Carousel fraud

The not-so-merry evasion of value-added taxes is a vicious cycle of false trading across multiple countries. Around these trader schemes, known as carousel fraud, fraud examiners work to uncover complex international fraud networks and identify at-risk business entities. 

In March, the European Public Prosecutor’s Office (EPPO) in Germany obtained its first two convictions from its ongoing tax fraud investigation known as Midas. The Landshut Regional Court sentenced one defendant to five years in prison and another to three-and-a-half years for claiming value-added tax (VAT) refunds with fraudulent invoices. According to prosecutors, the pair caused an estimated loss of 5 million euros by exploiting VAT rules to evade paying taxes on fraudulently traded protective face masks. 

The EPPO’s Midas investigation is centered on a criminal organization allegedly conducting a sophisticated VAT fraud scheme known as carousel fraud, or a missing trader intra-community (MTIC) fraud. The EPPO investigation, which has spanned 17 countries, first revealed in February 2024 a revolving network of smartphone, small electronic devices and protective face mask sales through shell companies and fictitious transactions. The scheme has allegedly caused damages of about 195 million euros.

This column delves into the mechanics of VAT carousel fraud schemes and the history of trading rules abuse. It also identifies red flags of carousel schemes that fraud examiners can use to halt the cycle of consumption tax evasion. 

What is VAT?

VAT is a consumption tax applied at each stage of a product’s creation and distribution. Every step in the production chain requires paying a tax on the additional value added to the product. A seller pays the government the taxed amount, minus what they paid the previous seller in the chain. 

For example, if a jurisdiction in the European Union (EU) has a 20% VAT, a consumer purchasing a final product for 100 euros from a store would pay an additional 20 euros in tax to the store. The 20 euros would be the store’s VAT output. Instead of paying the government the full 20 euros, the store selling the final product would subtract whatever VAT it paid when it acquired the final product from the distributor (VAT input). 

The distributor would’ve charged the store 20% VAT when it sold them the batch of products, sending the government the difference between 20% of what they made off the store and the amount they paid in tax when they purchased the product from the manufacturer. The manufacturer would’ve paid VAT to the business that sold them raw materials and would then pay the government 20% from its sale to the distributor, minus what they had to pay in VAT for the raw materials. 

At each step, VAT is paid to the government, but only the final consumer is accountable for the full 20% of the final product price. Each business in the supply chain is responsible for collecting taxes from the purchaser of its products, calculating its inputs and outputs, and sending the government the taxes it’s liable for paying. In certain circumstances, if a business paid more in VAT than it collected (VAT input is greater than VAT output), it might be eligible for a refund or reimbursement. 

What is a carousel scheme?

Fraud schemes, like the alleged fraud in the Midas investigation, abuse trade rules between members of the EU. VAT is applied differently in the various member states, and the export of goods to another state is typically VAT-free. A distributor that sells goods to a store in another member state doesn’t collect VAT from that store. The store, when it sells those goods, collects the VAT, and because it didn’t pay any VAT inputs, the store is responsible for remitting to the government the full amount collected.

In its most basic form, a missing trader scheme involves fraudsters importing goods into a country without paying VAT to the seller. They then sell those goods in the country, collect the applicable VAT and keep it without paying the government. The trader is “missing” from the chain of inputs and outputs. 

Carousel schemes can be significantly more complicated than other missing trader schemes. Instead of involving a single fraudulent trader absconding with VAT payments they owe to the government, carousel schemes are a conspiracy among several traders operating in multiple EU member states and cycling products (real or imaginary) through a series of bogus sales. At the center of the scheme, there’s still one trader who imports goods into the country VAT-free and disappears without paying the required VAT on the purported in-country sale. The difference is that the in-country buyer is involved in the scheme and extracts money from the government. 

Here’s an example. Company 1 in France sells to Company 2 in Germany without any VAT collected or paid. Company 2 (the “missing trader” or “straw person”) sells to Company 3 in Germany, collecting the full VAT and paying the government nothing. Company 3 then sells to Company 4, still in Germany, charging VAT and paying their VAT responsibility to the government. Company 4 exports the goods back to Company 1 in France VAT-free. 

Company 4, based on its invoices, pays its VAT input, but because it exported the goods, it has no VAT output. With a higher input than output, Company 4 is now eligible for a VAT reimbursement from the German tax authority. Company 1 then restarts the series of sales, spinning the carousel around and around with the same goods, but this time with a new Company 2. Each time, the coconspirators extract more VAT refunds from the tax authority. 

In some carousel schemes, actual goods are involved, and sometimes there’s only a paper trail of false invoices. Some carousels are less complex with fewer horses, with one company buying the goods and immediately exporting them for a refund. Other times, there are hundreds of false fronts creating a sea of fake invoices to complicate the scheme and make it appear authentic.

