Share this post
In the early-2010s, a tax official in a European country, referred to as Country A in this anonymised case study, noticed an unusually large number of tax rebate requests from a pension fund. She investigated further, despite threats made to her, and this led to the revelation of a multibillion-euro tax fraud scheme.
Unfortunately, taxpayers in a number of European nations are thought to have lost more than €60 billion to a network of bankers, lawyers and financial traders who had devised complex systems for claiming tax rebates to which they were not entitled. In addition, the scandal could have been avoided had authorities heeded the warnings about the practice from whistleblowers two decades before they took action.
This case shows the importance of taking whistleblowers seriously and investigating fully their reports of wrongdoing.
Background
A number of market participants were found to have been employing unethical and potentially illegal methods of working the tax system across the European Union and beyond. These tactics involved two parties collaborating to co-own the same shares and then trading them in such a way that both parties claimed a tax rebate to which only one party should be eligible.
In the early 1990s, a state commissioner had warned that this practice was occurring within the financial markets. Additionally, five whistleblowers also came forward to warn authorities but were ignored.
However, an administrative assistant in Country A’s central tax office noticed unusual transactions. A pension fund based in Country B was buying and selling shares worth billions of euros in quick succession before claiming huge tax refunds.
As there was only one beneficiary of the fund, the assistant considered this to be suspicious and demanded to know more. She felt the answers, given through lawyers, were evasive. This led to her investigating further and finding examples of similar tactics from other market participants. She began receiving threatening legal letters from representatives of those involved.
Eventually, colleagues would take up the investigation with her, and journalists in Country A would uncover the full extent of the scheme.
What happened?
Authorities across Europe acted on the reports and began legal proceedings against many of the participants in the tax rebate scandal. Country A extradited one key player in the scheme from Country B, finding the lawyer guilty of advising clients on how to illegitimately claim tax rebates. He was jailed and made to pay back millions of euros that he had gained from his misconduct. Country A also jailed a number of other bankers for their role in the network. Country C, another European nation, suffered significant losses in terms of tax receipts and launched a major legal campaign to find those responsible. It is working with authorities in other countries to bring legal action, with some market participants already having been fined for their lack of oversight in allowing clients to reclaim tax illegitimately. A number of major institutions became implicated in the scheme, many of whom were under investigation or who had employees investigated as a result.
What should have happened?
Multiple whistleblowers had already reported on the practice before authorities took it seriously. Had officials taken these reports seriously, 20 years before the tax assistant’s discovery, European countries could have saved billions of euros of tax income.
In addition, the first reaction to the tax assistant’s investigation was for some of the companies involved to try and close her down with legal threats. This proves the importance of a culture that values whistleblowers and carries out independent investigations into their reports.
Some of the implicated organisations suffered reputational damage over the saga, something that could have been avoided if there had been a mature compliance culture in place, as well as clear reporting and investigation procedures.
Another method through which companies better maintain compliance is by creating an effective employee personal trading policy.
The Markets in Financial Instruments Directive (MiFID II) states that “an investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under this Directive as well as appropriate rules governing personal transactions by such persons.”
By implementing a pre-clearance procedure to screen potential trades by employees, you can restrict those trades that might lead to conflicts of interest or to illegal activity, such as that witnessed in this case study.
How IntegrityLog and TradeLog help
- IntegrityLog is an online whistleblowing reporting tool that allows for confidential, as well as anonymous, reporting of misconduct. It is compliant with GDPR and with European whistleblowing laws implemented in the wake of the EU Whistleblowing Directive.
It is easy to use for investigating teams, with a clear dashboard to show the status of cases and any forthcoming deadlines. Compliance officers can communicate through the platform with whistleblowers. It keeps all data accessible only to authorised personnel. Request a demo of IntegrityLog today to see how it could improve your corporate compliance efforts.
- TradeLog automates the process of pre-clearing trades for employees to prevent insider trading schemes. You set acceptable parameters of financial products in which your employees can invest, avoiding those that could create compliance issues.
The online tool also allows for surveillance of employee trading activity, alerting you to contraventions of the law or your company’s employee trading policy. This helps you maintain compliance with a reduced administrative workload. Request a demo of TradeLog to find out how it can help reduce misconduct within your business.
