Forensic Accounting In MTIC Frauds

Not so long ago, it seemed that as a forensic accountant focusing on financial crime, Missing Trader Intra Community (MTIC) frauds accounted for every other case that I dealt with. Massive amounts of VAT were being lost to the public coffers leading to urgent action being taken by HMRC. The missing traders, the importers into the UK, were the expendable companies going bust owing huge sums to the Revenue, whilst associate partners in crime along the trading chain continued to make VAT reclaims on goods that sometimes only existed on paper!

The MTIC frauds gained notoriety in the early years of this century, importing and circulating small expensive items where large values could be packed on a pallet or in a cardboard box. Thus several modest “outers” could contain £ hundreds of thousands and take up very little space in a bonded warehouse. This was important because the fraud relied on few real costs being incurred, where consignments were passed along several buffer companies, each making a relatively small profit, before the goods were eventually re-exported and the final tranche of output VAT recovered by the exporter from HMRC.

This complex trading chain often became a “carousel”, whereby the exported goods were re-imported and the process began again.  I recall investigating a number of companies based all around the UK representing several different dealing chains on behalf of the Department for Business (Companies Investigation Branch) throughout the years leading up to the extended measures being implemented in 2006 by HMRC – and also in the years following when the determined fraudsters continued to find ways of exploiting the VAT system.

The nature of the frauds steadily changed over the years, with computer chips and mobile phones being replaced by all manner of goods, and I recall tracing diverse sales, such as Arabic/English dictionaries and imports of fabric from India that were consigned through Europe. In fact, anything that attracts VAT can become the focus of the fraudster. This includes Carbon Credits, the trade-able certificates permitting the industrial issue of one tonne of carbon dioxide, that became a favourite medium in light of their high value and lack of any physical substance.

Buying and selling at too small a profit can be an offence!

The question of turning a blind eye to MTIC trading has been considered in detail by the Courts over the years. In particular it was quickly decided that the buffer companies in the trading chains were just as guilty as the defaulting importer or the final exporter of the goods. The Nelsonian defence of “I see no ships” (i.e. when Lord Nelson looked through his blind eye) was not acceptable and the seemingly innocent intermediaries should have known a fraud was going on.

However, I was instructed in an MTIC fraud earlier this year where a bookeeper of a company taking part in organised VAT and duty fraud, involving extensive missing trader activity, was being indicted along with the principal perpetrators.

The company involved demonstrated many of the hallmarks associated with a wider and organised MTIC fraud:

  • Sequences of back-to-back deals.
  • Batches of goods not insured or do not move during a deal.
  • Patterns of deals can be traced back to missing traders.
  • Buffer companies making negligible margins.

In this case it was necessary to explain the nature of MTIC frauds to the Court and highlight the level of involvement that a mere bookkeeper would have. It was clear that this involvement would exclude any management of the fraud but could well include a knowledge that “something” was not quire right.

In these circumstances it has been necessary for the Crown to cast a wide net when prosecuting MTIC fraudsters. The fraud can only function if a large number of participants trade with each other, seemingly buying and selling at small profits legitimately. However, the reason for the sequences of trades is to facilitate the fraud, and goods imported should need only one or two at the most “middlemen” and certainly do not need to be re-exported again. The whole trading chain of deals needs to be funded by something – and this is the money owed to HMRC when the importer goes bust (i.e. the missing trader).

In around 2008 I was instructed by a large mobile phone trader who appeared on the surface to have a legitimate business. The company owned large purpose built premises and sold mobile phones by mail order, and to shops around the UK. However, the number of phones that it bought and sold (many on to other independent phone traders) was akin to the total number being imported into the UK. When you consider the proportion that would be separately dealt with by the main players (BT, Orange, Phones 4U etc) you could see that the business was in fact a sham.

Anybody could become an MTIC fraudster

I found from that case that, if I had wanted, I could sign up to a particular web site, place an order for phones and then use the site to find a buyer. My risk? I would have to deposit £100,000 into an account at the Bank of Curacao and expect to simultaneously receive £101,000 from another source through this bank. Theoretically I had bought and sold a consignment of mobile phones, and would have received emails or faxes of the various documentation, making £1,000 profit.

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