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VAT fraud worsens social problems
In Russia, legitimate businesses meet with unwarranted suspicions
because of reluctance of government to award refunds
Oleg Nikishenkov - Moscow News - themoscownews.com - 4.9.12 - JRL 2012-66

At first glance, the issue of VAT fraud may seem one with major macroeconomic significance, for discussion by economists and policy wonks, but with little application to Russian society as a whole. It may generate extra income for criminals, but not affect the lives of ordinary Russians all that much.

Looking more closely, however, the more sinister effects become clearer. Apart from tragedies like the death of the lawyer Sergei Magnitsky, who was investigating cases of fraudulent refunds, criminal gangs frequently target the underprivileged and poor to help them, often unwittingly, in their schemes.

'Dead Souls' in real life

Yelena Panfilova, director of the Russian office of Transparency International, said that criminals often use stolen or purchased passports to forge supporting documents for refund claims, with homeless people or students in difficult financial straits the chief victims. These victims then become fall guys if the scheme is uncovered, being sent to prison instead of the actual criminals.

Panfilova cited the case of one man who was accused of stealing 5.4 billion rubles ($182 million) through a VAT fraud scheme. To arrest him, police had to go to a village saw mill, where they found the suspect company's "general director" working odd jobs. He has since been sentenced to five years.

The Novaya Gazeta newspaper reported a similar story last week, after a woman named Yulia Gorskaya was arrested for fraud. According to case documents leaked to the media, Gorskaya is a multibillionaire. Photographs of her house, published by Novaya Gazeta, show that in reality she is barely scraping together enough to live.

Thieves buy property rights

Document and identity theft are not the only features of fraudulent activity, however, as so-called "black notaries" have access to property databases to help them find desperate owners of houses or apartments, who can provide them with an address for a shell company. As with the victims of document theft, the property owners are often the targets of investigations and arrests once the authorities catch wind of the schemes.

"We have people here who find themselves in a hopeless situation and are forced to get involved in this or that criminal enterprise," Panfilova said.

Meanwhile, the schemes' developers remain in the shadows.

"Their inventions work well and the schemers somehow think that conceptually it's almost a legitimate business," Panfilova said. "They walk along the streets, smiling."

How the refunds work

Adopted in most developed countries, the United States being a major exception, value-added taxes are designed to achieve tax equalization between different sectors of the economy, so-called "fiscal neutrality." Governments often grant exemptions, particularly to support export sales, and therefore allow refunds for sales that satisfy official criteria.

Because the bureaucratic process of applying for refunds is so formalized and clearly outlined, cases of fraud pose a huge problem for authorities, said Sergei Budylin, of the Roche & Duffay law firm ­ and not just in Russia.