‘Grave risk’ of VAT fraud

A board set up to conduct a systems audit of the VAT Department has found a lack of accountability and risk awareness in the management of the department at all levels, saying this posed a “grave risk” in terms of insider fraud.

The audit was carried out in the wake of allegations of fraud which rocked the department three years ago and eventually led to convictions against several businessmen and a VAT employee.

The purpose of the audit was to identify the strengths and weaknesses of the systems in place at the VAT Department and to review policies.

Reacting to the report, VAT Director-General Joseph Sammut has denied that there was lack of accountability and risk awareness in his department.

The report, completed in February last year, was only tabled in Parliament yester-day by Finance Minister Tonio Fenech.

VAT department audit

The board, composed of Herbert Agius, Cynthia Scerri-Debono and Joseph Croker, said there were complaints from certain areas of management that they had no time for supervision of staff within their areas of responsibility. Staff members also said there was hardly any supervision of their work.

“All this shows a lack of accountability in certain areas of management, as well as a lack of risk awareness, especially with regard to insider fraud,” the board said.

“This poses a grave risk to a department where fraud can come in many guises and where vectors of fraud keep changing. Effective monitoring right across the department is a must in order to instil awareness and dissuade any attempts at insider fraud.”

The board said staff levels in supervisory positions needed to be raised and the responsibilities of management needed to be clearly defined and communicated. It said that, while long-serving VAT inspectors had received formal training, others who had joined more recently had not.

Methodologies in investigations, coupled with better targeting and better preventive methods, needed to be enforced.

The board noted that the number of VAT inspectors in the Operations Directorate had diminished in recent years. Some had been dismissed after the recent cases of fraud while others had been moved to other areas within the department.

VAT inspectors had recently also started conducting their work in pairs. This, the board said, was a measure which should be continued, but it also meant that more inspectors were needed.

The board also called for the engagement of more auditors and accountants by the department.

It stressed that the VAT Department needed a Risk Management Directorate which would include within its area of responsibilities the Analysis and Control Unit set up in 2009.

The board called for a restructuring of the VAT Department’s registry and better communication between the Central Liaison Office and the unit that verified trans­actions and acquisitions.

With regard to investigations, the board noted that all files were being distributed among inspectors, resulting in a number of files lying on desks awaiting attention.

“Taxpayers expecting refunds are contacting the inspectors, putting them under pressure by asking for favours to have their files dealt with early,” the board said. “On the other hand, in cases where fraud is suspected, the favour asked may be to place the file at the bottom of the pile. This system may lead to collusion.”

It recommended that inspectors should be handed only those files with which they could deal at any one time.

In order to avoid files being lost when the inspector was absent from the desk, these files were to be locked in lockers provided for the purpose.

The board said it was disturbed by the fact that the number of monthly de-registrations amount­ed to 500, “especially in the light of allegations made of cases where taxpayers were de-registered in order to hide cases of fraud”.

It recommended that the department should conduct more checks before de-registering taxpayers, irrespective of whether they were in a credit or debit position. The board said that the number of taxpayers in Register B – 36 per cent of the total taxpayers – was also worrying when considering the low thresholds applicable to this category of taxpayers. “This indicates that under-declarations are rife.”

“In order to stem loss of revenue for the economy and ensure a level playing field for all, the board recommends that a number of investigations be targeted at this category of taxpayers,” the report said.