VAT carousel: fiction or truth for financial institutions ?

For several years there have been occasional stories of VAT carousels that are exposed after the facts and where banks then do a look back in the transactions on their systems to determine whether something could have been noticed in the past.

The aim of a VAT Carousel is to recover the remittance and refund of VAT on goods supplied within a chain of companies from the VAT authorities of the country concerned. The companies involved will ask for the VAT to be refunded, but not for the VAT to be declared on the goods sold.

The VAT returns of the Member States in which the trader requests the refund will be refunded fairly quickly and before the fraud is discovered the company concerned will have already been emptied and will have disappeared, or the company will have been declared bankrupt.
In the example below the companies are connected and owned by the same criminal organization. In time this will be noticed by the affected VAT administration in the countries concerned.

VAT Caroussel fraud

Can financial institutions detect this type of fraud and help proactively to counter these operations? What could be incorporated is subsequent refunds of the VAT on the customer's account (there is one bank account number known to the administration used by the company, and the account number of the VAT administration is also known in the systems) and to treat this as a suspicious transaction. However, this can be normal practice for companies with heavy investments (renewing their car fleet, setting up their offices, purchasing raw materials in a production cycle, etc. in successive periods).

That is why KYC is very important as an additional measure and why a good relationship manager will know what his customer is doing at that moment. The customer who is very obscure in his statements about his activities should then already have come out of our analyses as a higher risk. (sale of 2nd hand cars, mobile phone and other electronics,...)

We can go back a few years in the history of transaction monitoring to see if we can refine our detection scenarios and make an adjustment. The analysis of these types of trigger events is of paramount importance in order to make our systems more efficient.
VAT Fraud schemes - how to fight against it?

In the above example, we talked about fraud in associated fraudulent companies, but this can also be set up with customers who are unaware of it. But a VAT audit or a raid by the judicial police will damage the reputation of honest companies. That is why businesses should also do the necessary checks if they "deliver" or "purchase" with other businesses.

A simple check in the VAT Information Exchange System (VIES) validation of the VAT number will give us a first indication whether the other party is liable for VAT and has not been removed.

EU VAT Information Exchange System (VIES)

Europe is taking initiatives to combat the phenomenon by developing a definitive system in which a single VAT area will be more robust in tackling this type of fraud.

How can we help you ?

If your financial institution has a business model that executes transactions with other companies, this knowledge can contribute to countering certain risks and to implementing or revising specific monitoring scenarios. But also as a company you have every interest in ensuring that your procedures and policies contain these elements.
Piet De Vreese - Pideeco Network Partner
Piet De Vreese Managing Director
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