In 2019, the Canada Revenue Agency (CRA) made a decision it would later regret.
Managers at RCAF headquarters in Ottawa have agreed to an urgent request from telecommunications company Iristel. The Ontario company sought a refund of $63 million in sales taxes.
However, Iristel has already been the subject of a tax audit.
Since the company began selling telephone minutes wholesale over the Internet, its revenue – and its GST/HST reimbursement claims – have skyrocketed. The agency suspected that some of the company’s suppliers were involved in a fraudulent scheme.
But Iristel assured tax authorities that there was no reason to be ashamed, arguing that without these refunds the company would no longer be able to pay its employees and would be forced to close its doors.
When Iristel then pressed the CRA for an additional $86 million in sales tax refunds, the agency refused.
She claims that Iristel knowingly participated in a ruse called Merry-Go-Round, or at least exhibited willful blindness. She is demanding that the company pay back the $63 million it has already paid to her.
The justification of the finance agency’s allegations against Iristel has not yet been proven in court.
Iristel denies these allegations. She appealed her case and filed a $275 million lawsuit against the CRA, alleging abuse of process, misrepresentations and abuse of power.
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BO Elkjær, journalist at Dagbladet Information in Copenhagen, has been investigating carousel fraud since 2009. He believes Canada has become a new target for these fraudsters since Europe tightened its rules and imposed prison sentences on them.
Photo: Radio-Canada / Henrik Hjort
A low risk crime
Iristel’s case is anything but an isolated incident.
An investigation by CBC’s The Fifth Estate in collaboration with Enquête shows how international criminal networks steal hundreds of millions of dollars from Canadian government coffers without fear of being caught by authorities.
The CRA says it has identified more than $1.1 billion in this type of GST fraud. This figure includes both amounts claimed by fraudsters that were paid by the IRS and those that the CRA refused to pay.
The amount of public money stolen is likely much higher as these schemes are difficult to detect.
This is a very low risk crime. The government will not necessarily realize that these funds have been stolen from it, notes Danish journalist Bo Elkjær, who has been investigating this type of fraud in Europe since 2009.
Carousel fraud is widely known in Europe and has been used there for decades by well-organized criminal groups such as the Italian Mafia, the Hells Angels and Eastern European gangs.
The ride of the crooks
To deceive tax authorities, these criminals create a network of companies that organize to create the illusion of legitimate business activity.
This scheme is called a carousel because transactions in an artificial supply chain occur in a circular manner.
Companies in a carousel pay each other large sums of money – including sales taxes. These taxes must ultimately be paid to the state, but the company that has to transfer the money disappears beforehand.
In addition, the last company in the carousel exports the product abroad – a tax-free sale – and then demands a refund from the state for the taxes it itself paid to its supplier.
The state is therefore reimbursing a tax that it never received.
With each spin of the carousel, the fraudsters demand further reimbursement, thereby amassing millions of dollars in public funds.
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Marius-Cristian Frunza, a London-based financial fraud expert, believes Canada is falling behind in the fight against carousel fraud.
Photo: (CBC) / John Badcock
A fertile ground for fraud
The telecommunications sector – including the sale of telephone minutes over the Internet – is particularly vulnerable to this type of fraud because they are intangible products that do not require storage or transportation.
Transactions are carried out much more quickly and in an accelerated manner, allowing fraudsters to commit this tax evasion on a much larger and more extensive scale and in a shorter period of time, explains Marius-Cristian Frunza, a London-based carousel fraud expert.
And fraud with such virtual goods is also more difficult to detect.
In many cases, transactions are conducted on paper without goods or money actually changing hands.
In other cases, fraudsters create a carousel around a genuine, long-established company. These legitimate companies may not be aware that they are in a fraudulent scheme.
Did Iristel know that a plan had been implemented? The company’s CEO, Samer Bishay, says he knows nothing about it.
“I don’t know who was involved in the supply chain,” he said. They say there are three suppliers above us, so the supplier of a supplier, a supplier. If the problem exists, we must prosecute these people and bring them to justice.
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“If I really did this, then why don’t I wear handcuffs?” Iristel CEO Samer Bishay says the Revenue Agency’s allegations against his company are unfounded.
Photo: CBC / John Badcock
An Uber driver who makes millions
The providers who billed Iristel for millions of dollars a month for voice minutes did not have permanent locations.
Their headquarters were accounting firms, private residences or temporary office rental centers in southern Ontario, Alberta and British Columbia.
According to ARC, most of these companies’ official directors had no experience in telecommunications. Among them we find an Uber driver and delivery person for Skip the Dishes, a granite countertop installer and a driver for Walmart.
According to the expert Marius-Cristian Frunza, the people recruited as directors of these companies could be directly involved in the fraud or be simple managers who get caught up in this criminal affair without actually knowing what it is about.
The Revenue Agency believes that these modest-income suppliers had no real commercial activity and that Iristel did not question their ability to generate more than $663 million in sales.
Samer Bishay says he saw nothing suspicious when he started paying hundreds of millions of dollars to these suppliers. He says he started his company himself from a temporary office, with no experience in telecommunications.
