Five years ago, I wrote about the impact of MTIC (Missing Trader Intra Community) Value Added Tax (VAT) fraud on telecoms and published a free guide to help telcos identify and avoid the risks. I’m well aware that MTIC is generally viewed as a pretty dry subject and telcos outside Europe don’t think it applies to them anyway, so I thought it was time for a wake-up call. MTIC fraud indicators have now been seen in GST markets, so I’ve put together a couple of case examples which, hopefully, make the issue, and the risks, more understandable. I’ve also highlighted some of the red flags from these cases to help you identify potential risky trading.
Governments find it very cost-effective to collect Goods & Services Tax (GST) with the result that this kind of consumption tax is now levied in many countries. GST is very similar to VAT, which is found in most European countries, but GST tax rates tend to be lower. For example, VAT is 20% in the European Union whilst GST tends to be around 5-10% in most countries, so the gain from tax fraud is less. However, the lack of awareness means the risks with GST tax fraud are much lower. In other respects VAT and GST are so similar that the Wikipedia entry on VAT refers to GST as just being another name for VAT.
In simple terms, both VAT and GST traders must charge tax on their goods or services and can reclaim any tax they’ve paid on business-related goods or services. Missing trader fraud relies on cross-border supplies being zero-rated for tax purposes so the GST trader can reclaim tax on its airtime purchase, but doesn’t charge tax on its sale of airtime. In its simplest form, the fraudsters establish a fraudulent trading chain and one of the companies in the chain goes missing with the tax. More info is available here.
In 2016, in response to escalating fraud losses, the UK introduced a domestic reverse charge for the wholesale supply of Electronic Communication Services (ECS). This was designed to prevent wholesale supplies of telecommunication services from being exploited for missing trader VAT fraud. The reverse charge applied to business-to-business sales where both businesses are registered or should be registered for VAT and meant that the customer accounted for VAT instead of the supplier. The UK action resulted in increased transit traffic in Spain and Italy; there was no legitimate commercial explanation for this increase. So, if the UK squeezes the MTIC balloon and it bulges out in Spain and Italy, where does it go when Europe starts to squeeze?
As more countries adopt GST, so the opportunities open up for tax fraudsters, increasing the likelihood that tax authorities will have to implement countermeasures, including denying input tax to telcos caught up in fraudulent chains. The acid test for the European tax authorities is known as the Kittel Principle. This test can be broken down into three components:
- Was there fraudulent evasion of tax?
- Was the transaction connected with that fraudulent evasion of tax?
- Did the trader know when he/she entered into the transaction, or should he/she have known that it was connected with fraudulent evasion of tax?
These summaries are drawn from UK Tax Tribunal records and other publicly available sources.
Askaris Information Technology Ltd
In the case of Askaris vs HMRC, appellant Askaris Information Technology Ltd was intending to develop a low-cost roaming solution for migrant oil workers and, in the process of seeking SIM suppliers, discovered that Jersey Telecom wanted call routes to Gambia for Gambian nationals in Jersey. Askaris said it could supply Gambian VoIP minutes, although it could not fund the initial supply, so Jersey Telecom recommended that Askaris use VoIP Capital International (based in Mauritius) to factor the deals. VoIP Capital’s website states that:
VoIP Capital was formed in 2011 with the intention of providing working capital to wholesalers of VoIP, SMS and data. VoIP Capital has designed its services to assist wholesalers in closing the timing gap between the payments which need to be made to vendors for the purchase of wholesale routes and the eventual receipt of payment from their customers.
Askaris didn’t own a switch either, so Jersey Telecom recommended using Error Scope Limited and a managed services agreement was created, where Error Scope rented a switch to Askaris.
The Askaris business process involved buying airtime from Skynet Corporation Ltd to supply it to Jersey Telecom. Askaris signed a wholesale interconnect agreement with Jersey Telecom and subsequently assigned its rights under that agreement to VoIP Capital. Askaris appointed VoIP Capital to act as its payment intermediary and escrow agent, and instructed VoIP Capital to pay invoices from Skynet directly.
Invoices from Skynet to Askaris were factored with VoIP Capital, excluding the amount of VAT. Skynet charged VAT to Askaris, but VAT was not due on Askaris’ supply to Jersey Telecom. In order to pay the VAT, Askaris drew funds from its parent company in UAE, which were paid directly to VoIP Capital. Jersey Telecom made its payments to VoIP Capital, which, in turn, paid the Skynet invoices.
Askaris requested monthly VAT Returns, but this was rejected by HM Revenue & Customs (HMRC); Askaris appealed and the request was approved. Shortly afterwards, HMRC Officers visited Askaris at their accountant’s offices. HMRC drew attention to the fact that an invoice from Skynet was invalid as the VAT element was shown in US dollars not pounds and an officer provided a copy of Notice 726 (joint and several liability) and explained that airtime had been identified as a commodity used in missing trader transactions. He explained that Askaris may be subject to continuous monitoring and monthly visits to the company. HMRC subsequently sent a letter headed “VAT Fraud Alert: Alternative Banking Platforms” to Askaris, noting HMRC had seen evidence that suggests missing trader fraudsters may be attempting to make use of alternative banking platforms (“ABPs”) to facilitate fraud. By ABPs they mean financial institutions that provide the functionality of a traditional bank but without a bank’s reporting or regulatory requirements. ABP characteristics were said to include them being outside the jurisdiction of the supplier, not regulated by a recognised financial authority, and all transactions relying on web facilities.
