Missing Trader Intra Community Fraud(MTIC) VAT Fraud

Practical aspects of cooperation between Member States and EU Institutions

A UK Perspective – May 2008

Cedric AndrewMTIC National Coordinator

HM Revenue and Customs, United Kingdom

Understanding MTIC

The biggest VAT fraud that we face.

Orchestrated attack on the VAT system by organised criminals.

Requires contrived supply chains involving apparently legitimate businesses.

Takes advantage of EU VAT rules and trade facilitation.

Main commodities – were until 1st June 2007 mobile phones and computer chips – currently metals, alcohol, soft drinks

Major threat to public finances

2000-012001-02

2002-032003-04

2004-052005 - 06

GBP Billion

GBP Billion

2.50

2.50

2.30

1.701.90

3.00

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Financial Year End

£ B

illio

n

GBPBillion

GBPBillion

2.50

1.301.70

1.50

1.101.10

2.00

Impact on public finances - Previously published estimates of MTIC fraud

Range of civil interventions

– Registration – point of entry to VAT system – VAT repayment – extended verification: ‘Knowledge’ test Joint & several liability– Selective application of reverse charge derogation

Criminal investigation & prosecution – Exemplary prosecutions– Working with other UK and International law enforcement

agencies on joint investigations

Tackling MTIC – UK Domestic Strategy

Tackling MTIC – UK International Strategy

European Union

Improving speed & quality of information exchange (EU regulation 1798/2003)

Examining options for change to EU VAT system

International

Development of international Memorandum of Understanding Agreements and Mutual Legal Assistance Treaties

Operational

Joint working with international partners

Mutual Administrative Assistance to track goods, paperwork & businesses e.g. Multi Lateral Controls

Criminal work to trace money and identify orchestrators - Mutual Legal Assistance

The Knowledge Principle

Derived from the following ECJ judgements :

• Bond House, Optigen and Fulcrum (UK - Non Economic Argument )

• FTI (UK - Joint and Several Liability)

• Objective test confirmed by Axel Kittel (Belguim)

Keys Extracts from Kittel

Paragraph 56: ‘a taxable person who knew or should have known

that, by his purchase, he was taking part in a transaction connected

with fraudulent evasion of VAT must, be regarded as a participant in

that fraud

Paragraph 57: ‘That is because in such a situation the taxable

person aids the perpetrators of the fraud and becomes their

accomplice.’

Multi Lateral Controls – EU Regulation 1798/2003

• The individuals orchestrating the fraud

• The nature of their fraudulent behaviours

• The methodology and the characteristics of the fraud

• All of which can be applied to identify current and future fraudulent activity and to develop appropriate targeted administrative and criminal interventions

Although Multi Lateral Controls are historic events, they assist by identifying and understanding:

