Why VAT carousel crime schemes are almost impossible to prosecute
2. Conceptual model of VAT carousel fraud
Carousel fraud, often called Missing trader fraud (or more specifically Missing Trader Intra-Community, MTIC) is a sophisticated economic criminal activity exploiting Value Added Tax (VAT) evasion.
The name carousel fraud derives from the typical circular chain of transactions set up by the criminals to maximize profits and often en-tails sham paperwork and temporary companies to engage in the trades. In order to hide the fraud, the circle sometimes involves com-pliant honest traders.
2 UK High Court judgment, case No. CH/2009/APP/0066.
For a crime committed in a given European Union country, a mem-ber of the fraud ring acquires goods, tax-free from a trader in another country within the European Union, or a VAT country outside of Europe. Then, the goods are sold on through a series of VAT-registered companies of an assumed country (here we specialize on the UK, where, as of 2006, the scheme achieved monumental proportions).
According to [Stone, 2008] “The participants in a fraudulent MTIC transaction will normally include the following:
– A ‘supplier’ of quantities of small volume high value goods, such as computer chips or mobile phones, who is located in an-other EU Member State.
– A ‘missing trader’ is a VAT registered business that is no longer at their principal place of business for VAT purposes and cannot be contacted.
– A ‘defaulting trader,’ the one who continues to trade, submitting their VAT declaration but not paying or making false export claims (known as Export Set Off or Cross Invoicing).
– An ‘intermediary’ or ‘buffer trader’ is a VAT registered business used by the ‘broker’ to distance themselves from the missing, defaulting or hijacked trader (the one whose identity a VAT registration number (VRN) is adopted, usually without that taxable person’s knowledge by the hijacker).
– A ‘broker’(or shipper, exporter) is the entity which dispatches the goods back to another EU member state or a 3rd country and reclaims the VAT charged to him by the buffer.
– A ‘conduit trader’ who may be located in another EU Member State or in a non EU country who buys and sells zero rated for VAT purposes and exports on, frequently the goods back to an-other EU Member States. It is generally regarded as being non- -compliant.”
The similar definition of participants in a fraudulent MTIC transac-tion was adopted by Financial Actransac-tion Task Force [2007]. All of the involved companies, except that of a missing trader, may claim a lack of knowledge of the scheme. The scheme works for the standard but not for the reverse VAT mechanism (in the same country a seller has to return output VAT to the Tax Office). The essence of the crime is to go through a chain of buffers in order to create a distance between the importing and the exporting companies; and in some cases re-exporting
the same goods to another EU member state. The loss to treasury fol-lows because input VAT tax is reclaimed by the broker and output tax is not paid by the missing trader.
Initially, the country most affected was the United Kingdom, but then the scheme shown in Figure1 diffused to other EU countries.
Figure 1. A simple fraudulent MTIC “carousel” transaction chain.
Kingswood is an organizer (also a buffer) and MSL
(MY SECRETS LIMITED) is a broker. The topology corresponds to the appellation case MSL and the Commissioners
for HMRC.3 The Upper Tier Tax Tribunal ruled in favour of HMRC The most sophisticated scheme is the so called “contra trade”
scheme. Here, there exists 2 chains, one “dirty” – horizontal in Figure 2, and “clean” – the vertical one. One company (in the yellow back-ground of Figure 2) appears in both chains. Its VAT tax obligation value is zero because the input VAT and the output VAT for the trans-actions are equal. The crucial feature of the scheme is distancing a defaulting trader from the point of a possible crime discovery (that is a company that demands a tax reclaim). In real cases structures of chains may be more complex.
The English type VAT carousel scheme has the following features:
– conduit traders appear at both ends of the chain. This means that tax duty obligation appears earlier than a tax reclaim request.
This could be irrelevant in practice if all transactions happened in very short period of time,
3 Upper Tribunal (UK Tax and Chancery Chamber) caseno FTC/76/2011.
– goods such as mobile terminals and computer chips – high value, low volume,
– transactions are of high value and occur in spurts (this could be easily stopped by inspecting Financial Intelligence Unit data), – there is no doubt that goods crossed the border,
– usually, it was not clear what happened with goods after they left UK. They could start another carousel chain,
– goods could be country specific (mobile terminals specified to a given country).
Figure 2. A contra trade scheme corresponding to the appellation case GSL and the Commissioners for HMRC.4 The Upper Tier Tax Tribunal ruled in favour of HMRC. NEX is an organizer (also a buffer) and GSL (GREENER SOLUTIONS LTD) is a broker.
The dirty chain exists, but its details are not necessary for our analysis
The Polish type VAT carousel scheme differs from the English one that the goods are unlabeled, are traded in a continuous man-ner and the paths of invoice and money flows are different from a transport flow. The chain of transactions may start in Poland as seen in Figure 3 or outside of Poland as shown in Figure 4. More-over, there are many missing traders and end customers. Crucial for the scheme is the falsification of shipment documents. It is impos-sible to prosecute end customers and is difficult to investigate many missing traders. If prosecutors are not able to prove that trans-port routes were not possible and invoice and shipment documents are carefully drafted (without obvious errors) then criminals go
4 Upper Tribunal (UK Tax and Chancery Chamber) caseno FTC/91/2010.
unpunished and obtain a VAT refund from the Treasury. It is rare that suspected persons break during testimonies and admit wrong doing.
A typical chain of transactions consists of the following steps:
– Company 1 from Poland issues an invoice and international shipping document, CMR, related to a sale (fictitious) of goods (there steel rods) to company 2 in the Czech Republic/Slovakia.
The VAT tax rate is 0. The assumed price is 100.
– Company 2 then sells the goods to Poland and issues an invoice and international shipping document CMR related to a sale (fic-titious) of goods (the same steel rods) to company 3 in Poland.
The VAT tax rate is 0. The price is equivalent to 100 (after cur-rency exchange).
– In reality the goods do not leave Poland. They are sold by com-pany 1 to comcom-pany 3 through a series of intermediaries i. In this work we do not analyse this aspect. The price of goods should be 123 (with the current base VAT rate of 23%); and the corre-sponding VAT input tax reclaim should be 23. However, since there is a collusion between the companies involved and their people, a final buyer pays around 115. As a side effect, the legal trade collapses.
Figure 3. Companies involved in the Polish type VAT carousel
The Polish type VAT carousel scheme has the following features:
– Conduit traders appear at the beginning of the chain.
– Goods are steel rods and metal scrap chips – high volume, low value. Hence, many transports.
– There are also systematic money flows (this is less suspicious;
and banking Financial Intelligence Unit data need more sophis-ticated analysis to observe irregularities).
– Goods do not cross the border.
– Goods are sold to the end client at a discount.
– Goods are not country specific.
– One round of goods flow could be exploited in several fictitious invoice flows on paper in different Polish tax districts. In most cases, this is not discovered by the police and fiscal services due to the lack of central databases.