Missing Trader and AML
Practicing accountants are probably very well aware of the fraud known as MTIC (or Missing Trader Intra Community), but it’s good to be reminded of the scenario that can present itself when suspicions of MTIC fraud ought to be aroused.
The CCAB (Consultative Committee of Accountancy Bodies) has recently published some Case Studies on money laundering to make practitioners more alert to some of the tell-tale signs.
Today we are going to look at one of these cases where a firm becomes inadvertently involved in the MTIC fraud (slightly adapted for an audience in Ireland).
Smith & Jones provides compliance services for Acme Limited, a local business which trades in small personal electronics.
As part of their work, Smith & Jones prepares the VAT returns for Acme Ltd. Whilst inputting the VAT return figures, the partner notices that there were high levels of sales to Adder Ltd., a new customer for Acme Ltd.
When sending back the VAT return for approval and submission by the managing director of Acme Ltd., the partner asked about Adder Ltd. and was told it was a great new customer introduced to the company by another customer. The partner thought nothing more about it.
On preparation of the next VAT return, the sales to Adder Ltd. had increased. The partner thought it a bit odd that all the goods shipped to Adder Ltd. came through a different supplier and were sent using a different delivery company to that used by Acme for its other customers but was reassured by the client explanation that the delivery company was a group company of Adder Ltd. and that they preferred to use it.
This continued for the next VAT period. Acme Ltd. then had a VAT visit which the partner attended. At that meeting, the VAT compliance officer made some non-specific but pointed comments about Adder Ltd., asking what Acme knew about the company. This struck the partner as odd, but he was reassured by the client who said Adder Ltd. had been subject of a VAT enquiry and had had to pay a VAT penalty because they made an error when their tax adviser was ill, but it was all “sorted”.
In the follow up letter, the VAT officer made some general comment about being careful in dealings with Adder Ltd. He mentioned concerns about “missing VAT”. The VAT officer also attached a leaflet on missing trader intra-community (MTIC) fraud (also referred to as missing trader fraud), which explained how criminals create complex structures of linked companies (known as chains) to abuse VAT rules, whereby a company often at the beginning of the chain and only trading for a short period of time, charges VAT to a customer but does not pay this to the government and then effectively disappears. The partner found the leaflet quite informative.
After two further returns were filed, the Revenue wrote to Acme Ltd. and to Smith & Jones indicating that they were conducting an investigation into its VAT returns as they suspected VAT fraud. Smith and Jones were also asked for copies of all documents and correspondence supporting the VAT returns.
What red flags could Smith & Jones have picked up?
- Although not by itself suspicious, upon being informed that Adder Ltd. had been introduced to Acme Ltd. by another customer, the partner might have enquired as to the identity of the customer as additional background.
- Upon discovering the change of supplier and delivery company, the partner ought to have enquired whether any cost savings had been made. Moreover, the knowledge that the delivery company was a group company of Adder Ltd. should have prompted further enquiries about the arrangement.
- The information that Adder Ltd. had suffered a VAT penalty should have raised further concerns in the partner’s mind, especially as Adder had only recently become a customer of Acme Ltd. and the introduction had come through a third party.
- If the partner was not familiar with MTIC fraud, the mention of “missing VAT” should have alerted the partner that all may not be in order at Adder. Given that Smith & Jones prepared the VAT returns for Acme, the partner would not want either Acme Ltd. nor his own practice to fall under suspicion of involvement in VAT impropriety.
We will look at another case study in the series next week.
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For our latest Audit Quality Control Manual (October 2021) (implementing the latest Irish Audit & Accounting Supervisory Authority standards including ISQC1 on audit quality control) click here. View the Table of Contents here.
We also have an up to date Anti-Money Laundering Procedures Manual (September 2021) – View the Table of Contents click here.