There was nothing wrong with that, he said.
A customer with a questionable past
The ARC believes that Iristel customers in the United States were also involved.
One of those customers was Louis Arriola and his company LDI Networks, to which Iristel sold over $120 million worth of telephone minutes.
In 2009, he was sentenced to 27 months in prison for fraud involving fake telecommunications companies. In 2012, he was accused of looting and embezzling investor funds; the case was later settled out of court.
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Louis R. Arriola.
Photo: LinkedIn
Iristel boss Samer Bishay admits he didn’t do any internet searches to check his client’s background.
We carry out a credit check. Why should you do a Google search for someone? “I won’t do that,” he said.
Cryptocurrency transactions
At the same time, in 2019, Iristel and its suppliers decided to process their transactions through an obscure cryptocurrency payment platform, TeleEscrow.
It was Louis Arriola who founded TeleEscrow and its cryptocurrency called Amerixcoin.
According to Amerixcoin transaction records analyzed by CBC, Iristel’s account at TeleEscrow received $600 million in payments between October 2019 and March 2020.
Amerix Coin’s transaction records show that the entire $600 million came from a single telephone company owned by Louis Arriola.
The payments then circulated in a loop between Iristel, its chain of suppliers and other companies, returning to the starting point and to Arriola’s company.
These payments formed the basis for tens of millions of dollars in additional tax refund claims that the company submitted to the CRA, which have so far been rejected.
In addition, the TeleEscrow payment platform in the USA came into conflict with other companies due to questionable transactions.
A bankruptcy trustee said that TeleEscrow was designed to commit fraud, was part of a criminal organization with no real business activity, and that Louis Arriola and others at Telescrow conspired to create a shell company to commit massive fraud against banking institutions.
Louis Arriola did not respond to our questions.
According to the Revenue Agency, the aim of the TeleEscrow platform was to deceive[ARC] by leading him to believe that payments had been made between Iristel, its suppliers and its customers to justify the VAT refund requests.
According to expert Marius-Cristian Frunza, this type of fraud is also a commonly used means of escaping banks. They use these payment platforms to facilitate their transactions and not to be monitored by a country’s financial authorities, he says.
Samer Bishay justifies his decision to use TeleEscrow by saying that payments could be made faster than through the traditional banking system. He adds that he had no reason to be suspicious of Louis Arriola.
I didn’t know who Louis Arriola’s associates were, who he did business with, who he slept with. “It’s none of my business,” says Iristel’s boss Samer Bishay. And it’s very unfair to say after four years that you should have known this and I should have known that.
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Muhammed Atif, the founder of Samaviya, a company based in Islamabad.
Photo: LinkedIn
The Secrets of Bills
Through a confidential source, we managed to obtain invoices from certain suppliers in Iristel’s supply chain.
Through a more detailed analysis of the files, we discovered evidence that suggests the existence of a well-organized network. Multiple invoices from these different suppliers – who are essentially competitors – were created by the same person.
In addition, minutes of telephone calls are sold and billed from one provider to another in very short periods of time, sometimes just every second.
You can’t do that in a normal company. That doesn’t mean anything. This should be a big wake-up call, believes Bo Elkjaer.
The analysis of the invoices also shows that they were created in the time zone in which Pakistan is located.
We were able to confirm that these invoices were indeed created in Pakistan. Our analysis confirms that most of the companies in Iristel’s supply chain are indeed connected.
An Islamabad-based company, Samaviya, is said to have received nearly $42 million from one of the Canadian suppliers linked to the carousel.
We tried to contact Samaviya founder Muhammed Atif, but he did not respond to our questions.
I think the money that was stolen from the Canadian treasury is lost. He disappeared. “You won’t get it back,” says Bo Elkjaer.
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“The IrisTel case would be problematic from the perspective of European standards. There are warning signs everywhere,” says carousel fraud expert Mike Cheetham.
Photo: (CBC) / John Badcock
Canada, an easy target
Mike Cheetham, a Dubai-based carousel fraud expert, believes the ultimate responsibility rests on the shoulders of Canada’s tax authorities.
There will always be criminals who take advantage of easy targets. Their tax system gives them a free hand, he says.
In Europe, the enormous amount of public money stolen has prompted governments to take action. According to the European Public Prosecutor’s Office, carousel fraud is the most profitable crime in the European Union, costing member states around €50 billion in lost taxes every year.
Suppliers in some of the most vulnerable industries, such as telecommunications, are no longer responsible for collecting sales tax – and therefore can no longer claim fraudulent refunds.
European companies are required to vet their suppliers and customers much more thoroughly than in Canada.
In addition, European authorities are conducting criminal investigations against these fraudsters. Some were sentenced to prison.
They have found places where they are not harassed by the authorities, such as Canada. “This is a huge global criminal network that is targeting you,” says journalist Bo Elkjær
The Canada Revenue Agency and the office of Finance Minister Marie-Claude Bibeau declined our interview requests.
In an email, the minister said that the fight against these schemes takes a lot of time and resources, but he is ensuring that the tax authority wages a more aggressive fight by improving its review approach and risk assessment tools.
