In April 2010, around noon on a Wednesday, four policemen were standing in front a tower block in the outskirts of Budapest. They came to search the home of a professional boxer who lived on the tenth floor. The police searched the flat in an hour and seized two computers.
The Hungarian police conducted the search based on information they had received from the German authorities. According to the Frankfurt Prosecutor’s Office, the boxer was involved in the activities of a Hungarian company, which was a member of a VAT fraud network. The fraudsters – including employees of the largest German bank, Deutsche Bank – operated in several European countries in 2009 and 2010 and defrauded 800 million euros.
Direkt36 learnt about the details of the investigation from 315,000 pages of confidential documents – including records of criminal investigations, wiretaps and emails – that CORRECTIV, a German non-profit newsroom, shared with a team of 63 journalists.
CORRECTIV initiated the cross-border project “Grand Theft Europe” and coordinated an investigation by 35 media partners from all 28 EU member states plus Norway and Switzerland. From Hungary, Direkt36 was the only journalism organization involved in the project.
The team investigated the so-called VAT carousels, the most common method of VAT fraud. In such cases, one or more members of the international network of companies disappear before paying VAT, while other companies of the network reclaim taxes which were never paid. The international stories can be found here.
It is estimated that through carousel fraud a shockingly high amount, 50 billion euro, is stolen every year from European taxpayers. According to German authorities, a Hungarian company Clean Power Solution Kft. was involved in the above-mentioned VAT carousel network connected to Germany. More recently, the owner of another Hungarian company, Hydro-Well Kft., was accused by the Czech authorities of being a member of a network that supplied fuel to the Czech Republic from Slovakia. However, Czech members of the network failed to pay VAT, causing over 8 million euros of damage.
In response to Direkt36’s questions about carousel fraud, the Hungarian Ministry of Finance quoted the government’s measures to whiten the economy. According to the ministry, international cooperation is needed to address the problem at the European level.
Carousel in Europe
But how does the VAT system work and how is it possible for fraudsters to commit tax crimes? In Hungary, VAT – value added tax – is one of the most important taxes, it is included in the price of almost all products and services. In Europe, Hungary has the highest VAT rate (27%).
Although there are certain VAT-exempt products and services, as a general rule, companies include VAT in their prices, then pay the VAT to the budget. Companies can reclaim some of this money: they can deduct the VAT that had been included in the price of the products and services that the company paid for. Thus, VAT is ultimately paid by consumers who are unable to reclaim VAT, but they have to pay it at the time of almost every purchase.
Let’s take a carpenter as an example, who sells a table for gross 12,700 forints. Calculating with 27% VAT rate, the table’s net value is 10,000 forints, while VAT is 2,700 forints. However, it also costs the carpenter to produce the table and to run his business. The VAT of his costs can be deducted from the VAT he has to pay in taxes. For example, if he had bought wood for the table for a gross price of 3,810 forints (net 3,000 forints + 810 forints VAT), the logger selling the wood had already paid a 27% VAT into the budget. The carpenter can deduct the 810 forints from the 2700 forints that he needs to pay after selling the table, so, in the end, he only has to pay 1890 forints as VAT.
By the time the table arrives to somebody’s home, it can go through many more companies. However, participants in the chain do not always abide by the rules of the game: some companies charge VAT when selling a product, but they do not pay it into the budget. By the time a tax audit would be carried out, they disappear.
The missing-trader fraud, one of the most common cross-border VAT fraud methods is named after such disappearing companies. The repetition of the fraud is called carousel fraud.
The members of the network, at least on paper, trade between countries of the European Union. The movement of goods between member states is VAT-free, so a Slovak company (A) can sell a table to a Hungarian company (B) at a net price. The Hungarian company (B) sells the table to another Hungarian company (C), charging VAT. Although company C pays the VAT to B, B does not pay it into the budget, but disappears. Company C reclaims the VAT that it had paid to B – although nobody actually paid this tax into the budget. Company C can then sell the goods back to A, once again, VAT-free, and the process might start again. At any part of the chain, even more companies can be added. The more complex the network, the harder it is for the tax authorities to detect the crime.
The big carbon credit fraud
Of course, big frauds are not commonly committed with tables. Criminal organizations have other favourite products.