A history of abuse

Carousel fraud isn’t new. The EU has seen significant abuse of trade rules and has conducted numerous high-profile fraud investigations that have resulted in convictions. The most famous of these VAT frauds, dubbed the “fraud of the century,” involved trading carbon emissions credits and cost the EU billions of euros in 2008 and 2009. When the EU international emissions trading system went live, companies received a certain number of carbon credits and had to purchase additional credits from other companies if they wanted to exceed their allotted carbon emissions. The program created a new market overnight, with companies attempting to figure out the value of carbon credits as they wrestled with managing the new emission limits. 

Fraudsters saw an opportunity (at least initially), as the credits were VAT-free for sales to other states but still covered by VAT for in-country sales. Since the carbon credit wasn’t a physical product, a fraudster could execute a carousel scam with relative ease because no shipments or deliveries had to be fabricated. Fake trades soon flooded the emissions credit market, and tax authorities in France were buried in VAT reimbursement requests, resulting in billions lost to these carousel fraud schemes within months. 

In 2012, several ghost companies claimed to import mobile phones from Belgium in a 176 million euro carousel scheme. The phones, some of which hadn’t been officially released by the manufacturer due to a production delay, were purportedly traded among several companies within the U.K. before being exported to another EU member state. The exporters then flooded the U.K. tax authority with reimbursement requests, alleging they’d paid VAT on the phones and received none from their exports. The trading took place over eight months, with the fraudsters hoping to abscond with the VAT reimbursements before the tax office could tie the reimbursements to the missing VAT payments at the front of the scheme. The fraudsters used two freight companies to create a paper trail of imports and exports, with vans driving back and forth between countries carrying pallets of low-value devices or dummy cargo. 

More recently, the EPPO’s “Moby Dick” investigation worked to uncover a 520 million euro VAT fraud operated by several organized crime groups. The fraudsters perpetrated a carousel scheme through a handful of EU member states, including Bulgaria, Croatia, Cyprus, Italy and the Netherlands, from 2020 to 2023. They purportedly sold 1.3 billion euros worth of AirPods, laptops and other consumer goods and submitted requests for fraudulent VAT reimbursement.

The future of VAT fraud schemes

According to the EPPO’s March 2025 report on 2024 operations and ongoing investigations within the EU, fraud cases were up 38% from 2023, with half of all estimated losses coming from cross-border VAT schemes. Germany and Italy had the most representation among EU countries, with 328 active investigations between them. The nation with the third-highest number of VAT fraud investigations, Portugal, had only 21 active investigations. The EPPO processed more than 6,500 reports of crime in 2024, with 70% coming from private parties. 

Although EU member states may pursue VAT tax schemes using their own law enforcement authority, the EPPO is an independent body tasked with investigating fraud, corruption and money laundering throughout the EU. The EPPO, which was founded in 2017, covers 24 of the 27 member states that agreed to enhanced cooperation as part of the 2007 Treaty of Lisbon.

Globally, more than 170 countries use VAT. The Canada Revenue Agency (CRA) has identified carousel schemes as a significant issue, announcing in 2024 an increased focus on detection and investigation of these frauds. An unsealed affidavit from last year alleges that Canada paid out $37 million in VAT reimbursements to scammers engaged in a telecom carousel scheme.

In 2022, the European Parliament released a study highlighting the threat of MTIC fraud, estimating that it costs EU member states 60 billion euros per year, with 80% of the fraud conducted by organized crime. The report acknowledged that the current VAT system is likely to remain in place, as EU member states hadn’t reached a consensus on VAT reform. 

The study concluded that a split payments method, in which VAT is paid upfront by the buyer when transactions are made, would be an effective method to prevent missing trader fraud. However, the cost of implementing such a system would dissuade many member states from participating. In the short term, the study recommended that businesses requesting large VAT refunds undergo additional checks and verification, especially when they have only recently been established. Other suggestions included greater collaboration among member states and a rapid-response plan to cut off VAT reimbursements to companies suspected of MTIC fraud.

What can fraud examiners do?

In the absence of significant reforms, combating VAT schemes and MTIC fraud requires a bit of pay-and-chase on the part of tax authorities. Fraud examiners should look for the classic red flags of fraud, especially those involving new businesses. A 2007 Financial Action Task Force (FATF) report identified the need to combat the laundering of the proceeds of carousel fraud and provided guidance, including a list of indicators. Fraud examiners should look for the following:

• New businesses with high revenue turnover.
• Recent changes in sectors or commodities.
• Old goods with high tax rates or high value and low volume.
• Foreign nationals in charge of companies who’ve never been involved with business in those companies’ jurisdictions.

Samuel May, J.D., CFE, is a research specialist for the ACFE. Contact him at Smay@ACFE.com.