Gold Mines, VAT Scams and Money Laundering – How Can We Spot Red Flags?
In recent investigations, the South African Revenue Service (SARS) has uncovered a massive VAT fraud scheme involving illegal gold mining operations. Fraudsters are using fake mining companies and invoicing schemes to launder money and evade taxes, costing the government billions in lost revenue.
One notable scam involved gold buyers disguising illicit - often stolen - gold from old or abandoned mines, as legitimate second-hand scrap. This so-called ‘scrap’ gold is then introduced into the legitimate market, sold to refineries, with fraudulent VAT claims being submitted for tax refunds. These operations are supported by a network of "fly-by-night" suppliers that issue fraudulent invoices to claim VAT refunds, despite not providing any real goods or services. These companies were often liquidated or deregistered once they came under scrutiny from SARS, only to be replaced by new entities with similar operations. Large, suspicious payments flowed between these companies, and many had directors or owners who were either employees or linked to multiple companies in the scam, further complicating the trail of accountability.
The Telltale Signs of Illegal Activities
As an accountant, it's crucial to be aware of potential signs of illegal operations when dealing with clients in the mining or metals industries. Here are some of the key red flags:
Unusually High Yields: If a client claims extraordinarily high yields that far exceed industry standards, this could be a sign of fraudulent activity. Whilst it is not illegal for a company to do well, consistently overperforming the industry averages should raise flags and warrant further scrutiny.
Frequent Supplier Changes: Be cautious if your client frequently switches suppliers, especially if these suppliers are liquidated or deregistered shortly after transactions. This could indicate the use of "shell" companies to facilitate money laundering.
Dubious Suppliers: If a client deals with suppliers that seem to exist only on paper or have suspicious ownership structures, these could be fronts for illegal activities.
Large, Unexplained Payments: Watch out for large transactions between a client and small or unknown entities that don’t appear to have a legitimate business purpose. These could be part of a scheme to launder money.
Unclear or evasive explanations: If your client is unable or unwilling to provide clear details about their suppliers, operations, or VAT claims, it could be a sign of something amiss. Make sure that get satisfactory answers to your questions from management. If you do not understand the answers you receive, you may need to do more work but there is also a chance that management cannot or do not want to provide clarity.
By staying vigilant, applying professional skepticism and looking out for these warning signs, accountants can play a vital role in helping to combat fraud and maintain the integrity of the financial system.
Always ensure that you ask the right questions and thoroughly investigate any discrepancies to protect your client and your practice from the legal risks associated with these illicit activities.
