project which I mentioned earlier. The foodstuff project The main intention with the project was to audit and investigate Swedish companies who were buying foodstuff from companies in other EU-countries. The project mainly aimed at detecting VAT fraud. In all cases investigated the basic idea was that the wholesaler in Sweden did not pay VAT and the retailers he sold to in Sweden they did not pay VAT either. Neither income tax was paid for the profit originating from this trade. In all cases the supplier in another EU country was paid in cash. In the project hundreds of companies in Sweden have been audited. The project started the 1 st of January 2003 and went on with audit activities until the end of December Comparing information in VAT Information Exchange System (VIES) with VAT returns was the most important method which was used to detect VAT fraud in connection with foodstuff deliveries. The normal criminal behaviour of the buyer is not reporting at all to the Tax agency. However, differences can have many other explanations, as wrong reports from the supplier or reorganisation of the buying company, which means that the purchase is reported in a daughter company s tax return.

8 8 In the project we found that five characteristic features could be used to describe and separate the different criminal modus operandi from each other. Each of these features could in turn take a lot of different shapes. 1. The use of dummies or in other words strawmen or front companies (decoys). 2. False invoices. 3. Pretended sales to other EU countries or pretended export to countries outside EU. 4. Black trade not reported to any authority. 5. Income tax evasion by undeclared income or false deductions. I will especially speak about the first criminal modus operandi, the use of dummies, because this is a very serious problem. I have a lot of experience of this problem and I have also suggestions how to combat the problem. Let me first give you a short description of the criminal market place that was relevant in connection with the use of dummies. In the end of the nineteen nineties the Swedish retail dealers of food stuff and household commodities were not interested in the developing demand of such products originating from the Middle East. As was the case for other earlier arriving immigrants the need of products coming from the homeland had to be met by initiatives of immigrants themselves. This meant to begin with import from countries outside the European Union with the accompanying customs clearance in connection with the import. Beside the demand of food stuff and household commodities there was also a demand of gifts and furniture. After some time the people who were importing those commodities, noticed that the demanded goods could be bought in Germany by relatives. As Sweden is member of the European Union since 1995 such purchases could be made in other EU-countries without paying any VAT. Any customs clearance did not exist either. The prices in Sweden were and still are higher in Sweden than in Germany for example. In this way a new market was created which immigrants dominated. The fact that the purchases of the wholesalers took place in other EU-countries increased the possibilities of committing VAT fraud, which also made it possible to keep the prices lower than the Swedish retailers could for the corresponding Swedish commodities. When our project started we found some Swedish wholesalers who used their own VATnumber in connection with cash payment in another EU country, for example Germany. They were disclosed 7 8 months later through the quarterly report from VIES. The possibilities to sue the wholesaler for tax fraud and bookkeeping crime were as a rule very good after having checked the VAT returns against the VIES reports. Rather soon the criminals found out that it was possible for the authorities to compare the VIES reports with the VAT returns. So they changed their behaviour. Now the wholesalers used a dummy that used another firm s VAT-number. The dummy paid cash. The VIES report contains the other firm s VAT-number. The other Swedish firm did not know anything about the transactions. When the wholesaler used a dummy and another firm s VAT-number it was almost impossible for the authorities to disclose the wholesaler.

9 9 In another often used modus operandi the wholesaler lured a person who was unacquainted with business to start an enterprise and get a VAT registration. The wholesaler asks him to buy different kinds of food in another EU-country using his own VAT-number not the wholesalers VAT-number. The wholesaler gives cash money in advance to this person so he can pay cash to the supplier. The wholesaler pays a monthly salary to this person. After 7 8 months it is possible that the dummy is disclosed. If the dummy doesn t squeal, the wholesaler will go free. It never happened that the dummies squealed. The dummy has to pay VAT, which he can t of course. Those dummies were sentenced for VAT fraud and bookkeeping crime. In some other cases the wholesalers also used a buffer company. The dummy used his own VAT-number and paid cash in for example Germany. The wholesaler paid a monthly salary to the dummy. After 7 8 months the dummies were disclosed by the VIES reports. When the tax authority or Economic Crimes Bureau contacted the dummy, they claimed that they had not sold the goods in Sweden. They claimed they had sold the goods to a company in Denmark. However, it was not possible to identify the Danish buffer company. Economic Crimes Bureau could not prove VAT fraud, because Economic Crimes Bureau could not prove that the goods had been sold in Sweden. The Swedish buffer company had to prove to the tax authority that the goods had been sold to Denmark. They could not and they were obliged to pay VAT, which they could not of course. The dummies were paid for taking the risk of going to jail for some time. As a matter of fact a lot of people were willing to take that risk. In some cases however it was obvious that the dummies were totally unaware of the fact that they formally were owners of a company which had made purchases for millions of euros without paying VAT. Now I will discuss some remedies to this criminal use of dummies. The projects concerning VAT fraud in connection with cross-border trade which have been carried out by the Swedish Tax Agency and the Swedish Economic Crimes Bureau have shown that the use of dummies is widespread. In my opinion it is too easy for unserious persons to register dummies, or in other words buffer companies, for the only use of committing VAT crime or frauds on the creditors. I recommend the following remedies to combat the use of dummies: When applying for registration the applicant should be interrogated about his knowledge about business activity. Checking that the owner and the representative of the company have not been convicted of economic crime or any other serious crime. Compare the official address of the company with the address of the place of business. If special capital is obligatory to the company in question, check that it has been paid in before the application for registration has been made. I also recommend the following checks to be done after approval and registration. Unannounced control visits to the new company within six months checking the

10 10 book-keeping, accountant, business activities and addresses used by the company. Check that the VAT registration has been correct concerning time of levy - monthly or yearly. Check that the formally responsible person of the company also is active in the company s business activities. If faults are found in the check up it shall be possible for the tax authority to revoke the VAT registration and other registrations as well. Pretended sales to other EU countries Another common fault in the Foodstuff project was pretended sales to other EU countries. Swedish companies reported sales to companies in other EU countries. However, the companies in the other EU countries denied having purchased anything from the Swedish enterprises. The Swedish companies had in fact sold the goods in Sweden without declaring and paying VAT. This criminal behaviour was the easiest to prove, because the authorities had something very concrete to tackle, namely the false invoice. Further more many verdicts were very clear that it is the seller in Sweden who has the whole burden of proof to show that the goods really have left Sweden and have been sold to a foreign purchaser. The need for reconnaissance or in other words physical searching Another important thing that the Swedish National Economic Crimes Bureau has found in many investigations and projects is the need for reconnaissance or in other words physical searching even when investigating economic crimes. It is important to follow transports and also follow people when they make payments to other people in cash. It is especially important when you are looking for the head of criminal syndicate with a lot of dummies and front companies.

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