EU targets terror financing with VAT fraud crackdown

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To gain the cooperation of reluctant countries such as Germany in its anti-fraud efforts, the EU executive is highlighting the link between VAT fraud and terrorism. EURACTIV France reports.

The European Public Prosecutor’s Office (EPPO) received the green light from 20 EU countries last Thursday (8 June). But after an arduous negotiation process, several northern member states decided not to cooperate.

The EPPO, which will initially be staffed by members of Eurojust and Olaf, will focus on tackling the fraudulent use of European funds (mainly cohesion funds and Common Agricultural Policy payments) and cross-border VAT fraud.

VAT fraud costs the EU €50bn every year. But as the biggest revenue generator for all EU countries, VAT is a highly sensitive issue.

To avoid stepping on the toes of the member states’ national justice systems, the EPPO will only be called in to investigate cases worth more than €10m. The EU has no competence on national taxation.

EURACTIV has learned that Germany insisted on this threshold in return for its cooperation on policing VAT.

“Germany is always a difficult partner on fiscal matters, particularly to do with VAT,” a Commission source said.

For the EU executive, which is trying to complete an overhaul of the European VAT system by next September, German opposition is nothing new. Initiatives such as the Common Consolidated Corporate Tax Base (CCCTB) and community VAT measures have been systematically obstructed by Berlin.

Brussels has begun to roll out the heavy guns to mobilise member states on the issue, linking fraud to organised crime and the financing of terrorism.

Financing terrorism

“Cross-border VAT fraud costs EU countries €50bn every year. We have every reason to believe this money is used to finance organised crime or terrorism,” said the EU’s Economic and Financial Affairs Commissioner Pierre Moscovici.

In a documentary recently aired in Denmark, Journalists Bo Elkjaer, Mads Nilsson, and Troels Kingo Larsen, in collaboration with Matias Sedelin and Danish newspaper Jyllands-Posten, revealed how radicalised Danish citizens used VAT fraud circuits in Scandinavia to fund Al-Quaeda.

The affair was unearthed by Spanish investigators, following the trail of the suspected ringleaders of a terrorist network based in Spain’s North African enclave of Melilla. The young men established companies in Denmark with the sole objective of defrauding the VAT system, with the help of local sympathisers.

According to the investigation broadcast by DR Nyheder, the gang has been active since the early 2000s and has collected more than €8m.

During the investigation into the VAT fraud on the EU’s carbon market, which led to prosecutions last year, the FBI handed Italian prosecutors evidence concerning the involvement of Italian citizens, which they had stumbled upon while searching for Osama Bin Laden in the mountains of Afghanistan.

VAT fraud and tax havens: connected problems

France’s National Financial Prosecutor is currently examining around forty cases of VAT fraud, including at least ten concerning large-scale carbon market fraud carried out between 2008 and 2009. This crime led to five murders in the middle of Paris. At the end of 2016, another person close to the fraudsters was targeted by gunfire in the French capital.

VAT fraud is also a problem in the automobile sector. New cars, registered as second-hand, are imported from Germany to France with false VAT certificates. The seller then offloads the brand new vehicles for a reduced price and no VAT is ever collected.

From 2020, the EU plans to take control of cross-border tax flows. With the EPPO, member states hope close cooperation will make it easier to track down and seize missing funds.

But cooperation is only one aspect of the fight against tax fraud. French prosecutors working on a €146m case from 2008-2009, dubbed Crépuscule, found that one of the shell companies they were investigating had been registered in Delaware from Luxembourg.

Such secretive arrangements, which are still possible under today’s tax system, allow the proceeds of crime to flow anonymously around Europe.

EU targets terror financing with VAT fraud crackdown