Why dismiss investigating tax fraud? An assortment of reasons.

Documents obtained by Atlatszo.hu show that the Hungarian tax authority and its executives tend to choose from a wide range of reasons when they are rejecting investigations into suspicious matters, while jurisdictional boundaries are also in shambles.

Atlatszo.hu took an extensive look at investigative records and found a number of curious events, when lower-level executives acted outside of their jurisdiction and terminated investigations into value added tax fraud in cases where, clear as day, something was amiss.

Frauds involving value added taxes are an established practice in Hungary. Just last year, a whistleblower came to the public saying that a well-defined scheme involving the trade of sugar alone costs the state HUF 1 trillion in damages, which is around 3.2 billion euros or more than 3 of the country’s gross domestic product.

The site’s queries repeatedly led to a Mrs. László Kedves, who personally terminated a number of investigations, even though the evidence at hand would have warranted further scrutiny.

An investigation into a company, H.O.S.E. Bau Kft., for VAT fraud implicated its partners that were accordingly also targeted for an audit. Kedves rejected the claim citing questionable legal argumentation. This happened despite the fact that even public records show that the company existed for only a year and a half, during which it issued invoices for HUF 260 million (around 840,000 euros) and its expense records almost perfectly balanced its earnings. Then in 2009, it terminated operations overnight, changed owners, moved its headquarters to a remote farm in the countryside, meaning the company will soon disappear into thin air.

It is one of the best established tax dodging practices in Hungary to found a company that amasses significant debts to the treasury from unpaid taxes, then ownership is transferred to an untraceable party. This often means homeless people who naturally have no means to pay the debts that are at times astronomical.

Kedves also played a part in another filing for an investigation into a major security firm, after auditors found irregularities in contracts signed with subcontractors. This time, she rejected the request saying the available evidence doesn’t justify the notion that any of the existing partnership arrangements would be fraudulent. This case dates to 2008, a time when security services was the segment of the economy most prominently contaminated with tax evasion.

Kedves found no compelling evidence that anything would be wrong and dismissed the case, so there was no further inquiry into the subcontractor agreements in question. Since then, several of the companies involved have gone into liquidation.

It seems that Kedves has established herself as someone who isn’t easily convinced that there may be something afoot. She rejected investigating a so-called carousel fraud involving a Romanian firm, the owner of which resided 500 kilometers from his job on record, there were doubts about his identity and even Romanian authorities voiced concerns about the firm. But Kedves isn’t alone in doubting when it comes to senior tax authority officials.

Atlatszo.hu encountered a number of other cases where the suspect circumstances seemed to have merited at least a browsing of the books, but yet again, the inquiries were rejected. A regional executive dismissed an investigation into a company that marked coal mining as the main focus of its activities but also imported computer components and conducted invoicing that didn’t cover any actual exchange of goods or services. No compelling evidence was found that they presented a risk, no investigation was conducted, no further security could be targeted at the books. Since then, all of the companies involved are featured on the tax authority’s “blacklist” exposing parties with tax arrears of HUF 100 million or more (around 320,000 euros).

Early 2011, auditors wanted to look into the affairs of a company that imported 2,000 tons of sugar over a single quarter of 2009, but then conveniently lost the accounts for the first half of the year. Officials wanted to look into shipping records that could have exposed the itinerary of the goods as well as the firms that were involved. Senior director Katalin Somos – a returning figure of the suspicious cases we covered – dismissed the case, seeing no “major risk to budgetary revenues.” The company operated for one year, then quietly disappeared.

Atlatszo.hu discussed the conditions of tax fraud relating to sugar trade here.

Translation by Gergő Rácz. Read the original post in Hungarian here (16 May 2014).