Steering Clear of Missing Trader Fraud

Poor due diligence will lead to catastrophic consequences. Companies found to be involved in a Missing Trader Fraud not only risk having their tax claims withheld, but also liable to severe penalties by tax authorities.

At Mazars, our in-depth expertise will help industries navigate complex GST issues and meet the most intricate and obscure compliance requirements. Gene Kwee, Partner and Head of Tax in Singapore and Mabel Ng, Associate Director, Tax in Singapore share their expert views below.

Introduction to Missing Trader Fraud (MTF)

In this fraud arrangement, a supplier or “Missing Trader” deliberately fails to account for the GST charged on his sales while businesses along the supply chain continue to claim credit of input tax or refund of GST from authorities.

In Europe, such frauds have been a persistent issue for the longest time, costing authorities in the European Union some €60 billion[i] in tax losses annually. More extreme cases are known as ‘carousel fraud’ which involve a repeated cycling of goods allowing continuous profit to the fraudulent trader.

In Singapore, over 300 GST-registered businesses have been suspected of being involved in the fraud amounting to S$450 million in tax as of 2019. The Inland Revenue Authority of Singapore (IRAS) has completed its audit and investigation for 70 businesses which account for about S$90 million in GST[ii].

Following an intense crackdown on MTF arrangements, six men were charged on 4 August 2021 for their alleged involvement in a fraud case involving S$114 million of sales. This case became the first prosecution of its kind in Singapore.

Similar to the years following the 2008 recession, businesses need to brace for higher levels of fraudulent activities during this period of uncertainty.

Increased vulnerability to fraud activities

The COVID-19 pandemic has rapidly changed the way companies do business. With a focus on business continuity at a time of crisis, companies may introduce new processes and engage new suppliers, while undermining the standard risk assessments and control protocol.

The unprecedented shift to remote work involves doing away with physical meetings and on-site inspections. Amid lockdown restrictions and high supply chain demands, businesses are pressured to expedite the approval processes for online transactions.

This situation is further compounded by the loss of technical expertise due to cost measures including layoffs and hiring freezes across industries. Transactions alerts processing might not be executed at a timely manner due to drastically reduced staffing and technological constraints.

There is no doubt that the current economic environment leaves Singaporean businesses vulnerable to financial crimes such as fraud and misrepresentation. Emerging threats can also come from within where employees perceive an opportunity to commit fraud for illicit gains.

Staying vigilant through effective due diligence

Companies are expected to take full responsibility for their business transactions, and perform reasonable due diligence checks on the entities that they trade with.

This includes analysing and validating the financial, operational, and strategic assumptions of a company through an effective due diligence process and taking precautions in response to the risk indicators. The due diligence measures must also be commensurate with the type and level of risks identified.

To better meet the Knowledge Principle outlined by IRAS, businesses must have the right team onboard who fully understand the requirements along with the expertise to undertake the necessary steps to verify the integrity of the supply chain.

Risks to look out for

At Mazars, we can create a risk management framework to identify potential exposures and manage risks to your organisation.

A call for greater clarity

IRAS has released an insightful e-Tax Guide for companies, as it strengthens its audit and investigation efforts on companies involved in MTF arrangements. While this fraud scheme is a growing issue in Singapore, we are concerned about the potential impact on innocent businesses and small and medium-sized enterprises (SMEs).

Businesses who are naive, yet innocent may find themselves unknowingly caught up in MTF and have their input tax withheld as investigations take place. Delayed tax refunds may have a significant impact on business operations and commercial viability especially for SMEs. Certain measures need to be taken to prevent innocent taxpayers from taking the loss when another fraudulent party is at fault.

Gene calls on the IRAS to provide more guidance and clarity on the due diligence needed to tackle this fraud, as businesses navigate the ongoing health and economic crisis.

“We need a framework that reflects the increasingly global economy, where people do business across borders. There needs to be a shift in mindset from MTF being purely a domestic issue to an international one. Taxpayers need a principle-based approach that take into account the different supply chain models in cross-border transactions.”

“We hope the authorities will offer more assistance for businesses to undertake proper due diligence and stay on top of compliance requirements. More clarity in this issue would be greatly welcomed,” he adds.

For a further discussion on how we can assist you with tax compliance and risk management, contact us today.

Learn more about Missing Trader Fraud below.

[i] European Union Agency for Law Enforcement Cooperation. https://www.europol.europa.eu/crime-areas-and-trends/crime-areas/economic-crime/mtic-missing-trader-intra-community-fraud

[ii] Channel News Asia. 2020. https://www.channelnewsasia.com/singapore/iras-seize-goods-investigations-goods-and-services-tax-act-519991