WE MAKE RECOMMENDATIONS BUT IT DOESN`T DEPEND ON US WHEN THEY WILL BE IMPLEMENTED
The VAT frauds are the most serious financial fraud in Europe

Interview with David Smith, Manager of the Crown Agents Programme for Modernisation of the Bulgarian Financial Administration

Interviewer: Ralitsa Peycheva

- Mr. Smith, what results do you expect to accomplish by the end of the contract you just signed with the Ministry of Finance?

- Our main purpose is to improve the procedures for collection of State revenue. This includes higher level of compliance with the legislation, improving NRA’s capacity to reveal frauds, and better coordination among all agencies, which are responsible for state revenue collection.

- What do you mean by improving the procedures? What are the faults of the currently existing methods?

- The main accent is on the collection of excise and VAT, the most important taxes, with which we work. We are also examining the opportunities given by the legislation. We are trying to make sure that the procedures that are being implemented within the agencies fully comply with the legislation. An important part of our work here is to asses to what extend the officials, working within these agencies, are trained, and what are the opportunities to introduce further qualification in order for them to better perform their duties.

- Is getting over the dreadful bureaucracy, with which citizens and companies have to deal with included?

Yes, simplifying the procedures is a key component because it provides for a higher level of compliance with the laws. Here I want to state that the rise of the revenue is not due to the large number of identified frauds, but to the fact that more and more people comply with the laws. I can give a practical example with the Summer Compliance Campaign carried out by the NRA at the Black Sea. Actually, we’ve been their advisors during two campaigns – the one I already mentioned and the one that is currently in process.

- You mean the NRA exercise at the sea side, during which they monitored premises with high turnovers 24 hours a day?

- Exactly. The success of this campaign, however, is not measured only in how many violation notices were issued by the NRA officials. The more important thing is that the bars and restaurants, that were violating the law, after the checks began to declare higher turnovers, which are closer to their actual profit. This way we increased compliance with the legislation in Bulgaria. The possibility to seize the violators is a lot higher now.

The Winter Compliance Campaign, which is currently in process, follows the same principles. The same checks that were performed at the sea side will be now performed in the winter resorts. But there isn’t a lot of information around this campaign at the moment. Four of our advisors are participating in it. We dedicated a lot of our capacity as well but it’s too soon to speak about particular results. Besides, we are only advisors; the NRA officials are those who have to asses what has been achieved.

- As in the previous contract, no particular financial results were written down in the new contract as a final purpose (or at least they weren’t publically announced). Isn’t it appropriate that, you, as a party on the contract, to be in some way bonded with an estimated rise of the revenue from customs duties, excise and VAT from import as a result of your joint work with the Ministry of Finance.

- As for the opinion about us in Bulgaria I want to state that in the beginning of our firs contract in 2001 the media interest in us was huge, there were a lot of negative comments in connection to our future work. In time, however, especially in the last four years this interest became a lot smaller. We’ve been here for a lot of time now and I believe that the results from our program are good and people are no longer asking the questions they used to ask. The number of comments in the media is very small and most of them are neutral, or even positive. It is in our best interest to perform our jobs as good as possible but we’re not looking for publicity in the media. In the meantime we want to be as transparent as possible, and the results from our work to be clearly visible.

As for the revenue - during the Programme for Modernisation of the Customs Administration, in the period between 2002 and 2006, the customs revenue increased by 182% - from 2.5 billion BGN in 2001 to 7 billion BGN in 2006. This is now a fact. It is hard to say what percentage of this increase is thanks to Crown Agents. Nevertheless, we have solid evidence to prove our contribution. After the mobile Assurance Teams started work in 2002 the National Customs Agency revenue rose by 25% compared to September 2001. These are good results and prove the influence of the Mobile Assurance Teams over the increasing number of identified frauds.

When working with the NRA in relation to VAT it is even harder to say what percentage of the achieved is owed to Crown Agents’ work. There are a lot of factors that influence the revenue collection. We are in Bulgaria as advisors, we make recommendations. All our advices have been accepted but it is beyond our duty how long will it take for them to be implemented, this doesn’t depend on us.

- While talking about the Customs, on what stage is at the moment the famous reform there? According to many experts this remains the most corrupt and unreformed agency in Bulgaria.

- My opinion about the state of the customs administration is a lot more positive.

I don’t deny that the structure has a lot of problems, and still need serious reforms and improvement in their work, as well as our recommendations. Actually, all other customs administrations have similar problems, not only the Bulgarian. Any country, which says that they don’t have problems with their customs, is just lying!

Of course, smuggling channels and corruption still exist, but this will always remain that way. I can positively state, however, that life has become a lot more difficult for smugglers, than it was before 2002.

- So, according to you this effect is owed to the Mobile Assurance Teams? How many smuggling channels have been uncovered since the Mobile teams began working?

