Financial Fraud Ring Exposed: How Criminals Drained Millions from Romania using Bulgarian Shell Companies

Bulgarian investigative outlet Context, in partnership with BIRD journalists, uncovered a massive financial fraud scheme that has been draining the Romanian state budget for years. This transnational tax evasion scheme utilizes EU tax rules and was orchestrated using Bulgarian shell companies, causing damages worth over 250 million euros.

Methodology of the Scam

The fraudsters employed a method known as “missing trader intra-community” (MTIC) fraud, exploiting zero tax rules between EU members. This scheme involves setting up one or more shell firms in European countries, engaging in VAT-free trade, and taking advantage of the following steps:

1. Import goods tax-free from another EU country.
2. Sell the goods domestically, charging domestic buyers VAT.
3. Keep the collection of VAT and hide the proceeds.
4. Close the importing firm, evading legal action.

Impact on the European Union

MTIC fraud is a widespread problem in the European Union. According to Europol, annual losses to this type of fraud reach almost 50 billion euros. In Romania, such criminal activity negatively impacts the state budget and hinders essential development projects.

Involvement of Bulgarian Consultants

The European Public Prosecutor’s Office Head, Romanian prosecutor Laura Codruta Kovesi, denounced this cross-border tax evasion and stressed the severe consequences. In Ruse, Bulgaria, consultants have been aiding Romanian entrepreneurs in setting up companies, offering headquarters and identifying socially vulnerable individuals to pose as sole proprietors for minimal payment.

• Three of the most prolific consultants discovered had established hundreds of shell firms.
• One particularly aggressive consultant advertised a “Tax haven in the EU” on their website and set up 230 companies.
• Among these companies, eight Romanian-controlled firms were implicated in significant tax frauds.
• In some cases, fraudsters embezzled European Structural and Investment Funds by inflating import goods values.

Instances of Tax Fraud

One instance of fraud involved the overvaluation of machinery exports between a Chinese exporter and a Romanian manufacturer, leading to the theft of nearly one million euros. Romania’s national tax collection authority identified 140 such cases involving Bulgarian firms over the past decade.

Consequences and Solutions

In the face of financial turmoil, the Romanian government has considered measures like tax hikes and spending cuts. However, Kovesi emphasizes the importance of combating organized crime, as financially crippling them would effectively starve their resources to fight other crimes such as drug trafficking.

• Romania had the largest VAT gap among member states in 2021 (36.7%).
• The European Commission reported 36.7% of expected contributions went uncollected.
• Germany managed to collect 7.5 billion euros in VAT contributions.