VAT fraud in the financing of terrorism
Dr Marius-Cristian Frunza, expert in financial crime and associate professor of finance, Dauphine University, discusses the interplay of VAT fraud in the financing of terrorism.
The fight against modern terrorism or uber-terrorism concerns mainly the strengthening of security measures. Whilst in the United States, Apple’s privacy related policy opens new ground for debated around the individual freedom, in France the Emergency state which empowers authorities with very restrictive measures and a thorough monitoring of individuals seems to be the preferred mechanism of defense against the terrorist threat.
Recent events show that in fact the economic and financial aspects of terrorism play a crucial role. Yet governments and the public seem little sensitized to the problems related to economic crime which supports terrorism world wide.
Terrorists allegedly linked to ISIS involved in bloody attacks represents only a minority among Islamists or the peak of the iceberg. A segment less known, but more significant is represented by those adepts who have built across Europe and world wide an economic and financial backbone supporting the criminal attacks. This category of Islamists is involved in the economic crime and has various businesses with doubtful character. Among fraudulent businesses the most frequent are the Value Added Tax (VAT) scams (known as the Missing Trader Fraud), the traffic of weapons, drugs and humans.
Among the financial crimes, the VAT fraud seems to be the favorite tool for these “economic terrorists”. This fraud is based on a network of shell companies taking advantage of the laxity in European Union’s tax system.
VAT fraud is particularly easy to implement, requires relatively little seed-funding and can be leveraged across markets and countries . The products targets are: electronic gadgets, the food and agricultural commodities, but also intangible goods or services including CO2 emissions, electricity, “cloud memory ” or Voice Over IP (VoIP).
According to the estimates of the European Commission the VAT fraud represents approximately 220 billion dollars of losses for the member states of the European Union. Nevertheless this crime remains barely detectable and investigations are usually long and winding. In addition, the recovery of the embezzled funds is almost illusory, the money being lost as quickly in the meanders of the tax havens and “shadow banking” .
The Islamists engaged in the economic side of terror are generally directors of small and medium enterprises, sole traders or merchants. Their business turnovers do not account more than a few million dollars and this makes them less visible to the banking systems that are focused on the detection of large financial flows. Several cases have been reported over the past two years with ramifications on several continents.
Without any doubt the discovery of invoices for an Italian brokerage firm[1], in a stronghold of the Taliban on the border between Pakistan and Afghanistan remains the most famous case
Lessons to be learnt
Many lessons can be learnt from the court cases which bind the VAT fraud with the financing of terrorism.
First , these networks of fraud existed for several years and have probably largely supported the recent terrorist actions. Until now the authorities considered the VAT fraud inherent in the economic functioning of the European space.
A significant downside is however highlighted when analyzing the tool and methods used for countering the terrorism financing exclusively focused on the traditional banking system. Until now the monitoring of the terrorism financing, often amalgamated with the laundering of money was targeting mainly the international fund transfers.
But the “economy of the terror” is based on small amounts spent not only through the traditional banking system. The classic “cash”, the alternative means of payment or even the virtual currencies are part of the arsenal used by the actors involved in the economy of terror.
Figure. Company X buys a product without VAT from supplier Y based in the United States (for example) and resells the product in a European Union Country to Company Z with VAT. After a period determined Company X closes without paying the VAT.
| Year | Facts | Countries of the VAT fraud | Countries of terrorist operation |
| 2014 | A patrol of the U.S. Army found in a Taliban camp located on the border between Afghanistan and Pakistan the invoices of an Italian company involved in a carousel of VAT on the market the emissions of CO2. [2] | Italy | Pakistan |
| 201 4 | Abdessamad Fateh of Danish nationality has been introduced by the American authorities on the list of terrorist persons. He was the director of a company involved in the VAT fraud on the trade of electronic gadgets and food products. [3] | Denmark | Syria/Iraq |
| 2015 | Zakaria Said Mohamed is currently being searched by the Spanish police, under the charge of terrorism. He was in the process of recruiting activists to join lSIS in Syria and Mali. He had a trading business for beverages non -alcoholics in Denmark where he is investigated for fraud [4] | Denmark/ Spain | Syria/Iraq /Mali |
| 2015 | An American court approves the extradition procedure for Samir Azizi, Afghan and German citizen. Azizi is wanted in Germany for having orchestrated a VAT fraud. The American judge indicates that the pocketed funds have served to the financing of terrorism. [5] | Germany /United States | ? |
Economy of terror
The “economy of terror” unveils a universe underlying the jihadist networks, less violent, and yet very powerful and with ramifications in all levels of society. We are witnessing also to the development of a true transnational criminal infrastructure and designed to take advantage of those countries whereas the economic system is based on trust and individual responsibility.
The European Commission has created in the beginning of this year a special unit engaged in countering the terrorism financing. Indeed the European approach that brings together the efforts of all countries is surely the right one, but the means and the powers which this unit will have the freedom to act on the European Space are the key points of its viability. In this aspect the European Union has many lessons to learn from the United States for countering the threats at federal level. European countries should ad will be forced by circumstances to adopt a model similar to that of the FBI which showed from inception its utility in tackling serious organized crime. An European FBI should be hence only a question of time?
Join Dr Marius-Cristian Frunza in his webinar to be broadcast live on 5 May 2016 where he will discuss how the new wave of terror is being supported through a dedicated economy.
- [1] A massive VAT fraud occurred on the CO2 emissions market . (see Fraud and the carbon markets : The Carbon connection Routledge 2013) . A SEAL unit found in 2014 in Taliban camp invoices from an Italian brokerage firm involved on that market.
- [2] VAT fraud in Italy on the carbon market
- [3] http://www.thelocal.dk/20140926/dane-added-to-us-terror-list
- [4] http://www.nytimes.com/2014/06/17/world/europe/spanish-police-target-cells-recruiting-war-volunteers-for-insurgencies-from-western-africa-syria-iraq.html?_r=0