HMRC put a block on Askaris VAT repayments and notified Askaris that their latest repayment return had been selected for extended verification. Following the verification visit and subsequent investigations, HMRC denied input tax totalling GBP809,610.02 (USD1.1mn). The Askaris transactions included both direct tax loss chains and contra chains (where a company sits as a buffer in separate transaction chains tracing back to specified fraudulent defaulters).
The disputed input tax issue was finally resolved by a tax tribunal in March 2020, and I have summarised the tribunal’s conclusions below:
- Askaris was aware of fraud in the industry from the outset;
- the approach to due diligence was insufficient, Askaris didn’t do basic company searches;
- it failed to re-examine due diligence after HMRC advised the fraud risk;
- Askaris failed to question the ability to set itself up and enter a competitive market with no experience, relying on suppliers of a switch and invoice factoring recommended by their only customer, and yet achieve consistent mark-ups with what they regarded as low commercial risk;
- it entered into agreements with Skynet and Jersey Telecom in circumstances where the lack of documentation, including the pricing of airtime, created apparent commercial risk but was not questioned by the Director;
- it failed to protect its commercial position in relation to CDRs – in the event of a dispute over billing, Askaris had no rights to access information from Error Scope, which was itself maintaining insufficient records; and
- its use of VoIP Capital, an offshore banking platform, to factor invoices at the recommendation of their only customer.
I would add further red flags:
- Askaris had no knowledge of Skynet and identified it as a potential supplier via LinkedIn;
- Askaris’ business was based on a single supplier and a single customer;
- Jersey Telecom recommended Error Scope to Askaris; it was run by Liam Barton, whose father Steve Barton, was one of Askaris’ main contacts at Jersey Telecom; and
- Askaris claimed to have checked Error Scope’s accounts, but the only accounts lodged with Companies House show it as a dormant company.
Unsurprisingly, the Judge decided that Askaris knew or should have known that the sales were connected to fraud.
3P Telephone Company Ltd
In the case of 3P vs HMRC, the 3P Telephone Company Ltd was set up by Mr Phil Murphy with a view to wholesaling VoIP. Murphy had considerable experience in the telecom sector, mainly focused on sales, including that of non-geographic numbers. He had no technical telecom background, and no experience in VoIP prior to starting trading. He’d set up various companies to trade in telecom and other sectors but those businesses had not been successful, and Murphy acknowledged that wholesale Electronic Communication Services (ECS) was “far tougher than standard telecoms”. He first researched ECS when someone who lived close by sent him a “rate card”, setting out various rates for supplying ECS on routes to various countries. Murphy was unable to develop any business from it, but he saw VoIP as a natural progression from his previous telecom experience.
3P had no start-up capital but Murphy intended to trade on the basis that his customers would pay him before he had to pay his suppliers. There was no business plan, other than Murphy wanting to earn about GBP500-600 (USD700-850) per week. He didn’t think he needed a business plan because he didn’t require any capital investment. Using an alternative banking platform would mean that 3P would be paid by its customer at the same time it was required to pay its supplier.
Murphy met with Barry Lawson, whom he had known for many years and had worked for as a consultant. After the meeting, 3P entered into a Reciprocal Carrier Services Interconnect Agreement with Lawson’s company, InterX Ltd. Murphy contacted HMRC to verify the VAT registration of InterX and around the same time, InterX contacted HMRC seeking to validate 3P’s VAT registration details. HMRC subsequently had a meeting with Murphy at which he stated that potential suppliers included British Telecom and Talk Talk. He also said potential customers included InterX and Orange County Telecom Inc. HMRC warned Murphy about the serious problems with missing trader fraud in the wholesale supply of ECS. Murphy said that his accountant had warned him, but that he did not think he would ‘get stung’ because he knew the telecom industry very well. Shortly after the meeting, HMRC sent Murphy copies of Public Notice 726 which dealt with missing trader fraud generally, and referred to certain indicators of VAT fraud and examples of due diligence checks that should be made and also wrote to 3P describing the risk of missing trader fraud.
At some point, Murphy searched for telecoms and VoIP on LinkedIn and came across a Mr Christopher Lara. Having spoken to Lara on Skype, he was impressed with his knowledge and described him as a “mine of technical information”. Lara gave Murphy some rates which he put on a spreadsheet and sent to Lawson. Lawson said he could sell four or five rates to a Tier 1 network provider, Colt Telecom (Murphy understood that Lawson had a close relationship with Colt Telecom). Lawson referred Murphy to VoIP Capital and 3P ended up giving VoIP Capital a charge over the business. Murphy also created charges of GBP40,000 (USD56,000) to VoIP Capital and to Lloyds Bank, secured against his home. Murphy understood that VoIP Capital insured any commercial risk of non-payment in the deals; he did not pay a premium to VoIP Capital as it was “all in the margin”. He said VoIP Capital provided a form of factoring and had a switch which meant that they could monitor the business being done.
