False gold transaction invoices – prevention and compliance

By Jeffrey Quan, Peng Jing, and Wu Zhenyu, ETR Law Firm
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Since the State Administration of Taxation and Ministry of Public Security jointly issued the Notice on Launching Special Actions against the Crime of False Issuance of Special Value-added Tax (VAT) Invoices through Gold Transactions in 2015, authorities have cracked down on false issuance of special VAT invoices for gold transactions, leading to a number of prominent cases.

This article discusses the crime of issuing false gold transaction invoices – and necessity of incorporating compliance requirements into the gold block and precious metal trading business in advance, with reference to available data analysis and the authors’ experience in compliance cases.

UNDERSTANDING THE CRIME

Jeffrey Quan, ETR Law Firm
Jeffrey Quan
Senior Partner
ETR Law Firm

To better understand the crime of issuing false gold transaction invoices, it is important to first grasp the concepts of “the crime of issuing false special VAT invoices (crime of false special invoice issuance)” and “tax risks in gold transactions”.

The crime of false special invoice issuance is stipulated in article 205 of the Criminal Law as a crime violating the state tax collection and administration system, and state taxation. It refers to illegally issuing false invoices for fraudulent export tax refund and tax deduction without actual transactions being made.

There are four main scenarios of false issuance:
(1) falsely issuing special invoices for the purpose of fraudulent export tax refund and tax deduction for others or oneself, or asking others to do so for oneself, or recommending others to do so, without any actual business operations;
(2) falsely issuing special invoices bearing false quantities or amounts for the purpose of fraudulent export tax refund and tax deduction for others or oneself, or asking others to do so for oneself, or recommending others to do so, through actual business operations;
(3) instructing others to falsely issue special invoices or other invoices for oneself for the purpose of fraudulent export tax refund and tax deduction, based on actual business operations; and
(4) recommending others to falsely issue special invoices or other invoices through a third party (usually a natural person) who actively mediates and brokers between the two parties, to conduct such false issuance despite knowing there’s no actual transaction between the parties.

As a precious metal, gold’s physical transactions are characterised by large sums, high invoice value, small volume and great liquidity. In actual gold transactions, buyers do not necessarily require special VAT invoices, nor do they need VAT input invoices.

Therefore, gold trading enterprises may accumulate a large number of sales invoices – and these surplus invoices may motivate arbitrage by “exploiting gold transactions to falsely issue special invoices”, posing significant tax risks.

There are two main forms of the crime of issuing false gold transaction invoices: (1) separation of invoices and goods, in which lawbreakers entrust members of Shanghai Gold Exchange to purchase gold and obtain input tax invoices, and sell the gold without issuing invoices to actual buyers, then issue false invoices for the collection of national tax credits without making actual transactions; and (2) altering or forging special VAT invoices, or altering or forging the information (e.g., name of buyers and goods) on gold transaction invoices using high-tech means for undue profits by providing such invoices to companies needing input tax invoices for tax offsetting.

Since these false and fake invoices may lead to VAT losses of the state – with reported crimes involving gold transaction invoices in recent years often amounting to more than RMB100 million (USD15 million) – the crime is considered particularly serious.

CRIMINAL CHAIN

Peng Jing, ETR Law Firm
Peng Jing
Associate
ETR Law Firm

Taking a certain gold transaction invoice-related crime for example, the sophisticated criminal network involved a gold agency, gold trading enterprise, invoice-receiving shell company, actual gold user and downstream companies.

The gold trading enterprise was a member of the Shanghai Gold Exchange, and the gold agency was responsible for contacting the others in the gold sales business chain. The enterprise had no direct contact with any subjects other than the gold agency.

Typically, the general criminal process of issuing a false gold transaction invoice is as follows. First, the gold agency contacts the invoice-receiving shell company through a series of third parties to obtain the invoice information of the shell company.

Next, the actual gold buyer (actual gold user) transfers payment to the account of the shell company (i.e., the downstream company of tax deduction) via bank cards controlled by the gold agency, and enters into a gold sales contract in the name of the shell company with the enterprise who will make false record of capital flow and issue false special invoices after the purchase payment is transferred to it from the downstream company of tax deduction.

After the enterprise purchases the gold, the gold agency will instruct its consignee(s) to pretend to be employees of dozens of shell companies to sign the pick-up mandates and give the gold to the actual user.

Finally, the gold agency will instruct the consignee(s) to ask for special invoices from the enterprise and give the invoices to others, thus completing the separation of invoices and goods.

In the above-mentioned process, the enterprise and related persons are usually deceived, or deliberately neglect the other links, as they often have no comprehensive knowledge of all involvements, and tend to believe that the transaction is real, based on the gold sales contract.

FORE AND AFT COMPLIANCE

Recent years have witnessed heated discussions and practical attempts in relation to non-prosecution and third-party supervision mechanisms. Although false issuance of gold transaction invoices is merely a special situation of false issuance of special invoices (in “problematic” industries such as pharmacy and construction), the chain of crime in such cases is usually extensive – requiring consideration of due diligence issues, apart from the usual KYC ones – and various professionals (e.g. auditing, legal, supply chain management) may play a role.

Therefore, focusing on judicial practices such as non-prosecution is not enough. Attention must also be paid to pre-transaction and post-transaction compliance.

The authors believe that gold transaction enterprises should strive for sound corporate compliance. Apart from leveraging compliance systems such as defence-proof chain, voluntary disclosure and responsibility division, independent auditors, professional lawyers and other compliance experts should be allowed to play their indispensable parts.

Jeffrey Quan is a senior partner and Peng Jing is an associate at ETR Law Firm. Wu Zhenyu, an associate at the firm, also contributed to the article

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