In recent years, they used goods that are not individually identifiable (such as crops, sugar and non-ferrous metals), products of high value but low weight that are easy to transport between countries (such as mobile phones, chips, electronic devices). Intangible products, such as intellectual rights and certificates, are also susceptible to fraud: they do not even need not be physically transported from one place to another, but their trade is subject to VAT. The so-called carbon credits, which belong to the latter category, became the victim of a series of fraud across several European countries, including Hungary, at the end of the 2000s.
The origins of trading with carbon credits goes back to the Kyoto Protocol signed in 1997, which aimed to reduce greenhouse gas emissions. The United Nations set the maximum amount of carbon emission for each country that signed the protocol. This is called CO2 quota, of which each country has a certain amount. Countries that plan to emit less carbon dioxide than their quotas would allow, can sell their quotas to countries that pollute more.
In addition, it is also possible to obtain more quotas in exchange for various green investments, such as the installation of wind farms and solar power plants. One carbon credit is given after every ton of saved CO2 emission. Carbon credits can also be traded by companies and individuals.
For years, this has also provided an opportunity for carousel fraud: the credit buyer sells carbon credits from one EU country to another, VAT-free. The buyer, however, sells it on at a gross price but disappears before paying VAT into the budget. Typically, such missing traders only exist for a few weeks or months and their executives cannot be reached through the contact details of the company.
In 2009 and 2010, a carousel fraud network earned 800 million euros (more than 200 billion forints) from fraud with carbon credits. The credits were sold to various missing traders that failed to pay VAT, while the final buyer was Deutsche Bank. The German authorities have indicted nearly 200 people. In June 2016, the court found six employees of Deutsche Bank guilty (only one banker was imprisoned, the rest received a suspended prison sentence).
Confidential documents about the investigation into the CO2 carousel fraud network were shared by the German CORRECTIV with journalists working on the Grand Theft Europe project. According to these documents, a Hungarian professional boxer was also suspected of having been involved in the network. The boxer was the agent of F. Mohammed, the British owner of Clean Power Solution Kft., registered in Budapest. The Hungarian boxer’s role was to forward the company’s documents to the owner who was living abroad.
“I got to know Moha on a boxing gala in Hungary, everyone called him like that. As I recall, we were sitting side by side. He asked me if I could do a favour for him and forward him the letters of his Hungarian company. I didn’t know, and I also didn’t care about what the company was doing. Finally, I caught heat for this. After the house search, I broke all contact with them,” the man told Direkt36. He said he didn’t know he was named as a suspect in the case. “My flat was searched by the police, I gave them the laptops they asked for, but nothing else happened since then,” he said. Direkt36 does not reveal the man’s name because Hungarian law does not permit to identify people involved in criminal inquiries unless they have already been convicted in court.
Founded in March 2009, Clean Power Solution sold carbon credits – a total of 5.2 million tones in half a year – to a number of companies registered in Munich, the Frankfurt General Prosecutor’s Office wrote in April 2010 in a letter to the Metropolitan Prosecutor’s Office, asking the Hungarian authorities to co-operate on the case.
According to the Frankfurt Prosecutor’s Office, the Hungarian company’s customers were typical missing traders: they did not pay VAT in Germany, resulting in a loss of at least 16.8 million euros. In the end, carbon credits were acquired by Deutsche Bank through several other companies.
Meanwhile, Clean Power Solution Kft. did not even have its own office. It contracted two companies to offer registered office services, who were also entrusted with receiving mails addressed to the company.
In April 2010, the Hungarian authorities did not only search the boxer’s flat , but also the offices of these companies offering office services. One receptionist told the Hungarian police that Clean Power Solutions had only received “one or two letters,” which were then forwarded to an address in Glasgow, provided by the company. However, the letters returned unopened. Since Clean Power Solution did not pay the bills for the provision of office services, both providers terminated the contract with them.
Clean Power came under liquidation proceedings in 2011, when it owned 420 thousand forints (over 1000 euros) to the Hungarian tax authority. F. Mohammed, however, did not get in touch with the liquidator, so the company was deleted from the business registry in 2014, without ever having paid its debts.
Fuel business through Hungary
At least one other Hungarian company was involved in another network.
Last December, the Slovakian Aktuality.sk portal published a detailed article about the businesses of a family that accumulated huge wealth in southern Slovakia.
The Kolozsi family lives in Zsigárd, fifty kilometres from the Hungarian border. On their estate called Kolozsi Ranch, the family organizes an annual international coach driving competition, where Hungarian musicians regularly perform.
