Complex alleged frauds estimated to cost EU taxpayers billions of euro a year

Irish banks and shell companies were used in transactions worth millions of euro involving companies and individuals under investigation for tax fraud in Germany and elsewhere, leaked files reveal.

The files relate to multiple investigations by police forces and tax investigators into sophisticated alleged frauds which are estimated to cost European taxpayers billions of euro a year.

Documents show that clients of both Ulster Bank and Bank of Ireland were unwittingly involved in trades with individuals or companies suspected of being part of VAT fraud and so-called "carousel fraud". When carried out such frauds involve complex transactions between companies with the aim of stealing cash that should be paid over to tax authorities.

The leaked files also reveal how criminal gangs involved in the trade took advantage of innocent third parties through identity theft. They show how one Irish bank received payments from an online financial services platform suspected by investigators of facilitating millions of euro in payments between fraudsters.

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The files were obtained by the German non-profit Correctiv, and shared with newsrooms around Europe, including with The Irish Times. They allege that complex global networks of companies were suspected by the authorities of using lightning-fast transactions, disguised ownership and opaque markets to defraud taxpayers in the European Union of billions of euro in revenues.

Carbon credits

Much of the leaked material relates to the trade of carbon credits. These were created as part of a European policy to drive down harmful carbon emissions. Companies were incentivised to use low-emissions technologies as they could sell credits for amounts of carbon below the limit imposed on them. The lucrative market, the files show, has been exploited by organised criminal gangs who constructed sophisticated chains of companies involved in VAT fraud.

Traditionally, VAT fraud chains focused on low-bulk, high-value goods like microchips. In the EU business-to-business transactions are not charged VAT between countries in order to encourage trade within the bloc. However, fraudsters exploit this by importing goods VAT-free, charging VAT in an onward sale. Instead of giving it to the tax authority it is pocketed.

The VAT can also be claimed back from tax authorities, meaning there is a double hit to taxpayers in some instances – but not in Ireland because of tax measures taken here by the Revenue.

Carbon credits are even more attractive to fraudsters than micro-chips as no physical exchange of goods takes place. Key to the market’s operation are carbon brokers, who are unwittingly used by market operators to buy and sell the credits.

One broker which features in the files, thought not suspected of wrongdoing, was Czech outfit Carbon Warehouse, which facilitated the trade of tens of millions of euro of credits. The Correctiv files show that Carbon Warehouse also set up an Irish subsidiary, Carbon Warehouse Limited.

Its office was in a nondescript building in North Strand, near Croke Park, and there is little to suggest that there was ever a substantial presence here. At the time the address was shared with a provider of brass plate, off-the-shelf companies. Former employees who spoke to The Irish Times say they were told little about the Irish subsidiary's purpose.

However, the files show that it was used to buy and sell credits by companies suspected of involvement in fraud by German investigators. This was not uncommon on exchanges which traded in carbon credits. Insiders who spoke to The Irish Times said that the market was under- regulated, and the VAT treatment of carbon credits made it a magnet for fraudsters. One of the companies which was involved with Carbon Warehouse’s Irish subsidiary appears thousands of times in the leaked files. It is called Eucalyptus Worldwide.

Eucalyptus

Seychelles-registered Eucalyptus Worldwide was owned by a complicated corporate structure which, on paper at least, disguised its true owner. Its shares were held by one company, while a British-Swiss provider of corporate services called Mayfair Trust acted as its managing agent. The files identify Gurpreet Singh, a Dubai resident, as its beneficial owner. Its headquarters were also located in the emirate.

German tax investigators in Frankfurt suspected that Eucalyptus was involved in VAT fraud surrounding carbon credits, often purchased or sold on the Carbon Warehouse platform, which were ultimately sold to Germany's Deutsche Bank.

In September 2010, the investigators wrote that “there is sufficient evidence to justify the assumption that a tax offence exists and the person in charge of the company is knowingly involved”.

The files describe how Eucalyptus sold carbon credits to German companies, characterised by payments that “make no sense from a business point of view”. The company, according to the files, was “specifically installed” to enable German companies trade carbon credits without paying sales tax to the state. The investigators also suspected that the company could be involved in money laundering.

Transactions which the investigators linked to Eucalyptus were estimated to have cost the German taxpayer up to €48 million in five months alone. As investigators honed in on the company, Swiss bank accounts were frozen and the British office of a company called PKB International, which provided services to Mayfair Trust, was raided by HMRC, the UK tax authority, on foot of a request from German authorities “in connection with a major international criminal fraud investigation”.

Many other law firms and service providers were then raided too. In a letter sent to the British outfit following the raid, Mr Singh insisted that Eucalyptus “is an absolute transparent structure and is an absolute transparent company. It has not dealt in anything untowards or any form of illegal activities either in the UK, Germany, or matter of face in any other part of the globe”.

Efforts to contact Mr Singh for comment were unsuccessful.

Neither PKB International nor Mayfair Trust are suspected of wrongdoing. Andrew Lamb, who at the time was a senior partner with PKB International, the company which was involved in Eucalyptus' corporate structure, told The Irish Times "on behalf of a former associated practice that there was no VAT compliance footprint or fraud in the UK (or Ireland) and that it was essentially a German and French technical issue".

Mr Lamb told The Irish Times that if he had any information about Mr Singh’s whereabouts he would have passed it on to the appropriate bodies. Mayfair Trust was shut down in late 2017.

The files show that carbon credits were still being purchased by Eucalyptus though the Irish subsidiary of Carbon Warehouse even as German investigators ramped up their examination.