Transaction Chain

CountryTrader Name

Vat NoInvoice

DatePhone Model

Quantity

PriceProfit Per Unit

Net Value VAT Total

EU Supplier Estonia A xxx28-Apr-

06Nokia N91 2995 £502.65   £1,505,436.75   £1,505,436.75

Missing Trader UK B xxx28-Apr-

06Nokia N91 2995 £503.45 £0.80 £1,507,832.75 £263,870.73 £1,771,703.48

Buffer 1 UK C xxx28-Apr-

06Nokia N91 2995 £503.65 £0.20 £1,508,431.75 £263,975.56 £1,772,407.31

Buffer 2 UK D xxx28-Apr-

06Nokia N91 2995 £503.70 £0.05 £1,508,581.50 £264,001.76 £1,772,583.26

Buffer 3 UK E xxx28-Apr-

06Nokia N91 2995 £503.90 £0.20 £1,509,180.50 £264,106.59 £1,773,287.09

Buffer 4 UK F xxx28-Apr-

06Nokia N91 2995 £504.40 £0.50 £1,510,678.00 £264,368.65 £1,775,046.65

Buffer 5 UK G xxx28-Apr-

06Nokia N91 2995 £505.00 £0.60 £1,512,475.00 £264,683.13 £1,777,158.13

Broker UK H xxx28-Apr-

06Nokia N91 2995 £525.20 £20.20 £1,572,974.00 Nil £1,572,974.00

EU Customer France I xxx                

An Example of an Extended Verification of MTIC Transaction Chain

No Commercial Rationale

• EU Customer can buy for less from EU Supplier

• Buffers – Fixed Price Per Unit

Men of Straw

• EU Supplier

• UK Buffers

• EU Customer

• EU Regulation 1798/2003

• Essential information received from Estonia and France

WHOLESALER

FRENCH SUPPLIER

MISSING TRADER

BUFFER TRADER

INVOICES

MISSING TRADERINVOICE

BUFFER INVOICE

CONSIGNMENT DELIVERED DIRECT TO WHOLESALER

?

RETAILER

WHOLESALE INVOICE

Simple Acquisition Fraud

WHOLESALER

FRENCH SUPPLIER

MISSING TRADER

BUFFER TRADER

INVOICES

MISSING TRADERINVOICE

BUFFER INVOICE

BELGUIM CONDUIT

DUTCH CONDUIT

BELGIUM CONDUIT DELIVERS CONSIGNMENT

DIRECT TO UKWHOLESALER

FRENCH SUPPLIER INVOICES BELGIUM

CONDUIT

BELGIUM CONDUIT INVOICES DUTCH

CONDUIT

DUTCH CONDUIT INVOICES UK

MISSING TRADERS

FRENCH SUPPLIER DELIVERS CONSIGNMENT

TO BELGIUM CONDUIT

?

RETAILER

WHOLESALE INVOICE

Complex Acquisition Fraud

UK Defaulter

Buffer 1

Broker

3rd Country Customer

EU Conduit 1

EU Conduit 2

EU Conduit 3

EU Supplier

Buffer 2

Buffer 4

Buffer 3

3rd Country Freight

Forwarders

UK Freight Forwarders

EU Freight Forwarders

By AirFerry

By Air

Off Shore Bank

Third Party Payment

£1,000,000

Tax Loss£149,111

Sells: £852,064 VAT £149,111 Total: £1,001,175Benefit: £1,175

Sells: £853,064 VAT £149,286 Total: £1,002,350Profit: £1000 Net VAT: £175

Sells: £855,064 VAT £149,636Total: £1,004,700Profit: £2000 Net VAT : £350

Sells: £857,064 VAT £149,986Total: £1,007,050Profit: £2000 Net VAT: £350

Sells: £859,064 VAT £150,336Total: £1,009,400Profit: £2000Net VAT: £350

Sells: £910,607 VAT: NilTotal: £910,607 Profit: £51,543Net VAT:- £150,336

Sells: £1,000,000 VAT: Nil Total: 1,000,000

Complex Carousel Fraud

Switzerland

United

Kingdom

France

Regulation 1798/2003

Logistics Office

Naples IIGerman Customs

Naples IISwiss

Customs

‘Nemesis’ Scanning

Conduit

Traders in

Other Member

States

Invoices

Invoices

Invoices to

Conduits

Germany

Multiply Invoices Multiply

InvoicesMultiply Invoices

Share

Nemesis data

with Other

Member

States

Regulation 1798/2003

Mutual Cooperation

Mobile phone 3rd country exports May 2005 – Nov 2006

May

-05

Jun

-05

Jul-

05

Au

g-0

5

Sep

-05

Oct

-05

No

v-05

Dec

-05

Jan

-06

Feb

-06

Mar

-06

Ap

r-06

May

-06

Jun

-06

Jul-

06

Au

g-0

6

Sep

-06

Oct

-06

No

v-06

USA

Singapore

Hong Kong

Switzerland

Dubai

0

50

100

150

200

250

300

350

400

£ Millions

USA

Singapore

Hong Kong

Switzerland

Dubai