The Carousel Fraud with Misclassified Goods
A UK-based company, VAT-registered, imports mobile phones from a supplier in Country E and exports them to a buyer in Country F. The company claims VAT exemption on the exports. However, the customs declarations describe the goods as 'electronic components' with a lower tariff code, while the commercial invoices describe them as 'smartphones'. The company has been operating for one year and has a turnover of GBP 10 million, but its VAT returns show consistent zero-rated exports with no corresponding input VAT. The bank notices that the same goods are re-exported multiple times within a short period, with slight variations in invoice values. The company's director is also a director of several other companies with similar trading patterns.
1. What type of trade-based money laundering scheme is likely occurring here?
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This appears to be a carousel fraud (VAT fraud) combined with misclassification. The company is likely importing goods, claiming VAT exemption on exports, and then re-exporting the same goods multiple times to create a chain of transactions that generate fraudulent VAT refunds. The misclassification of goods (declaring smartphones as electronic components) is used to evade higher tariffs or to obscure the true nature of the goods. The repeated re-exportation and slight variations in invoice values are typical of carousel fraud, where goods circulate to create the appearance of legitimate trade and maximize VAT claims.
2. How should the bank respond to these red flags?
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The bank should: (1) conduct enhanced due diligence on the company and its director, including checking for connections to other suspicious entities; (2) review the trade documents for inconsistencies and verify the tariff codes with customs authorities; (3) analyze the transaction patterns for signs of circular trade; (4) consider filing an STR with the National Crime Agency (NCA) or relevant FIU; (5) potentially freeze accounts and exit the relationship if fraud is confirmed; (6) cooperate with tax authorities and law enforcement. The bank must also ensure it is not facilitating tax evasion, which is a predicate offense for money laundering.