Despite introducing VoIP Capital, Lawson wanted 3P to use a banking platform provided by Akirix, based in Ogden, Utah, for any ECS trade; he explained the benefits of this in an email to Murphy. Each participant in a deal chain would have a ‘sub-escrow account’ at a US bank and payment between parties would be simultaneous. Supplies of ECS in a chain were given a project number by Akirix and when payment fell due, it would be made automatically and simultaneously once the ultimate purchaser made its payment. The funds for each purchase would be ring-fenced in each trader’s Akirix account and Akirix provided traders with an invoice for each transaction in the chain.
3P also entered into an agreement with Unique Techniques Inc of Irvine, California to provide a “switching partition and billing solution along with technical support for daily operations”. The agreement was for an initial term of one year and was signed on behalf of Unique by Raphael Heard, President. Murphy could not initially recall how he came across Heard, and suggested he might have been recommended or he might have come across him on LinkedIn.
Once 3P carried out its first wholesale ECS deal, turnover increased substantially; during these periods, 3P’s sole trading activity was the wholesale supply of ECS. Murphy said it was because of his relationship with InterX, and Lawson’s connection with Colt Telecom, that he was able to generate what appear to be large amounts of business from what was effectively a standing start.
|Quarter||Outputs (GBP)||Inputs (GBP)|
HMRC traced 18 of 3P’s 19 transactions with InterX back to fraudulent tax losses, either to Swift IQ Limited or Simax (UK) Limited:
Swift IQ ⇒ Connect Trading ⇒ Parkwell Investments ⇒ InterX ⇒ 3P ⇒ Orange County Telecom
Simax UK ⇒ Enhanced Communications ⇒ InterX ⇒ 3P ⇒ Orange County Telecom
The Judge concluded that:
Looking at the evidence as a whole, and on the balance of probabilities, I am not persuaded that Mr Murphy knew of the connection with fraud at the time the appellant entered into the transactions. I am satisfied, however, that he should have known of the connection with fraud.
Alternative Banking with Akirix
Hopefully, anyone considering doing business with an ABP would conduct some due diligence – after all, this business is holding your money! Would the following items help you form an opinion?
In 2018, New Zealand website interest.co.nz reported that Akirix provided transactional assistance to New Zealand financial services provider Worldclear between February 2016 and September 2016. The company has gone to a Utah court seeking to claw back USD4.3mn which it entrusted to Akirix and it alleges has been misappropriated.
Judge Dale A. Kimball has ruled Worldclear can file an amended complaint covering its claims of breach of fiduciary duty, breach of contract for both the initial and closure agreements, and unjust enrichment:
“Taking Worldclear’s well-pled claim as true, Akirix held more than $4 million for Worldclear and has failed to account for that money. This court finds that these facts are sufficient to meet the pleading burden that Worldclear’s property was placed in Akirix’s charge, and that Akirix was in a position to have and exercise influence over Worldclear…”
By 2020, the United States District Court for Utah was considering an ownership and liability dispute concerning Akirix. According to filed case papers, around August 1, 2010, Jack and Larry Lewis entered into an agreement whereby Jack would act as Larry’s nominee and hold, for Larry’s benefit, all of Larry’s property and his ownership interest in various legal entities, including Akirix. Larry put various assets in Jack’s name and for use of his name, Jack accepted 10% of Larry’s earnings. They entered into the Nominee Agreement as part of a strategy to avoid pre-existing tax claims by the United States Internal Revenue Service. This document shows the court refusing to enforce the Ownership Agreement and includes the following statement:
The Court has recognized on three occasions that both Jack and Larry have unclean hands, and the Court is unwilling to aid the parties from the consequences of their fraud.
Missing Trader Migration to GST Markets?
Here’s the situation: you operate in a country which has implemented GST and international VoIP traffic is coming into your country and being handled by a small telco. That telco adds a small margin and passes the traffic to another small telco (Telco B) in country. Telco B adds a small margin and passes the traffic to another small telco (your telco). You add a margin and pass the traffic to a neighbouring country, where it presumably terminates.
Is this normal or abnormal? Are there any similarities with the MTIC cases, above? We all know that telcos maximise margin by using least cost routing, so how does an operator achieve the cheapest route by chaining traffic through small telcos in a neighbouring country?
This is a real, current, example. If you’re involved in a chain like this, it is time to ask yourself if this arrangement makes commercial sense. Or to put it another way, have you been taking easy money and ignoring the fact that you’re adding a margin without adding any value? Fraudsters are seeking out telcos which don’t operate effective preventive controls and the fewer questions you ask, the easier their job becomes. Missing trader fraud is an organised criminal activity which will establish complex commercial structures and systems in order to achieve the payoff – just make sure you don’t get stuck with the bill.