On February 23th, 2010, the company purchased almost €1 million in carbon credits on the platform. The transaction certificate shows that Carbon Warehouse used an Ulster Bank account as part of the deal. Listing the Irish subsidiary as a partner to the transaction, it shows that Carbon Warehouse received fees of €2,280 for the deal, which left a balance of just under €2.5 million in the Eucalyptus account with Carbon Warehouse.

Identity theft

The Correctiv files also show how criminal gangs abused innocent third-parties, using identity theft to disguise suspicious transactions behind a front company which had nothing to do with the trade. This presented huge challenges for the unfortunate companies, and the small business owners who ran them.

The documents show that the same Irish structure, involving the North Strand address and the Ulster Bank account, was involved in December 2009 in the sale of almost €1.4 million of carbon credits by a German company called Euris Finanz. It turned out to be an elaborate case of identity theft.

Similarly to Eucalyptus, the files show that Frankfurt tax investigators suspected Euris Finanz was involved in a VAT fraud chain which ultimately ended up with carbon credits being sold to Deutsche Bank. They suspected the company was a so-called “missing trader”, which is a common type of VAT fraud.

The files show investigators thought the company’s director was “part of a closed trade chain that has been fed from abroad since June 2009 and is able to negotiate large packages of emission certificates” and that he was “part of a network of companies that has been set up for the purpose of band-based tax fraud”. Investigators believed that Euris had traded 354,000 tonnes of carbon credits, resulting in a loss of over €800,000 to the tax authority.

Towards the end of April 2010, the owner’s home and business were raided by tax investigators. His wife was questioned and computers seized. Later his bank accounts were frozen and financial assets were encumbered by the state.

However, a search of his home, business and computers found “no evidence of their participation in the trading of emissions rights”.

The man, Ernst Hartert, maintained that he had never been involved in the trade, illegally or otherwise, of carbon credits. He said he had received an invoice demanding €5,000, which appeared to be for the same transaction linked to Carbon Warehouse's Irish operations, in December 2009. The following month, two men called to his home, saying that the bill was unpaid, but Hartert refused to pay.

Investigators then found that the bank linked to Euris on the Carbon Warehouse transaction certificate was not linked to the company. In his real bank accounts, no transactions related to emissions trading were found. A registration for Euris on the Danish emissions registry was found to be a forgery, replete with multiple inaccuracies, and falsified signatures.

Lawyers for Hartert told the police that his mortgage could not be paid due to the freezing of his bank account, and although “completely innocent” he and the company “faced an irreparable financial loss, which will drive them through no fault of their own [to] insolvency.”

The files show that Carbon Warehouse ultimately terminated its relationship with the fake Euris Finanz after an individual – unknown to the real company – failed to furnish them with documents the broker had requested.

The Frankfurt tax authority said it could not comment on its investigations. A source said the investigations may still be ongoing.

Ulster Bank, which provided banking services to Carbon Warehouse, said that its anti-money laundering process “is a crucial element of our regulatory and legislative obligations, and also serves to protect our customers and our bank”. A spokeswoman said that commenting on an individual customer would be a breach of the law.

Swefin

The files allege that online payment platforms – often operating as shadow banks, with little or no real-world presence or regulatory oversight – were key, enabling rapid payments between companies that were difficult to track. Italian police documents from the public prosecutors office in Milan suggest such platforms allow for a “significant number of financial movements” to take place, “in which the transactions can be executed leaving fewer traces and can be carried out…in a few minutes with rapid internet connections”.

They “occupy a fundamental role in the perpetration of international tax frauds”, according to the leaked documents.

One such company was called Swefin. The Italian police files describe networks like Swefin as “ideal for the perpetration of large carousel VAT frauds carried out at a transnational level, since from the moment the economic flow enters the current account of Swefin to that of its exit, there are numerous movements conveyed on customer accounts… aimed at making the traceability of financial institutions difficult, if not impossible”. Furthermore, the files claim that these methods could be used for concealing and laundering illicit proceeds.

The Correctiv files show that a client of Bank of Ireland received significant payments from the Swefin platform in 2009. According to the files, three separate transactions on the platform took place between a company called Stardex, not suspected of wrongdoing, which banked with Bank of Ireland, and another company called Kuga Data.

The three transactions totalled over €350,000, and invoices in the files show that two were related to consignments of sim-free mobile phones. There were several transactions between other banks and the Bank of Ireland account, with a total of €851,500 being paid, while the files contain invoices for over €1.2 million between Kuga Data and Stardex.

Maria Prouost, who controlled the company at the time, told The Irish Times that it was never approached by authorities about VAT fraud, and that to her knowledge none of the companies she dealt with were involved in such activities.

Kuga Data also appears in the files as being suspected of involvement in carbon credit-based VAT fraud. On the request of German authorities, Danish prosecutors raided its managing director’s home in April 2010. The businessman, Khashif Qadri, was also associated with the Swefin platform. The files show that police found salary statements paid to Mr Qadri by Swefin, and he was also listed as a director of the company. Italian police files name Qadri as having “assisted the criminal association with particular reference to the operation of the Swedish telematic platforms used for the definition of payments by the members of the organisation”.

Efforts to contact Mr Qadri for comment were unsuccessful. Following reports about Swefin in the Danish media, he was reported to have left Denmark for Dubai. A former director of the company told Danish media in 2010 that he was not involved in VAT fraud.

In response to a series of detailed questions, Bank of Ireland said that it could not comment on specific customer accounts. It said it "adheres to all legislative and regulatory requirements in all jurisdictions in which it operates. This includes all requirements emanating from the European Union, the United Nations and the US department of the treasury's office of foreign assets control."