By converging standards and regulations, and removing most - if not all - barriers to international export, the EU facilitates trade, improving the standards of living for millions across the continent. However, criminal actors are also using these same structures to engage in illicit activity.
To many across the continent, the European Union is the embodiment of peace and prosperity. It isn’t hard to figure out why either. Having existed in one form or another since the late 1950s, the EU has helped to prevent hostilities among its members throughout its entire history. Economic analysis also suggests that the GDP per capita of its member states would be approximately one-fifth lower today had the EU not been established.
The EU’s economic power is driven in large part by the integration of its members. By converging standards and regulations, and removing most - if not all - barriers to international export, the EU facilitates trade, improving the standards of living for millions across the continent. However, criminal actors are also using these same structures to engage in illicit activity.
The nature of ‘VAT Carousel’ fraud
The EU suffers from issues with fraudulent activity, with hundreds of millions of euros being swindled from the EU budget every year. Missing Trader Intra-Community fraud – known in some circles as “VAT carousel” fraud – is one of the most damaging forms, with Europol estimating that it costs the authorities around €60 billion annually in lost revenue.
Although there is no singular victim of the crime, there is no arguing about the damage it causes to society. Not only will lost tax revenue reduce the provision of important public services like policing, healthcare and education, it also increases the tax obligation of honest taxpayers.
A VAT carousel is a highly sophisticated fraud which is difficult to detect in a timely manner. In its simplest form, a VAT carousel takes advantage of EU rules on cross-border transactions. If a trader acquires goods or services from a company that is based in another part of the EU, they are not required to pay VAT as intra-community transactions are VAT exempt.
Criminal actors looking to establish a ‘carousel’ will begin by establishing or buying companies to acquire goods (known as Company A for clarity). Those companies will buy goods from a company within the EU (henceforth known as Company B). UK-based Company A will buy the goods from Company B, on which no VAT is due. Company A will then sell these goods onto another company – which could be a completely legitimate company or controlled by the fraudsters ( Company C) – this time including VAT in the sale price. Since the goods have been sold on domestically, Company A should declare the VAT that it has included on the goods, paying this onto the UK’s tax authority, HMRC. However, in cases of VAT carousel fraud, Company A then disappears, leaving the VAT unpaid. The goods will then pass through a number of companies – with this being done to act as a buffer, making the investigation more complex – before another company (which we will refer to as Company D) delivers these goods back to the EU and outside of the country. Company D can then reclaim the VAT that was never paid to the tax authorities. The company will then use the same goods and tactics repeatedly, earning the ‘carousel’ name.
The fight against organized VAT Fraud
VAT carousel crime is difficult to combat in a timely manner. With billions of euros in goods being traded daily, it can be incredibly difficult to determine which activity is criminal and which is legitimate. This is a problem which is heightened by the need to coordinate transactions from different member states across international borders. The information that will be needed to investigate and prosecute the offenders will likely be stored in differing, incompatible forms held by any number of different governmental or regulatory bodies, all located in different countries across the continent. Furthermore, with many of the ‘carousels’ already having been established and dissolved by the time the authorities have caught wind of them, those fighting it are often left to chase the stolen money, rather than acting preemptively.
There are a number of efforts being undertaken at both member state and pan-European level to improve how these crimes are combatted, but there is always room for improvement. We must greater leverage technology to allow tax departments to be proactive in their actions.
Firstly, we should accelerate ongoing efforts that aim to share and analyse information at a European level. Data analytics technology can then be used to expand on the wider context behind a company. For example, it would be suspicious for a company with an annual turnover of €100,000 to make an order for goods worth €1 million. Given that VAT data would be accessed by machines, Artificial Intelligence could then be used to create risk models that would help with the identification of anomalies. This information, which formerly would have taken hundreds of hours to compile, could be handed to a case handler, vastly improving the efficiency of the investigations and helping to better combat the VAT carousels.
Secondly, individual member states need to increase their analysis and operational capabilities. Reaction times need to be increased dramatically so that the action can be taken immediately after receiving a new piece of information. The reality is that most member states don’t have the technical means to combine national information with external information. Some member states also need to increase the information they collect from traders (eg reviewing VAT receipts in a machine-readable format).
The road ahead
VAT carousel fraud has thus far allowed criminal organisations to enrich themselves at the expense of EU taxpayers. Exploiting the same structures which have allowed the EU to become prosperous, ‘carousel’ style rings have been extremely difficult to filter out from legitimate trade that takes place in the EU. To truly combat it, we need to see a multi-faceted approach being enacted across the entirety of the bloc. We must improve the level of information collected about trade and company accounts. We should also look to utilise new technologies to generate useful insight from the vast amounts of data collected at a high cost. Only through this thorough approach will we be able to see the bigger picture required to combat fraud. The cruel reality of this shared European issue is that the member states with the weakest defences will be the ones left with the bulk of the bill.
- Jérôme Bryssinck is Head of Government Solutions at data analysts, Quantexa.
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