VAT Fraud – Red Flags for Identification

Julian Haswell Senior Investigation Officer

HM Revenue and Customs

HM REVENUE & CUSTOMS

• HMRC is responsible for the

administration and protection of all UK

National tax, duty and tax credit systems.

• These systems are frequently the target of

attacks by Organised Criminal Gangs.

• 2 million active traders registered for VAT.

AN ATTACK ON THE TAX SYSTEM WILL

INVOLVE:

• The exploitation of weaknesses in

processes and/or systems to fraudulently

obtain money

• Deliberate theft/evasion of tax to increase

the profit element on transactions

• VAT fraud accounts for losses of c. £2bn

to the UK and up to €50bn across the EU.

VAT FRAUD TYPES

• Suppression of sales/purchases

• Multi-cell repayment frauds

• Phoenix Traders (contrived insolvency)

• Failure to register for VAT

• Missing trader

MISSING TRADER FRAUDMISSING TRADER FRAUD

• A UK VAT registered trader can import

goods tax free from any other EU VAT

registered trader

• A UK trader can export goods free of tax

to another EU VAT registered trader

A SIMPLE FRAUDA SIMPLE FRAUD

EU Supplier

UK Company A

“missing trader”

Zero-Rated Supply £1,000,000

EU Supplier

UK Company A

“missing trader”

Zero-Rated Supply £1,000,000

UK Company B

Standard Rated Supply

£950,000 + £190,000 VAT

A SIMPLE FRAUDA SIMPLE FRAUD

EU Supplier

UK Company A

“missing trader”

Zero-Rated Supply £1,000,000

UK Company B

Standard Rated Supply

£950,000 + £190,000 VAT

Reclaims Input Tax

A SIMPLE FRAUDA SIMPLE FRAUD

EU Supplier

UK Company A

“missing trader”

Zero-Rated Supply £1,000,000

UK Company B

Standard Rated Supply

£950,000 + £190,000 VAT

Reclaims Input Tax

Zero Rated Supply £970,000

A SIMPLE FRAUDA SIMPLE FRAUD

EU Supplier

UK Company A

“missing trader”

Zero-Rated Supply £1,000,000

UK Company B

Standard Rated Supply

£950,000 + £190,000 VAT

Reclaims Input Tax

Zero Rated Supply £970,000

Tax Loss = £190,000

A SIMPLE FRAUDA SIMPLE FRAUD

DETECTION: GOODSDETECTION: GOODS

• Computer parts (CPUs)

• Mobile phones

• Consumer electronics

• Metals

• Intangibles:

EU allowances (carbon credits)

Gas and electricity

• Transfer of Going Concern

• Limited Company – bought ‘off the shelf’

• Mobile phone contact number

• Gmail or other non specific email address

• Accommodation address (brass plate)

• Customer has little knowledge of industry

DETECTION: INDICATORSDETECTION: INDICATORS

• Foreign / Overseas Directors.

• Use of front men.

• Change in declared business activity

• VAT application signed by Formation Agent.

• Small annual turnover indicated.

• No bank account given or ‘to be provided’.

• Nil returns or failure to submit VAT returns.

• Payment of VAT central assessments.

• Hijacking of VAT number.

• Criminal Background.

DETECTION: INDICATORSDETECTION: INDICATORS

• Back to back money transfers within 24

hours.

• Daily closing balance is small c/w turnover.

• Account highly active for 3 - 6 month period.

• Dormant account suddenly becomes active.

• Activity of account inconsistent with routine

business (no payments for utilities, wages,

rent)

FINANCIAL RED FLAGSFINANCIAL RED FLAGS

• Unattributable Cash withdrawals

• Third Party Payments

• Offshore accounts

• Split Payments

• Payment and Transfers direct to Overseas

Bank accounts

FINANCIAL RED FLAGSFINANCIAL RED FLAGS

• Money Laundering Reporting Officers

embedded in financial institutions

• Suspicious activity reports

• Financial Investigators to exploit the

intelligence

• Enforcement action under the Proceeds of

Crime Act 2002

REPORTING FROM THE FINANCIAL SECTORREPORTING FROM THE FINANCIAL SECTOR

• Set up a limited company.

