By Jérôme Bryssinck – Head of Government Solutions at Quantexa
The collection of Value Added Tax (VAT) represents an integral contribution to the budget of EU states. However, for national tax agencies, the battle to ensure that individuals and companies pay their fair share remains ongoing. A recent study revealed the enormity of this task, with research showing a gap of £131 billion (€147 billion) between the VAT that should have been paid, and what was actually collected.
There are several reasons for the disparity. Some of these, such as accounting errors, knowledge deficits or differences in interpretation are relatively benign in nature. However, there are also a number of actors who deliberately exploit the regulations around VAT to defraud the system.
Missing Trader Intra Community (MTIC) fraud – also commonly referred to as ‘VAT carousel’ fraud – takes advantage of the EU’s laws around VAT and has blighted the continent for some time now. While its true scale is unknown, most reasonable estimates put its total cost at anywhere from £17 billion (€20 billion) to more than £89 billion (€100 billion) annually. Even though VAT carousel’s do not defraud individuals of their own personal funds – this doesn’t mean that the general public is unaffected. Missing tax revenue means less to spend on important public services like schooling and public health, reducing their effectiveness in delivery. It also increases the tax obligations of honest people.
VAT Carousels: What do they look like? How do they work?
Throughout its existence, the EU has sought to minimise barriers to trade, making inter-state commerce as frictionless as possible. Indeed, today it’s incredibly easy for traders to export to other organisations inside the bloc. Unfortunately, this lack of obstacles hasn’t gone unnoticed by fraudsters either.
VAT Carousel’s take advantage of EU regulations around cross border trade. VAT is waived on intra-community transactions – this means that if an organisation chose to import a good from a company based in another part of an EU, then they would not be obliged to pay VAT.
As such, to create a carousel, criminal groups will begin by establishing a company (referred to hereon out as Company A). Company A will then import goods from a company in the EU (Company B). As Company A has bought goods from another EU based company (Company B), no VAT is paid. Next, Company A will then sell these goods on, this time to an organisation based in the same country (Company C) as Company A. Company C could be completely legitimate, or another company controlled by the fraudsters. As this transaction was conducted within the domestic market, VAT will be included in the sale price of the goods. Company A is then obligated to inform the relevant tax authority that VAT was included in the sale price of the goods. It should then pass the VAT on. However, Company A then disappears, withholding the VAT. The goods will then be passed through several different organisations – with this being done with the intention of obfuscating any investigation, putting a buffer between a company and the goods. In a Carousel, the final company in the chain (Company D) will then re-export the goods to another EU member state – which in many cases will be the original company that exported the goods (Company B). Company D will then reclaim the VAT, while Company B will re-use these same goods in another carousel scheme, hence the name.
Tackling VAT Carousels
VAT carousels can be incredibly difficult to combat. The sheer enormity of cross border trade which takes place in the EU complicates the job of an investigator. With billions of euros in goods and services being exchanged daily, determining what is legitimate from that of nefarious origin is nearly impossible to do with absolute certainty.
Further muddling the matter is the coordination required for effective prevention. Due to the nature of the crime, it’s necessary for different member states to co-operate. However, the data necessary for investigation and prosecution will often be stored in a number of differing and mismatched forms, held by various bodies, distributed across the length and the breadth of the continent.
Luckily, there has been some movement towards more effective methods of tackling the fraud. VAT fraud is one of the EU’s nine priority crime areas, and Europol’s Analysis Project MTIC was established with the sole intention of battling the organised crime groups often responsible for VAT carousel schemes. Furthermore, through implementing the Transactional Network Analysis system – a pan-continental risk analysis system – the EU has made great strides towards modernising and harmonising the VAT system, making it less vulnerable to fraudulent activity. However, more can be done.
Leveraging technology to create better defences
Technological development should enable tax authorities to become more proactive, and as such more effective in their combat of VAT fraud.
To ensure that this prediction comes to fruition, we need to improve our protocols for sharing and analysing data at the continental data. Data must be held in a uniform format, and states should look to create a central database where information can be accessed by any relevant body quickly and easily.
We can then apply data analytics technology to this information to provide wider context behind organisations and the transactions they engage in. For example, technology would be able to alert an investigator to a company with an annual turnover of €100K that was placing an order for €2 million worth of goods, as such an order would be suspicious. Machine learning technology could then be used to generate algorithmic risk models, which would then be deployed to better identify suspect companies. This could’ve formerly taken a human investigator hundreds of hours to compile, and as such, the efficiency of investigations will be far improved.
Member states should also seek to collect VAT receipts in a standard that is machine readable. Not only will this help with the issue of incompatible data formats, it will also help to place tax authorities in a position wherein domestic and external data can be combined to provide context.
