Criminal carousel
August 15, 2011
Frankfurt's district court began a marathon tax fraud hearing on Monday as prosecutors presented a 500-page indictment detailing how six men allegedly stole 230 million euros while selling CO2 certificates on the European carbon market.
The six defendants from Germany, France and the United Kingdom are accused of conspiring to avoid value-added tax (VAT) on sales of carbon emission certificates between September 2009 and April 2010.
The scheme saw buyers import carbon permits in one EU country without paying VAT and selling them in another, adding tax to the price but pocketing the difference for themselves.
"I didn't know back then that I was breaching German tax law, but I did know my actions were unethical and immoral," a 27-year-old British defendant told the court, according to Reuters news agency.
Criminal carousel
The alleged carbon certificate VAT scam is a classic case of what experts call "missing trader intra-community" fraud, which typically involves the sale of high value, easily transportable goods such as luxury watches or smartphones. Here is an example of how such schemes work:
- Company A, which is based in one EU country, exports goods to Company B in another EU member state. Under EU rules, such "intra-community acquisitions" are not subject to VAT.
- Company B sells the goods to Company C, which is based in its domestic market. Company B therefore charges VAT, which it is obliged to pass on to tax authorities.
- Company B disappears without passing the VAT onto the authorities, but Company C still claims the cost of the tax as an input deduction and receives a refund from tax authorities.
- Company C re-exports the goods back to Company A as a tax-free intra-community deal.
Real life examples of such schemes often involve multiple re-sales within the domestic market to make tracking more difficult. All transactions normally take place in a single day, and exist on paper only. The goods themselves are generally stored in the same warehouse until they are re-exported in the final phase of the scam. Typically, the same goods are circulated and re-circulated time and time again, hence the term "carousel" fraud.
This kind of fraud differs from regular tax evasion in that it represents a double-whammy loss to tax authorities. Not only do they miss out on the tax owed by the original importer of the goods, they also pay an unjustified refund to the re-exporter.
Slow start
According to a court statement, the hearing is scheduled to last until at least March 5, 2012.
The trial was scheduled to begin in June but was delayed due to the growing mountain of evidence, which currently includes some 600 files with a total of 45,000 pages.
If found guilty, the defendants could get prison sentences of six months to 10 years for each indictable offence, a court spokesman said.
The EU carbon market has been hit by a series of damaging scandals since its launch in 2005, from hacking attacks and VAT fraud to the recycling of credit credits and even outright theft.
Europe's carbon trading framework is a cap and trade system for CO2 emissions certificates. Transfers are recorded in national registries before being stored in the overall EU log, called CITL.
Author: Sam Edmonds
Editor: Nathan Witkop