MTIC Fraud

MTIC Fraud – an unwelcome and costly business activity.

Missing Trader Intra-Community fraud or VAT fraud more generally has been evident in channels since the early nineties and remains a real headache for both HMRC and indeed businesses that may unwittingly find themselves involved in it. This is primarily because the traditional routes to market prior to 1990 were more rigid in construction and less prone to such activity. Manufacturers would supply Distributors and they in turn would supply Resellers who sold product onto end users.

This path to market however became convoluted and far more complex with the addition of brokers, wholesalers, OEM’s and sub distributors resulting in current  blurring lines of purchase and supply across all major players. In the Reseller space a lack of warehousing availability means the convenience having product shipped directly by a supplier to the customer remains a common theme.

Today, Vendors supply more than just Distributors and they in turn, as do others further in the chain, buy and sell from and to, differing channel partners.

The amounts the UK treasury and indeed those of other nations lose each year are vast. Europol estimates it costs revenue authorities as much as 60bn annually.

The most common fraud is MTIC fraud, a frequently sophisticated exercise that exploits varying VAT rules across EU states. Organised criminals create a complex structure of ‘linked’ companies in several countries, sometimes extending into the Middle East. The aim is to take advantage of national and international VAT revenue accounting processes and laxity of control in routes to market and trading or shipping methods. It’s an extremely lucrative way for organised crime to launder dirty money and make money doing so. At some point in that chain, a reputable and unsuspecting partner is introduced and they are generally the ones to face the pain once those before and after the chain collapse or disappear.

It works by using the legislation that allows cross border trade to be VAT free, with VAT only applying to domestic sales. The creation of companies across countries by those engaged in VAT fraud allows for the movement of goods cross border, the charging of VAT domestically followed by a default when those inter-connected traders go missing or fold before paying the VAT levied and received by them domestically.

Carousel fraud is a little more complex but follows similar lines in that product is imported VAT free, sold on domestically once or several times and exported again, ending up with the originator. Again, the default and gain arises when one or more of those domestic traders across countries go missing. In such cases, it’s been known there is sometimes no physical movement of product, simply a paper trail or the same product  moved round in circles multiple times (hence the carousel).

Links between companies working this fraud are often disguised but the one sure fire give-away is that many do not trade for long, folding or disappearing in less than a year. They are invariably newly incorporated, have seen recent changes in ownership and lack solid financials. To mask this, they often use a ‘patsy’, a legitimate domestic business through which the supply chain can be disguised.  The lure of a great deal at no risk, substantial revenue opportunity and favourable margin often cloud the decision, as does a general lack of awareness of MTIC Fraud within buying and selling departments, senior management and business owners. 

Unwittingly being drawn into the fraud chain is a real risk, more so If the deal comes from suggested ‘reputable ‘ sources, people that previously worked for major well- known companies, new sales or buying people employed or indeed if the introducer to the contact is someone it’s felt can be trusted.

HMRC, to be fair does try; it visits newly formed companies, especially those that import and export and provides information on MTIC and hands such forms as VAT Notice 726 on Joint and Several Liability for unpaid VAT. It also undertakes regular checks of company VAT reports but none of these steps are enough to really drive home the message. It needs to ensure businesses have more detailed knowledge of MTIC Fraud and should be far more pro-active in shutting down or de-registering VAT fraudsters much earlier than currently. It’s often the case that by the time they move on known or suspected fraudsters, those unwittingly drawn in may have already taken a hit and perpetrators may well have drawn others in.

Distribution certainly is aware of MTIC fraud and many engage correctly with specialist MTIC teams employed to shield the business. Resellers on the other hand were never adequately prepared for the resultant shift of this type of fraud further down the channel, much more so given the move away from traditional warehousing and stock holding to direct shipments and the inclusion of logistic supply chain depots.

Sales people and business owners are keen to sell and new buyers brought into the business or new contacts made at trade shows are warmly welcomed when they bring with them ready made or seemingly risk free deals, more new clients and greater business volume. Checks, if any are applied are standard and left to their Accounting and Credit Risk functions.