The companies belonging to the Kolozsi family have been – at least, on paper – producing ten million euros of income for years, but only modest profit has been reported. According to Aktuality.sk, one of the companies of János Kolozsi traded diesel fuel with a company named Jopi Trade, registered in the neighbouring Vágfarkas – except that this was done in a fictitious manner. During an inspection, the traders were unable to present transportation documents.
János Kolozsi told Direkt36 over the phone that the Slovakian newspaper lied about him. According to Kolozsi, after the publication of the articles, the tax authority carried out an inspection at his companies, and they found “everything in order”.
According to the Czech authorities, Jopi Trade also appeared in a Slovak-Czech network. According to documents published by the Czech tax office in 2016, fuel from Slovnaft, a Slovakian subsidiary of Mol, was bought by Jopi Trade through a British company. Jopi then sold it – through several companies – to a company called FAU in the Czech Republic. Although the goods were passed through several companies on paper, the shipment from Slovnaft was actually transferred directly to the FAU’s storage facilities. Companies in the chain that would have had to pay VAT disappeared, causing a total tax loss of 8.4 million euros for the Czech state.
According to the investigation carried out by the Czech tax office, the Hungarian Hydro-Well Kft. was also involved in the network and was in contact both with Jopi and János Kolozsi. Founded in 2011 in Győr, the company also had a branch office in Komárom from 2013, right next to the Slovak-Hungarian border. Until 2016, the company was owned by a woman from Győr who never had any other business interests.
According to the Czech tax office, Hydro-Well entered the tax evasion network through Jopi Trade, while János Kolozsi helped the Hungarian owner to keep in touch with business partners. The Czech tax office also contacted the Hungarian woman during the investigation. It concluded that she “only met the business partners personally when they signed contracts,” but maintained a regular business relationship with Jopi and the Kolozsi family.
We contacted the Hungarian woman through Hydro-Well, where she is still listed as the agent of a new owner living abroad, but she did not answer e-mail. János Kolozsi said that his named appeared in the Czech documents “by accident”, and he did not help the Hungarian woman in any way. Kolozsi confirmed that he wanted to business with Hydro-Well, but “this didn’t work out, as the price was not right”.
In 2013, the Hungarian company was one of those businesses that supplied fuel to missing traders in the Czech Republic. In that year, the company reported 10.4 billion forints (over 30 million euros) in revenues, while it posted a loss of 141 million forints (over 400 thousand euros).
According to the Czech authorities, FAU “could have or should have known” about the fraud, so they froze FAU’s accounts and the company went bankrupt. However, the Czech court later ruled that the penalty was unlawful. The Czech press speculated that the case could have been politically motivated: FAU was a business rival of current Czech Prime Minister Andrei Babis. On a leaked voice recording, Babis said that his “guys” put pressure on FAU.
Hope in unity
Cross-border VAT fraud is as old as the current VAT system of the European Union, which was introduced in 1993, only as a temporary solution. While the system has repeatedly been modified over the past 25 years, these reforms do not provide sufficient protection against VAT fraud.
In 2017, the European Commission proposed a series of fundamental principles and key reforms to the EU’s VAT system towards a “Single VAT Area”. In the proposed system, as a general rule, the seller would be responsible for charging and collecting the VAT in the case of an intra-EU supply, irrespective of the place of residence of the consumer.
The new system, planned to be introduced in 2022, is estimated to reduce the damage arising from cross-border VAT fraud by eighty percent. However, the adoption of the proposal requires unanimous decision and the new system would greatly build on trust between the tax authorities of different member states.
Until a comprehensive reform at EU level, the member states themselves are introducing new regulations against cross-border VAT fraud. For example, in 2015, Hungary launched the Electronic Public Road Trade Control System, which enables the tax authority to track the goods that are transported in the country. Companies that transport products between Hungary and any other EU member state are required to register in the system, and submit the details of each delivery, such as the name and the quantity of the products transported.
In addition, as of July 1, 2018, all companies must send the tax authorities a copy of their invoices containing VAT higher than 100,000 forints.
“The measures aimed at whitening the economy (…) give a more detailed insight into companies’ activities: they reveal suspicious transactions and also help risks analysts of the tax authority to spot so-called missing traders,” Norbert Izer, Minister of State for Taxation told newswire MTI in April.