• Obtain a business address.

• Obtain a VAT number.

• Set up a bank account.

• Intense period of trading

• Disappear before VAT payment due

‘JOINING THE VAT FRAUD CLUB’‘JOINING THE VAT FRAUD CLUB’

CASE STUDY

OPERATION IRONWOOD

£2.6m VAT repayment Fraud

INTRODUCTION

• Two main companies involved are Cherrymist Ltd and Moorford Ltd.

• The Directors of these Companies were recorded as John Morris, Alexander Williams and John McLaren.

• Both Companies declared their business activity as ‘the supply of badges & buckles to medical & military establishments overseas.’

• Between 2002 and 2005 Cherrymist & Moorford requested £1.5m in VAT repayments.

• Suspicions arose about Cherrymist &

Moorford in 2005 when VAT Officers were

unable to locate the company officials

• By late 2005 repayment inhibits were in

place on Cherrymist & Moorford and the

directors had vanished.

• The absent directors and the increasing

VAT repayments resulted in the case being

referred to Criminal Investigation.

CASE ADOPTION

• Enquiries to locate Morris, Williams & McLaren proved fruitless.

• Court orders identified one intriguing transaction - to the Ensign Bus Co.

• Enquiries showed that Morris had bought a London Routemaster Bus to be collected by a man called Roderick Roy.

THE FIRST LEAD

• Roy was arrested in July 2006 and a Search of Premises was executed. In interview he said:

• That he had never heard of Cherrymist or Moorford

• Never known Morris, Williams or McLaren

• Did not recognise photos of Morris & Williams

• That no paperwork or documents related to these Companies would be found at his premises

• That the Bus was a gift from a man called Peter Collins

ARREST OF REDERICK ROY

EVIDENCE FOUND IN SEARCH OF PREMISES

EVIDENCE FOUND IN SEARCH OF PREMISES

• Photocopy of Nigerian passport supplied as ID by John Morris to open a Bank Account for Cherrymist Ltd

• Six identical colour passport size photographs found at Roy's premises.

EVIDENCE

• Photocopy of Nigerian

passport supplied as

ID by John Morris to

open a Bank Account

for Moorford Ltd.

• Nigerian passport in

the name of Roderick

Roy, found at Roy’s

Premises

EVIDENCE

• UK Passport for

Roderick Roy

• Photograph of

Roderick Roy taken

at the time of arrest

EVIDENCE

FACIAL MAPPING

FACIAL MAPPING

FACIAL MAPPING

• Fingerprinting and Handwriting analysis

• Strong fingerprint evidence links Roy to the fraudulent companies

• Handwriting analysis links Roy to the fraudulent companies and to a number of different identities.

FORENSIC SCIENCE

• Computer examination showed invoice templates for a VAT deregistered company

• Noble Computer Solutions received £1.5m between 1999 to 2002

• Repayments were sent to Nigeria

• Deregistered when the director was reported dead.

DIGITAL FORENSICS

• Forensic examination of mobile

telephones and SIM cards by FTS

• Analysis of PCs by Digital

Forensic Group

• Liaising with Police regarding

pedophilic material found on PCs.

Roy’s son convicted.

• HMRC Financial Officer placed a

Restraint order on Mr & Mrs Roy

• Foreign & Commonwealth Office

& US Immigration & Customs

Enforcement in an effort to track

down ‘Williams’ in Nigeria & USA

OTHER COLLABORATIONS

• Roy charged with 5

offences.

• Pleaded guilty in

November 2007.

• Sentenced to 3.5 years

imprisonment in 2008.

• Asset tracing &

confiscation ongoing.

OUTCOME