Missing trader fraud
Missing trader fraud involves the non-payment of Value Added Tax to a government by fraudsters who exploit VAT rules, most commonly the European Union VAT rules which provide that the movement of goods between member states is VAT-free. There are different variations of the fraud, but they generally involve a trader charging VAT on the sale of goods and absconding with the VAT instead of paying it to the taxation authority. The term "missing trader" is used because the fraudster has gone missing with the VAT.
A common form of missing trader fraud is carousel fraud. In carousel fraud, VAT and goods are passed around between companies and jurisdictions, similar to how a carousel revolves.
VAT rules
The usual operation of VAT is as follows: a business that buys and sells goods charges VAT to those to whom it sells, and is charged VAT by those from whom it purchases. It can reclaim the VAT it pays, and so passes to the government the net VAT it collects. In this way, a business acts as a tax collector on behalf of the government.Within the European Union, member states charge VAT at differing rates on goods as a form of indirect taxation. All exports of goods within the EU however are tax free. In other words, a business does not charge VAT on the sale of goods sold to buyers in another member state. This leads to the situation where an exporter will be able to reclaim VAT from their government, as it will have been charged VAT by the business from which it purchased the goods, and will owe the government nothing because it has sold the goods tax-free to a buyer in another member state.
Although missing trader fraud is most common in the EU as a result, it is also seen in other jurisdictions that have a value-added tax, such as Singapore.
Operation of the fraud
The fraud exploits the VAT rules allowing the reclaiming of input VAT from the government at different stages in transaction chains.Acquisition fraud
The simplest missing trader fraud is where a trader imports some goods that are zero-rated in the country of origin; VAT on the goods should be paid in the country into which they have been imported. After importing, Company A sells the goods to another trader, charging the price of the goods plus VAT, but does not pay the VAT collected to the government; Company A becomes a "missing trader". The buyer, Company B, who has paid the VAT to Company A, can then reclaim the VAT paid from the tax authorities on its VAT return. Company B then sells the goods to Company C, which reclaims the VAT charged to it by Company B and declares the VAT it charges to its customer, Company D. Company D then sells the goods to the general public, reclaiming the VAT charged to it by Company C and declaring the VAT it charges.In this situation, the fraudsters have obtained the value of the VAT charged by Company A to Company B. This situation, where the goods are made available for consumers in the importer's home market, is often known as "acquisition fraud".
The trader defaulting on its VAT liability is described as a "missing trader" or "defaulting trader", whereas the other traders in the transaction chain are "buffer traders". The role of the buffer traders is to distance the missing trader from the end consumer and make it harder for the taxation authorities to detect the fraud.
Carousel fraud
Carousel fraud is like acquisition fraud, except that the goods or services do not end up with an end consumer. Instead they are sold from one trader to another. Using the example in the previous section, say Company D sells the goods to Company E located in another member state of the European Union. Company D reclaims the VAT charged to it by Company C, but because the sale is zero rated it declares no output tax.In this scenario, Company D is known as the "broker". The broker is able to claim back from the government all the VAT that would normally have been paid on the goods, as exports are zero-rated. However, because there is a "missing trader" further back in the chain of sales, part of the VAT whose refund is claimed was never actually paid.
The goods will now carousel through other traders in member states. The above process begins again, sometimes with different companies and sometimes with one or more of the companies being the same. The process can repeat many times, with the goods going round as if in a carousel.
Contra-trading
Contra-trading fraud is the further evolution of carousel fraud. The fraudsters evade government detection by using two carousels of traded goods where one carousel is legitimate and the other is not. The contra-trader's output tax from one chain is designed to off-set the input tax incurred on the other chain.The two types of transaction chains are:
- "tax loss chains", where the contra-trader based in Country A incurs input tax on its purchases in Country A and makes zero-rated supplies of those goods to customers in other member states or exports to customers outside the EU; and
- "contra chains", where the contra-trader typically acquires goods from another member state and sells them on to traders in Country A, acting as an acquirer and generating an output tax liability from the onward sale.
Role of other parties
In addition banks are used to make third-party payments. These obscure banks are called "platforms" and work on the escrow principle. This means money is uploaded and transferred immediately through the client accounts; it takes a day for the money to come out of the platform. The biggest platform was offshore First Curaçao International Bank, which was closed by the Netherlands authorities in 2006. Using offshore platforms means that authorities cannot trace the money until they inspect books, and as the missing trader has already fled they cannot trace where the money was routed.Hypothetical example
Trader A is based in Slovenia, a member state of the European Union. He buys a consignment of mobile telephones from a seller in France, another member state of the EU. Trader A pays the French seller €1,000,000 for the goods.The goods are shipped to Slovenia. No VAT is charged by the French seller on that shipment because of the EU VAT rules described above. Trader A now sells those telephones to Trader B also in Slovenia, for €1,100,000 plus 20% VAT. Trader B pays €1,320,000 to Trader A. Trader B then sells the goods to Trader C, still in Slovenia, for €1,200,000 plus 20% VAT. Trader C pays €1,440,000 to Trader B.
The French seller may well be honest, but Traders A, B, and C are conspirators in the fraud. This may continue for many conspirators to better conceal the initial transaction; however, three will suffice for an example.
Trader C now sells the telephones to a German company, which may well be honest. No VAT is charged on intra-community trades, so the German company pays €1,500,000 free of VAT. So far the three conspirators have made altogether a legitimate profit of €500,000 on buying the mobile telephones for €1,000,000 and selling them for €1,500,000.
In an honest operation, Trader A should hand over the €220,000 it collected from Trader B to Slovenia's VAT collection agency. But Trader A does not report the collection or make the payment. Trader B paid €220,000 in VAT to Trader A but collected €240,000 in VAT from Trader C, so they hand over only the difference, €20,000, to Slovenia's VAT collection agency. Trader C paid €240,000 in VAT to Trader B and charged no tax on its sale abroad, so they reclaim €240,000 from Slovenia's VAT collection agency.
Trader A vanishes without handing over the €220,000 in VAT. When the last business in the chain collects the reclaimed VAT, all the conspirators can vanish with the €220,000. As the VAT reclaimed is not directly connected with Trader A, it is difficult for Slovenia's VAT collection agency to follow the links in the chain and justify refusing to refund the VAT on the intra-community sale.
In this scenario, Trader A is the "missing trader", Trader B is the "buffer" and Trader C is the "broker". In a real case there can be many buffers, all helping to blur the link between the final reclaim and the original importer, which will vanish. This entire series of transactions can occur without the goods ever leaving France before being re-exported. Furthermore, the same goods can go through the various buffers again and again, each pass around the 'carousel' bringing reclaimed VAT to the fraudsters.