Memorandum by Royston Ford, Cunningham
Lindsey Marine
1. I wish to respond to the public call
for evidence on this subject. I am a surveyor and investigator
specialising in claims, losses and "incidents" occurring
in the context of the movement of goods in international trade
and logistics. Investigations include incidents of damage, theft
and fraud.
2. I have been employed in this capacity
since 1993 having previously served as a Lloyds of London broker
(Marine and Cargo business). Over the last four years I have been
retained on a frequent basis by insurers who underwrite the specialist,
and high-risk, movement of "technology" traders' goods.
This includes CPU's and computer systems/components, mobile telephones
and related accessories or equipment.
3. I am writing in a personal capacity as
a professional interested closely in this subject. I am not writing
for or on behalf of my employer or its clients and my evidence
does not necessarily represent the views of those parties.
4. I am not qualified to discuss the effects
that MTIC fraud has on the legitimate trade in related goods but
do wish to offer a view of the effect that the fraud has had on
the insurance industry and perhaps to some extent on legitimate
traders because of the way in which the fraud has driven other
crimes.
5. I also wish to highlight some ways in
which MTIC traders are evolving the fraud and defeating many of
the preventative measure adopted by Revenue and Law Enforcement
agencies.
6. Losses in these sector forced most UK
composite (and specialist insurers) to refuse to cover traders
in these sectors and since 2003 this business has been almost
exclusively underwritten by an insurer in Switzerland who have
retained my firm's services on an exclusive basis.
7. As a result I have been involved in the
investigation of numerous occurrences of theft, robbery and fraud
arising from the trading of mobile telephones and computer equipment
(estimated total value ca. GBP40 million) and have worked with
police (operational and intelligence units) and HMRC on a frequent
basis. These investigations have involved enquiries in the UK,
mainland Europe and Dubai (which features as a principal "node"
of MTIC fraud networks).
8. As a result of these investigations it
has become clear to me that the majority of the trade in mobile
telephones and computer processors is entirely vitiated by MTIC
VAT fraud.
9. It is also apparent that the VAT fraud
is both an instigator and a multiplier of other crimes—particularly
theft of cargo in transit (most often by violent hijacking of
the carrying vehicles) and robbery (frequently armed) from warehouses.
It also leads to fraudulent claims against insurance covers and
may well also lead to the operation of insurance facilities with
the object of laundering the financial proceeds of the VAT fraud.
10. One aspect of the MTIC fraud in mobile
telephones is that the parties to the fraud must ensure that they
do not have in their possession any database or other record of
the IMEI numbers of the telephones they are trading in a circular
pattern. The reason is obvious: That such records (showing repetitive
transaction of the same goods) would indicate (to HMRC) knowledge
on the part of the trader that he was involved in a fraudulent
trade.
11. The effect of this is that the MTIC
cargo travels with no record being kept of the IMEI (or serial
or other identifying references). This fact is not lost on other
criminals who are aware that if they can steal the MTIC telephones
then the owner will be unable to provide, to law enforcement agencies,
information which would identify the stolen goods. The robber
or hijacker of the phones need only prepare a relatively weak
"legend" for the cargo which suggests it was purchased
legitimately and law-enforcement, should they have grounds to
suspect goods to be stolen, will be wholly unable to prove it.
12. There are manifold examples of criminals
obtaining information on the movement of MTIC consignments from
"inside sources" at the relatively small number of freight
forwarders and carriers specialising in this high-risk trade.
Intelligence and monitoring of known outlets for stolen goods
suggests that these hijacked or stolen cargoes are not offered
for onward sale. This suggests that the thieves are not always
motivated by immediate financial profit following sale of the
loot but rather that the consignments are possibly stolen to order,
as stock for MTIC activities or that the consignments are in fact
targeted for theft by the MTIC trader/owner of the property.
13. The reasons for an MTIC conspirator
to target its own consignments are predominantly one or both of
two options. The first is that the consignment is no longer useful
to the MTIC conspirators. Either it has travelled the carousel
for so long that it is now obsolete (phones are rapidly superceded
by newer and better models) and has a much reduced market value
because the boxes and packaging are damaged and worn and over
the lifetime of circular trading the cartons have fallen victim
to repeated pilferage (by warehouse personnel and drivers all
too aware that the cartons are not going to be opened and the
phones released for sale to consumers.) The secondary reason is
that the MTIC trader becomes aware that a consignment has been
intercepted by HMRC officers and the IMEI numbers scanned. The
consignment is now "too hot to handle" and must be disposed
of. If it can be disposed of in a manner that leads to a recovery
from an insurer then so much the better. Hence the staged hijacking
or robbery—phenomena which police statistics will clearly
demonstrate to be linked statistically with the rise and fall
of MTIC fraud activity.
