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VAT On, VAT Off June 22, 2011

Posted by Audit Monkey in The Joy & Pain of Internal Audit.
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A copy of ‘Operational Risk & Regulation’ crossed my desk the other day. I wouldn’t recommend taking out a subscription, it is a very dry read. There is the odd gem though, as the publication details the top five operational risk loss events in April 2011. The source is ‘SAS Software’, though I suspect it hasn’t involved Special Forces to collate the information. It quotes BNP Paribas Fortis as losing $104million (a nice round sum) due to theft and fraud, and here’s how:

“BNP lost an estimated $104.01 million due to a crime ring. Traders could buy and sell carbon dioxide allowances in the EU. In 2009, BNP unknowingly purchased emissions permits from a crime ring. The group bought the permits without paying value added tax (VAT) and then sold them to buyers at prices that included VAT. The crime ring then pocketed the extra funds that were supposed to cover the VAT payments”.

In short, this is probably a bit of good old-fashioned VAT carousel fraud.

A few questions. How can you ‘unknowingly’ purchase a contract? Where were the due diligence processes? How an earth does a crime ring get set up as a vendor in the carbon dioxide exchange (if there is such a thing)?

Of course, we all know where Internal Audit would be, doing a post event audit and saying ‘I told you so’. Yeah like that’s going to win friends and influence people.

Anyway, not that I’m going to lose a lot of sleep over it; it’s the Bank’s loss after all!

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Comments»

1. A Cow in Willesden - June 28, 2011

Do you think it was the same crime ring that trapped Smeagol in LOTR?
It reads like there is something lost in translation, maybe the article in its original language is crystal clear and provides a coherent description of how a contract can be enforced without the legal requisite of certainty (which I believe would otherwise preclude an “unknowing purchase” of anything)

2. Audit Monkey - June 28, 2011

Mmm. You’ve lost me with the Lord of the Rings humour. Unfortunately I’m not a fan. Not a fan of Harry Potter either!

With regard to contract certainity, I would have thought once a price had been agreed between the buyer and seller, the trade had been executed at the relevant strike price, it would have gone contractual. On discovering it was a fraudulent transaction, it becomes a bit of bind as it depends who the counterparty is, where the trade is in the system, AML regs, etc, whether you can recover the monies. I’m assuming the trading took place in the EU.

I’ll try and find some more information as it looks like a right juicy cock up.


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