The Road Ahead
It can be argued that the EU has historically struggled with fraudulent activity. Criminal actors had become wealthy by exploiting the same rules that have allowed trade to flow freely. To ever truly tackle VAT fraud, we need to see a greater use of technology, allowing for investigations to be undertaken more efficiently. We must also encourage greater cooperation at a pan-European level, as this will prevent cases from going cold when goods are moved out of a country. Only through this thorough approach will we be able to see the bigger picture required to combat fraud.
From fundamentals to digital evolution: Deutsche Bank and ACT release comprehensive guide for treasurers
The Association for Corporate Treasurers (ACT), in partnership with Deutsche
Bank, has today announced the release of “The Group Treasurer: An ACT guide to the first 100 days”, which provides valuable insights on the role of the treasury function – serving as an in-depth guide to those moving into senior treasury roles for the first time, as well as a valuable refresher on the latest developments for treasury professionals.
Treasury departments are often staffed by people who move across from other finance disciplines and, for them, navigating their first 100 days – with a host of new, often alien, concepts and the need to quickly get up to speed –can be a challenge.
The Guide serves as a complete compendium of the crucial, need-to-know information – starting with the basics, including the role of treasury, how departments are set up and what you need to know about treasury policy, before moving on to a series of deep dives into the critical features of life in treasury, including all you need to know about cash and liquidity management, the innovative technologies that are driving change, as well whether an in-house bank is right for you. Scattered throughout the Guide are useful insights from treasury professionals across a wide range of industries and geographies – providing best practice advice for gaining maximum benefit from your time in treasury.
“We have looked to create a guide that goes back to basics – and the ACT seemed the perfect partner for this” says Ole Matthiessen, Global Head of Cash Management, Deutsche Bank. “While the ACT can provide treasury professionals with training and qualifications necessary for a successful career, Deutsche Bank, in its role as a trusted advisor, can provide up-to-date insight on the options available for treasurers in the market.”
The Guide is also a reaction to the sweeping changes seen in treasury over the last few years. With new processes and technologies moving centre stage, the Guide seeks to provide treasury professionals with a concise “refresh” of the latest developments – especially for perennial challenges, such as the availability of liquidity.
Release 1 | 2 “I hope readers will find the Guide a useful tool” says Caroline Stockmann, Chief Executive, ACT. “And remember: the ACT is here to support you, whether you are a member or not, as our Mission is to embed the highest standards of professionalism and integrity in the treasury world, and act as its leading advocate.”
Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds
Tangerine Bank Ranks Highest in Overall Credit Card Customer Satisfaction for Second Consecutive Year
With 73% of credit card customers in Canada saying COVID-19 has negatively affected them financially and 24% who say they are unable to make monthly credit card payments, overall satisfaction with their primary credit card issuer remains relatively flat year over year at 764 (on a 1,000-point scale), according to the J.D. Power 2020 Canada Credit Card Satisfaction Study,SM released today.
“While credit card issuers in Canada are faring somewhat better than their U.S. counterparts in averting the negative effects of COVID-19 on customer satisfaction, they are not out of the woods,” says John Cabell, director of banking and payments intelligence at J.D. Power. “Credit card companies are falling behind in key areas related to the customer experience, especially in factors linked to financial sensitivity and customer support channels, which are crucial during the pandemic.”
According to the study, despite a one-point increase in overall satisfaction from 2019, credit card issuers have experienced a year-over-year decline in key performance indicators (KPIs) related to interactions with credit card customers, such as showing concern for customer needs; appreciating customer business; problem-free experiences; card activation; and reward redemption. As a result, satisfaction is down 12 points in assisted online experience and down 11 points for call centres.
More than half (55%) of cardholders acknowledge COVID-19 has changed their card usage habits, mainly by spending less. Understanding customers’ needs and addressing their changing priorities can help card issuers to mitigate future decline in satisfaction and elevate loyalty. The study shows that offering free or discounted services in response to COVID-19 are the actions driving a more positive impression of the issuer (39% and 35%, respectively), followed by gestures such as employee support (33%); waiving fees (32%); and community support (32%).
“The pandemic presents an opportunity for issuers to align their card services and benefits with customers’ evolving needs,” Cabell said. “Issuers can increase the perceived value of the card and strengthen loyalty. Offering discounted airline tickets or free airport lounge access is probably not as lucrative these days for cardholders as, for example, it would be to extend the duration of annual fees.”
Following are additional key findings of the 2020 study:
- Satisfaction declines with household income: With 29% of cardholders earning less during the pandemic, many are looking for relief from their credit card company and are more critical of card issuers. In fact, credit card satisfaction among customers whose household income has declined due to the pandemic is lower than among those whose income remained unchanged. The largest gaps in satisfaction are in rewards (-12 points); benefits and services (-11); communication (-8); and customer interaction (-8).
- Call centre woes: The pandemic has put a greater strain on call centres, which has negatively affected satisfaction. Caller wait times jumped to more than 12 minutes during the pandemic compared with less than 8 minutes prior to the pandemic. Also, caller satisfaction with the level of courtesy exhibited by call centre representatives declined significantly, which calls out the need for card issuers to restore best practices among their reps and identify better ways to manage customer support.
