VAT fraud details revealed

The police have compiled enough evidence to proceed against at least 25 individuals in Malta's largest VAT fraud investigation to date, The Sunday Times has learnt.

Six VAT office employees, a number of businessmen and a criminal gang are expected to face charges related to defrauding the VAT department of hundreds of thousands of euros, possibly millions.

However, since the investigation has not yet been concluded and further cases of fraud and bribery could be unearthed, the police may continue their investigation before charges are brought.

The case has shocked the country and jolted confidence in one of the government's main revenue sources. The scandal came to light after a businessman who had been approached, passed on the information to Finance Minister Tonio Fenech last December. It has since emerged that the kingpin was a VAT department clerk, who roped in other colleagues and a number of intermediaries, some with a criminal background, in a three-way fraudulent deal.

It is believed that the clerk pocketed more than €190,000 over three years, often meeting clients after office hours. He initially requested bribes to waive their accumulated fines and subsequently devised more elaborate schemes that involved illegitimate refunds being issued to businesses that agreed to be part of the scam.

When the police swooped on the VAT department on April 3, an employee and an intermediary were actually caught red-handed. The police seized all hardware at the offices to prevent evidence being deleted or tampered with.

Various methods were used in a web which benefited all the players involved, details obtained by The Sunday Times show. The businesses implicated in the scam include carpenters, restaurants, a major air conditioning supplier and a paint manufacturer.

• A number of VAT officials were roped into the fraud, including inspectors who were bribed to either cover the illicit transactions or even, in some cases, to waive garnishee orders filed against defaulting customers.

• Police have also unearthed a number of cases where expenses were deliberately inflated.

• The fraud took various forms: for example, a clerk would complete the details of the taxpayers' returns, inflating their expenses so that they would end up with a credit balance, while promising them they would not be investigated. This meant that certain clients were claiming a refund from the VAT department when in fact they owed tens of thousands of euros. In several of the cases, the VAT client's signature was forged.

• Clerks also capitalised on the fact that many VAT-registered companies were unaware that the government had given an amnesty to those who submitted late VAT returns. The clerk, together with three middlemen, used to tell clients that they would intervene to resolve their fine if they were paid a bribe.

• In at least one case, a businessman with a pending court case approached a middleman to waive pending VAT fines and interest. He also tried to ensure that the money he owed would be reduced. The company submitted nil returns for a number of years and recently submitted returns with a credit balance of over €10,000 - the same balance owed to the VAT department.

• Two VAT returns with a credit balance were submitted by the clerk on behalf of a restaurant which owes the VAT department €250,000.

A major contractor is also being implicated in the fraud though police have yet to confirm claims that an apartment was promised in return for waiving VAT fines.

Police are also looking into the possibility that a number of companies were de-registered to cover up the fraud. Hundreds of businesses are de-registered every month.

Police are understood to be probing the returns of those with a credit balance, and comparing the handwriting of clients with those of the suspects.

When contacted, Mr Fenech expressed his satisfaction at the police investigations. He said the ministry had pledged its full support to the investigation not only by giving investigators full access to information but by also attaching a number of senior officials within the department to support the investigation.

Asked whether he was surprised that these practices went unchecked for years, Mr Fenech said that when fraud involved collusion by a number of members of the same department, it was very difficult to detect.

"However, we now intend to carry out a detailed review of the operations within the department to identify the weaknesses of the system and present procedures, particularly those relating to the controls that are in place to detect wrongdoing, and ensure that these are not only strengthened but regularly checked."

What can he do, as the minister responsible, to restore faith in the VAT department?

"I will do whatever it takes to have a department that truly serves the best interest of the country. We will implement swiftly any recommendations that will come out from the review that we intend to start shortly, once the police inform us that this will not impact their investigation."

Mr Fenech said that as a result of the investigation there had been a policy change to take a tougher stand against businesses that default on submitting returns.

He said businesses should appreciate that the government was not looking for interest and penalties, but timely settlement. Businesses should not depend on defaulting on tax payments due for their financing requirements, as this could have serious recovery problems.

"Those who have serious problems should approach the department and agree on a payment schedule, rather than ignore the filing deadline, or file their returns without effecting payments and then hope to find someone in the department to solve their problem of accumulating too much interest and penalties."

How they did it

• Clerk requested bribes to waive accumulated fines.

• Three VAT inspectors were also paid to ignore fines.

• Garnishee orders filed against defaulting customers were waived.

• Expenses were inflated so that clients were claiming a refund from the VAT department when in fact they owed tens of thousands of euros.

• Clients' signatures were forged.

• VAT clerk duped clients into a bribe for 'exonerating' them from a late return fine - which in fact does not exist.

Timeline

December 2008: A businessman informs Finance Minister Tonio Fenech that he had been approached to defraud the VAT department. Mr Fenech passes information onto the police.

January 2009: Police start investigating the claims, monitoring the movements of suspected individuals.

March: Prime Minister authorises police to have access to all VAT department files.

April 3: The police swoop on the VAT department in Birkirkara, seizing documents, files and hardware, arresting six employees.

April 10: Around €12 million in VAT refunds are held back pending investigations.

April 20: VAT refunds are processed again.

May 14: Police compile enough evidence to proceed against several individuals. Investigations continue.

hgrech@timesofmalta.com