- Yes, to them as well. As for the channels – one route for illegal goods can be uncovered but it’s really hard to say how many people who are involved in it have been stopped. The channel will be restored, and another route will be established. Principal element in our work is to prevent the channels from appearing because many of the people involved in illegal activities are out of the country. Part of our work is to create difficulties for the smugglers, and to make it harder for them to perform their activities. We make recommendation to the Customs Agency exactly for this: how to identify the channels, and how to create obstacles for their functioning. We don’t have information about precisely how many channels have been stopped.    

- OK, then, but why doesn’t corruption at high levels within this agency decrease, and why after each new dismissal or appointment of  one or another official people start talking about rearrangement of puppets, who ensure the security of the smuggling channels?

- The recommendations we provide to the National Customs Agency for combating corruption concern all levels – both heads and inspectors. The people who work there have to prove that they posses the needed personal qualities to be pointed out as examples. If there are no such people in the customs administration it will be awfully hard to make any reforms. As far as smugglers and corrupt officers are concerned I believe that now is a lot more difficult for them then it used to be before 2002. Of course, this doesn’t mean that all problems have been solved.

- Then what should the “measuring instrument” of your successful work be? Yes, you give advices and recommendations but how can we know whether they are useful, and whether they are being followed?

- I’ll once more repeat that it depends only on the Ministry of Finance whether they will comply with our recommendations. There is a very clear system, which allows the Ministry to see and estimate that we are doing the work, we are here for. Crown Agents Inception Report, which was accepted by the Ministry of Finance in September 2007, contains 72 proposals for action. These, however, are proposals for action made by Crown Agents, and not by the Ministry or its agencies. The recommendations themselves are listed in a table and submitted to the Minister, and each quarter we submit an updated table with the recommendations, where we also asses their status – whether they are implemented or not.

- Then, would you comment on the levels of revenue from taxes planned in the budget for 2009? I am asking this question not only because of the financial crisis, but also because the NRA Executive Director, Maria Murgina, announced some time ago that there are certain obstacles with the collection of one of the most important taxes- VAT.

- In any case, all forecasts made at this point will be only hypothetical. Mrs. Murgina is absolutely right but this is partly connected to Bulgaria’s accession into the EU, and the creation of more opportunities for frauds since they`ve become international. In relation to this your country is a suitable target for such speculations because the systems are still not developed well enough. We had similar difficulties with other countries in 2004 during the previous stage of expansion of the EU. As a matter of fact, a great part of our work, especially on previous contracts, was aimed exactly at reducing VAT frauds.

- When talking about contracts – why is SANS included in the Second Phase of the Programme? What are the problems within this structure?

- This is in connection to the Financial Intelligence Agency, which was transferred from the Ministry of Finance to SANS. Actually we worked with them even during the previous contract. With the current contract we engaged to continue to provide assistance to the financial intelligence. After a lot of conversations with the SANS’ management, they identified a need of training in order to increase the skills within the financial fraud detection area. Fiscal crimes are also part of organised crime. The people from the Financial Intelligence Directorate need to improve their skills in locating VAT crimes, especially when they are connected to international frauds and VAT siphoning (the so called carousel schemes). We propose training, which will help them work more efficiently within the financial crimes area and mainly within the area of the abovementioned carousel schemes – registering nonexistent companies, which are stationed at different places, and perform a nonexistent export. I can’t give you precise numbers but this is a huge problem in the United Kingdom. There is nothing unique in these cases in Bulgaria. The carousel frauds are the most serious financial crime in Europe. Most of the money on the black market have been siphoned exactly via this crime scheme, and the sums are a lot bigger than from smuggling and drug dealing. This is a huge business. OLAF is currently dealing with the coordination of operations in a lot of countries with the purpose of revealing exactly these heavy crimes. This system for cooperation with the other member states and the EU is very valuable to Bulgaria as a member state. We work with them on certain crime groups or separate persons and activities. Information about frauds is being shared – how they are performed, what new is being used by the criminals. The VAT frauds constantly change, which calls for new methods for identifying them. From this point of view it is very important for Bulgaria to know how other countries are coping with the problem and what methods are being used. And our work as advisors will be exactly to help with the international cooperation.

- Would you tell us something more about your future work with the Economic Police and the State Commission on Gambling (SCG). What are the problems there and how are you going to help?

- The help we provide to the MoI can be divided in to two areas. We provide them with technical knowledge and training, connected to customs and revenue frauds, as well as recommendations for structural coordination, such as the one that exists between the NRA and the NCA. We want to involve the Economical Police, SANS and Border Police in this process of coordinating agencies.

As for the State Commission on Gambling we are mainly going to work on money laundering cases performed mainly within the casinos and the gambling industry, so that this money can again enter the real sector. We will provide training for the SCG and help them learn how to recognise money laundering and how to report it afterwards.