VAT fraud – bait for organized crime groups to funnel money


In 1993 the Maastricht Treaty (the Treaty on European Union or TEU) came into force. One of its main goal was to create a single market where goods, people, services and capital move within the union as freely as they do within a single country. Undeniably, the opening of borders has brought lots of benefits (the ability to study, live, work and retire in any member state; unrestricted flow of capital, products within the European Union etc.), yet the „frontier-free” market is also a bait for organized crime groups that want to take advantage of custom duties’ and other tariffs’ abolition. One of the most common and profitable crime is the value added tax fraud (VAT fraud) where mobsters make use of intra-community laws in order not to pay the tax on products shipped to another European Union’s Member State. According to Europol’s estimate, every year EU Member States lose 40-60 milliard euros in non-paid Value Added Tax.

Thanks to European Union’s regulations when a company A export its goods to a company B that is established in the territory of another Member State, the company A is exempted from paying the VAT in its country – the burden of paying the tax shifts onto the company B, which is obliged to declare the goods and pay the tax in its country (the country of product’s destination). Yet it can happen that company B will not declare the reception of foreign goods and will sell them as soon as possible to another company (for example a company C within the territory of the same country). Usually, the sale happens in a blink of an eye. Even though the company B needs to add the VAT on the invoice, the base price of the product will be much more attractive than the price of company’s B concurrence on that market, just because the company B is not planning on paying the VAT on that goods to the government – that gives company B more leeway in lowering the price. Company C (no matter if it takes part in this collusion or is an unaware party to the story) will,  later on, apply for a VAT refund to the government. In the meantime, the company B will disappear from the market (for example by declaring bankruptcy) without paying the VAT on the import of the goods from another Member State and what is more, will not transfer the VAT it has received on sales of the product to the company C. Above mentioned operations can be performed by many „actors” (not only 3 companies). It is possible, that by the end of the process the products in question will come back to the company A. That means that they will travel „in a loop” – that is why these kind of crimes are called „carousel crimes” (fake sell-buy transactions). It may happen that the goods in questions would never leave the country of the origin and all of transactions are staged – they exist just in writing.

The domains most prone to the VAT fraud are high-value goods such as mobile phones, jewellery, electronics, MP3 players, computer chips and so on. Yet not only tangible products are mobster’s target. As an example: tax crimes involving a German powerful actor – Deutsche Bank that traded CO₂ emission certificates in 2009 and 2010. Due to this criminal undertaking a sum of 145 million euros was defrauded and not paid in VAT to the government. In June 2016 the Deutsche Bank employees’ trial came to an end. One of them was sentenced to 3 years in prison and other six escaped jail-time with suspended jail terms or conditional fines up to 200 000 euros. Another example: in 2015, under large-scale investigation on an organised VAT fraud named Operation VERTIGO, it was found that around 150 million euros were defrauded by various activities in certain Member States (namely: Czech Republic, Germany, the Netherlands and Poland). Also territories of different European Union’s Member States were involved in this massive carousel fraud case (Spain, the UK, Belgium, Cyprus, Denmark, Ireland, Luxembourg, Gibraltar, Ukraine).

The debate on tax fraud has already been launched in 2006. 10 years later, main goals remain the same – in order to fight VAT fraud the European Union aims at strengthening the cross-checks between customs and tax data, to reinforce the cooperation of administrative, judicial and law enforcement authorities and to apply more attention to the accuracy, completeness and timeliness of data. One of the ideas to mitigate yearly tax loses is to introduce „reverse charge rule”. It means that the payment of the VAT to tax authorities is shifted from the supplier to the customer (only when identified as a taxable person). This solution helps to tackle the problem of a „missing trader” – a company that collects VAT from its customer but then disappears without remitting it to the national tax authorities. „The reverse charge rule” on an European level is only a temporary measure that can be used until December 2018. What is more, it can be used only in particular sectors that are prone to carousel frauds (for example construction, trading of greenhouse gases’ certificates, telecommunication services, mobile phone trade etc.). Yet this solution also invokes heated debates.