There is an attitude that if goods are sourced from a reputable supplier, the onward sale to overseas buyers with payment up front is a sound transaction. It may be nothing of the kind if the buyer is a shell company which until six months ago had a Standard Industry Classification (SIC) of watch making and jewellery but suddenly trades in electronics and telecommunications and is run by an 84 year old National of another country.

Checking and validating your supplier/client demands much more than just a business report, credit rating, VAT registration confirmation or Chamber of Commerce documentation or website verifications. They are important of course but it’s really how you combine all this and other information and interrogate or question it that makes the difference. This is equally important in any domestic sale.

Bluntly, if a relatively new business or one that has weak financials is seemingly willing and capable of pre-paying you considerable sums of money, you have to ask yourself the question - why and how?

HMRC has useful tools and guides to follow in order to avoid involvement in VAT fraud which for some years has come with Joint and Several Liability but not in a ‘language’ business owners or accountants fully understand. Leaflets and guides are fine but sadly they’re read and filed for future reference. There needs to be HMRC dialogue and training and ongoing refresher meetings instead of headline warning triggers to watch out for. Business owners after all do not always have a handle on every deal and transaction and sales people are paid to sell. Buyers are not trained to validate or be watchful of new supply chains.

What to watch out for….

Ø  Supplier and customer are the result of ‘introductions’ new sales people employed or a new buyer within existing supplier

Ø  Supplier provides the customer and assures risk free trade with pre-payment

Ø  Supplier suggests you take the deal and export as they cannot fund the VAT timing differential

Ø  Supply chain guarantees fixed gross margin percentage on deals

Ø  Supplier will not reveal source of supply

Ø  Supplier or their supplier if revealed will generally be newly incorporated, lacking financials or may have experienced a change in ownership

Ø  Supplier insists in invoicing you in Euro domestically when goods are for export

Ø  Supplier suggest you use their logistics company for onward shipment

Ø  Supplier refuses to allow you to inspect, touch or feel the product

Ø  Shipment to customer via logistics is not to the same country as that of the customer

Ø  Customer information is sketchy, weak and often masked with foreign ownership

Ø  Given information gathered on customer, there is no way you can justify their ability to pre-pay large sums

Ø  Supply chain and customer websites are basic and lacking in real information

Ø  Check that incoming prepayment matches the bank details of the customer

Ø  Supplier offers you gross margins higher than those they achieve

Ø  Goods of non UK specification are offered for supply in the UK

Ø  There appears to be no recourse if goods are not as described (given prepayment)

Ø  Supplier asks you buy and sell product you are not normally known to engage in

Ø  Supplier asks you to pay third parties or off-shore bank accounts

Ø  Supplier refers you to customer that is willing to buy products in the same quantity and specification

Ø  Formal contractual arrangements are often lacking

Ø  Supplier/Customer is newly incorporated (usually in last two years), lacks financials and may fail to file or publish them. Common theme is to cease trade before year end, moving activity to another prepared company.

Ø  Recent change in ownership of supply chain and/or customer

Ø  Customer is seen to have massive, sudden and unexpected increase in sales growth, often in exports

In all cases of HMRC withheld VAT, they will consider what precautions and actions you have taken to mitigate or steer clear of such trade. Their guidelines are just that and are certainly not exhaustive. They will check what due diligence you applied to trade and what actions if any you took to cease activity once you knew deals were dubious or questionable.

No business is immune from accidental involvement as known channel names have often cropped up in HMRC case lists. The cost to a business of withheld VAT can be substantial and often ends in business insolvency.

It’s vital Resellers and others in the channel not only prepare themselves well but demonstrate real intent in tackling this problem head-on. It is not that hard to achieve with the right understanding, correct process and order to cash workflow guidelines. Industry bodies could and should do far more to educate and inform the channel of the risk.

The fraud is sophisticated, extremely knowledgeable of channel routes and business practice; it can easily coerce unsuspecting and unprepared Resellers.