- Cardholders are digitally savvy: Nearly two-thirds (64%) of cardholders solely rely on digital channels to manage their primary credit card activities, and those cardholders are more likely to say it is easy to understand information about their account and do business with their issuer than do cardholders who do not rely solely on digital channels. In fact, one of the bright spots in the study is improvements in customer satisfaction with mobile and online interaction of 8 points and 7 points, respectively, from 2019.
Tangerine Bank ranks highest in overall customer satisfaction with a score of 825, which is 61 points higher than the industry average of 764. American Express (801) ranks second and Canadian Tire (793) ranks third.
The Canada Credit Card Satisfaction Study measures satisfaction of cardholders’ primary credit card issuer. The study measures performance in six factors critical to the customer experience (in alphabetical order): benefits and services; communication; credit card terms; customer interaction; key moments; and rewards. The study includes responses from 6,728 cardholders who used a major credit card in the past three months and was fielded in May-June 2020.
The impact of the Accounts Payable risk landscape
By David Thorley, Director of Customer Development, FISCAL Technologies
The current economic climate has never been so uncertain. Not since the 2008 financial crash has there been a period where organisations are mindful about how the markets will play out and the effect this will have on economies around the globe. As a result, organisations have become increasingly conscious about the way they spend money, but they have also become more aware about how they save money.
The Accounts Payable (AP) department aims to reduce the amount of money lost in an organisation, making sure all payments are completed on time and are done so correctly, but this is unfortunately not always the case. For example, half of large organisations have duplicated or misdirected a payment to suppliers. This roughly accounts for £3 million being directed to the wrong supplier and resulting in a long and lengthy process in getting this money reclaimed. On top of this, 33% of organisations experience internal fraud every year, with an average loss of half a million.
Therefore, it is clear that in almost every financial department things slip under the radar, but what are some of the risks in the AP department and how can they impact a company?
Lost opportunities reducing income
The capacity for AP resources to work on higher value activities is reduced due to error and query resolution, this can range from anything from chasing up suppliers to looking for a misplaced document. As a result, those within the department are limited to what they can do due to these mundane, repetitive tasks.
Ultimately, lengthy pre or post audit activity reduces the ability of the business to transact, limiting growth and reducing competitiveness, all of which can be avoided if the correct tools are in place.
In some geographies and industries, errors and adverse findings in statutory audits can lead to financial penalties. These penalties can be anywhere from a few thousand pound to tens of millions. Just last year a leading consultancy was fined almost £20m for poor auditing. Payment Policy infringements can reduce an organisation’s ability to bid for certain types of contracts; critical infrastructures for example, which can have a significant impact on the way an organisation operates.
Payment errors and fraud directly affects the bottom line, which can result in a major impact in the financial reporting. Often financial reporting is skewed resulting in liquidity and profits being reduced. In public sector organisations, these lost funds reduce the capital available for frontline services, which can not only impact the quality of service provided but could also affect the reputation.
Increased processing costs
Invoice exceptions prevent supplier invoices being processed automatically. AP staff spend an inordinate amount of time checking, correcting and managing invoice exceptions, which significantly increases processing costs and time. Given the current climate, this time and money could be put to better use, helping a company grow and expand.
Organisations making overpayments – paying duplicate or incorrect invoices – and fraud are a common problem. Together, these account for between 0.5% and 1.5% of the number of invoices processed, with the cost running into millions in many cases.
As a result, whenever an audit is conducted, the AP team spends time finding and providing information and documents. The more issues that are found, the more time audits take to identify and recover lost cash.
AP teams will frequently need to check supplier records during their normal transaction processing. Large, unmanaged MSF hold numerous duplicates and no-longer-required records that create more payment errors and hours spent investigating and resolving queries.
Whether a private or non-profit organisation, fraud, errors, compliance breaches or poor financial results all heighten the risk of reputational damage for the organisation generally and the finance director in particular. The reputational damage caused by a high profile incident of fraud can be significant, affecting the business’ credibility and even the share price.
The shockwave from fraud can be more damaging than the financial loss. After a fraud is discovered, considerable time will be taken up investigating every new potential risk of fraud. Whatever the outcome of the investigation, this is an unwelcome distraction for the managers concerned. But, more importantly, the effect on morale and belief in the leadership’s capabilities throughout the organisation – not just the finance team – will be harmed.
Managing these risks
AP assures the protection of cash within an organisation, identifying risks and resolving them. To do this effectively and efficiently it’s imperative AP departments have the correct tools in place to ensure they follow a simple process that allows them to save time and money, helping their organisation both in the short and long term
 (The Hackett Group, Key Issues Study 2020)
 Source: https://www.qsoftware.com/fraud-prevention-and-detection/erp-fraud-prevention-key-measures/
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