14. It is common for freight forwarders
specialising in this trading sector to operate "Open Cover"
insurance facilities. These are policies provided by an insurer
to the forwarder so that the forwarder is authorised to accept,
on behalf of the underwriter, cargo insurance risks proposed by
the forwarder's clients. The trader instructs the forwarder to
ship a consignment from A to B and also to insure it for the duration
of the voyage. The forwarder charges a premium to the client and
on monthly declarations it advises the underwriter of the insurances
effected and pays over the premium charged, less a commission
retained by the forwarder.
15. Since FSA regulation which would have
required the forwarders to become FSA registered and compliant
with the regulation of such insurances, the forwarders established
offices in Dubai from where they continued to operate these "open
covers" free from UK regulation. Customers of "Bloggs
Freight Limited" knew that they could apply to "Bloggs
Freight LLÇ in Dubai for their insurance cover. More often,
the insurance was, de facto, sold and effected in the UK in clear
technical breach of the FSA regulations.
16. There are numerous examples of fraud
in the operation of these open covers in Dubai whereby forwarders
accepted risk and premiums but failed to declare them and pay
premiums over to the insurer unless a loss occurred in which event
the victim's insurance was of course properly placed with the
underwriter after the fact.
17. Because of the decidedly murky operation
of these insurance instruments, there is a very real fear that
these unregulated activities may be used for the purposes of money
laundering. In at least one case where wholesale fraud was detected,
the forwarder concerned operated an "Insurance Division"
in Dubai and issued cover certificates in its own name. Premiums
were handled through a bank account with the First Curacao International
Bank in the Netherlands Antilles. This bank, used by MTIC traders,
has now been liquidated and its beneficial owner is currently
remanded in custody in the Netherlands on charges of running a
criminal enterprise, handling stolen property and money laundering—all
in connection with the MTIC activities of its account-holding
customers.
18. The concern is that a fraudulently operated,
unregulated insurance vehicle is the ideal conduit for money laundering
particularly when operated by a freight forwarding or transport
company. Such a company, if it were so minded, would have at its
disposal all the experience and documentation necessary to create
a high-value cargo which existed only on paper and to engineer
grounds for an insurance claim in respect of the cargo which it
could settle in order to have "clean" funds paid over
to the cargo-owning "claimant".
19. The extent of corruption within the
trade in these MTIC commodities, and within the freight companies
which service the "industry" has also resulted in the
use by MTIC traders of counterfeit cargoes and wholly fictional
cargoes existing only on paper. Why pay a large sum for real goods
to trade when a high taxable turnover can be achieved either just
on paper or with worthless counterfeit consignments? There is
little doubt that the insurance industry has fallen victim to
claims in respect of such shipments albeit that this is difficult
to quantify as the proof disappears along with the alleged cargo.
20. The prevalence of these related crimes
mirrors exactly the level of MTIC fraud and this will be borne
out by statistics from EU law enforcement agencies. In London
this will be predominantly the figures from the Metropolitan Service
and in particular, records held by Operation Grafton, an intelligence
unit specialising in high value freight crime associated with
London Heathrow Airport (where the majority of the relevant specialist
freight companies are located).
21. The insurance industry saw a high level
of claims in respect of the robbery or hijacking of mobile telephones
and CPUs between 2001 and 2003. The levels diminished somewhat
with the introduction of "Joint and Several Liability"
and then exploded in 2005-06 as it became apparent that action
by traders (the so-called "Bondhouse" case) in the European
Courts was likely to result in a finding against HMRC (in respect
of its Joint and Several Liability Orders).
22. Since the closure and liquidation of
First Curacao International Bank (de facto removal of financial
services from mobile phone and CPU traders) and extended verification
of VAT returns by HMRC, the wholesale bulk trading sector has
been almost completely halted. Coincidentally, the hijacks and
armed robberies have also stopped and there is no shortage whatever
in the supply of these goods to consumers.
23. Measures proposed by the European Commission
(cross-border liaison and cooperation etc) are all helpful in
clamping down on this fraud but have no realistic chance whatever
of representing real progress toward stamping it out. The simple
truth is that for as long as a situation exists where a non-governmental
entity is entrusted to collect tax revenue and pay it over periodically
to The Exchequer then somebody will always abuse the process for
their own fraudulent gain. Some traders who collect VAT will continue
to disappear with that public money.
24. The use of databases of IMEI or other
identifying references on goods in order to identify repeated
and circuitous trading of the same items has limited benefit.
