Accidental Criminals: Carousel Catch-All

At the end of last year, a high profile swoop by 400 Customs officers and 100 police saw 22 people arrested for carousel fraud. But as the authorities gear up for more major crackdowns this year, innocent traders will continue to get sucked into the VAT scam, says Stephen Fox

2007 will be another bumper year for innocent mobile phone dealers becoming embroiled in one of the biggest financial scams this country has ever seen.

It’s hardly a surprise that so many mobile phone dealers are receiving ‘the knock’ from the police when the Bank of England, the Office for National Statistics and City of London economists both agree that the carousel fraud problem is so severe they can no longer accurately calculate Britain’s trade figures.

Carousel fraud involves a company disappearing without handing over VAT it has collected whilst a company under the same control re-exports the goods and reclaims VAT from HM Revenue and Customs, even though the original tax wasn’t paid.

Goods are then often re- imported into the UK for another round of fraud.

Chain links
Carousel fraud exploits the principle that, within the European Union, exporters are able to claim VAT refunds from the government while importers are obliged to collect VAT from their customers and pay it to the government.

Using a complex pan-European supply chain, carousel criminals steal money every time they import and export the goods.

Already this year I have come across anxious mobile phone dealers who are seeking legal advice on how to avoid jail so they can protect themselves and hope the net will catch someone else further along the chain.

The trouble is – it’s difficult for the authorities to identify exactly who is behind the scam, and many people caught up in the chain will be able to legitimately defend their actions because of a series of ambiguities in this shadowy scam.

In my experience, many of the people embroiled in this type of scam are innocent. They are confused about the position in which they find themselves and are worried about getting an early-morning visit.

Electronic gadget traders routinely complain that the anti-fraud stance taken by HMRC is killing their business.

Some, those who have money tied up through no fault of their own, suffer because of the broad-brush approach adopted by the Revenue when dealing with the mobile phone and computer chip trade.

"Plenty of people who own mobile dealerships have been hoodwinked into helping criminals who have exploited them …"

Legitimate traders of mobile phones may find themselves without a VAT rebate if a supplier down the chain is involved in this particular type of fraud. It comes across as an unfair system where innocent traders could be penalised for the actions of criminals and the failure of Customs to identify the fraudsters.

Some of the people directly involved are young men who start off with the intention of making a bit of easy money but get swept along by other, more organised criminals driving the carousel with ruthless efficiency from Dubai, Ireland and other foreign jurisdictions as well as the UK for a share of the profits.

Plenty of people are those who own mobile phone dealerships and have been hoodwinked into helping criminals who have exploited them.

Innocent parties also become involved in the fraud by simply buying and selling on goods.
If it is the first party in the chain who is the absconding fraudster, the goods can continue to be sold-on by innocent parties.

In the UK, the position until 2006 was that HM Customs and Excise withheld VAT repayments to others later on in the chain, on the basis that the transactions were lacking in economic substance and so should be outside the scope of the VAT regime.

The VAT carousel fraud crackdown is a large-scale international criminal investigation into a crime costing the taxpayer hundreds of millions of pounds. It has affected the credibility of the mobile phone industry as well as that of the authorities who have been widely criticised over their attempts to ensnare the culprits.

The authorities are hot on the heels of the people involved and there is a certain amount of canny self-preservation going on, the theory being that those who take experienced legal advice now will reap the benefit later. This will increase as the investigation widens.

The figures indicate that people, many in the mobile phone industry, have creamed off between £1.7 and £2.75m.

Mobile dealers who have been connected in any way shape or form to this massive scam must prepare a defence otherwise someone will be only too happy to pass on the blame.

Getting caught out could prove fatal.

Stephen Fox is Head of Commercial Crime at law firm Betesh Fox. He is an expert in serious fraud defence.

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