It is likely to deter the MTIC trade of items such as mobile telephones
or technologies such as iPods and multimedia devices because it
is relatively difficult to alter the identification numbers which
appear both on packaging, on the casings of the items and in their
software or firmware—requiring them to be laboriously reprogrammed.
25. However, in order for revenue and law
enforcement officers to monitor fully these items it is necessary
not only to record the identification on packaging but to open
the packages and extract the identification numbers from the equipment
software. This is because of the prevalence of counterfeit packaging
systems mainly in Dubai and the Far East (where coincidentally
most MTIC rings begin and end). This level of inspection will
be difficult if not impossible for authorities to implement.
26. If it were achievable then these identification
databases may deter the MTIC trade in phones and other consumer
devices because of the overwhelming effort required to avoid detection.
It would not however deter the MTIC trade in computer processors
(where the largest illicit profit is to be made, owing to the
value of these individual items and their low volume/weight).
CPU's are traded in bulk cartons typically carrying 315 units
each. That is as much as GBP63,000 in each 10kg carton. Each one
of these cartons has only one readily available identifying mark—a
"lot" and a "box" number printed on an adhesive
label fixed to the shipping carton.
27. I am aware of MTIC operations where
CPU's are imported from Dubai or the Far East and pass through
a chain of transactions which includes a "missing trader".
The CPU's eventually arrive at a UK purchaser who removes the
processors from the shipping carton which he retains, empty, as
evidence to any HMRC investigation that he is a domestic "end-user"
of the CPU's. In fact the CPU's are exported back to the Far East
in plain boxes where they are repacked into counterfeit Intel
or AMD cartons with counterfeit "clean" lot and box
number labels before coming back into the UK. MTIC ring. This
example is an addition to the more customary and simple export
out of the UK (achieving a VAT reclaim) in the original packaging
which is then replaced with a clean identity in the Far East and
sent back around the carousel.
28. The system of reverse charge is a near-perfect
mechanism for stopping the fraud because traders are not able
to collect the VAT in the first place. In effect the only type
of business likely to be collecting VAT, under a reverse charge
mechanism, is a retailer selling goods in small individual transactions
to consumers. These tend to be large, stable businesses with little
in the way of tax-fraud risk-indicators. Taxable sales to consumers
are too difficult to "engineer" and too laborious and
slow to be of interest to career fraudsters.
29. However the system of reverse charge,
if it is to succeed, must be applied to all taxable transactions
and not simply "specified goods". I have evidence of
traders in mobile telephones and CPU's moving away from these
goods into items not envisaged by the reverse charge proposals.
30. Such goods include cosmetics where traders
are registering their own brands and patents so as to bestow a
high taxable value upon a relatively worthless cosmetic preparation
which can be purchased from chemicals suppliers in bulk. These
generic creams are then cheaply packaged with the artificial branding
and sold at exorbitant "paper-prices" for the purpose
of MTIC fraud. As these goods do not carry serial or other identifying
numbers or reference so the risk of detection is extremely low.
It also puts MTIC frauds within reach of criminals or aspiring
criminals who could not afford to acquire expensive cargoes of
consumer electronic goods or who were not prepared to steal such
goods from another party.
31. Other examples of the evolution of the
fraud include the use of bottled mineral waters (actually bottled
tap-water) with an artificially inflated brand-value and "fashion"
goods where garments are purchased from Southeast Asia at very
little cost and given a "fake-brand" makeover before
being used as MTIC cargo. As these tactics increase so the possibilities
for easy money-laundering are obvious!
32. By far the most worrying recent evolution
of MTIC fraud involves the use of what are purported to be rare
or unusual metals or chemical substances with artificially inflated
values as MTIC trading goods. For instance I have been asked to
consider an assessment of the risk in transporting what was described
as a rare non-radioactive isotope of copper, much prized as an
analytical reference material in laboratory testing applications.
The value of the material was said to be GBP6,000 per gram but
investigations proved that this was a readily available non hazardous
substance available for purchase at between EUR5 and EUR7 per
gram. The company seeking a risk assessment of the carriage of
this material was a freight forwarder who until that time had
specialised in the carriage of mobile telephones and CPU's.
33. I consider that MTIC fraud has become
the largest growth criminal industry that Europe has seen in recent
years and that the practitioners of it will not stop if there
is the slightest prospect of their activities continuing. The
move towards using merchandise with little or no distinguishing
marks or references that would expose the circular trading suggests
that the only effective counter-measure is to take the collection
of tax, to the maximum possible extent, away from potential fraudsters.
A universal reverse charge mechanism seems the obvious solution.
15 January 2007
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