Global economic crime spreads: Latvia has highest VAT shortfall

RIGA - Economic crimes against enterprises and other legal persons continue to grow in the world. According to the PwC 2014 annual report on global economic crime, approximately 37% of respondents admit to being victims of economic crime (up 3% on 2011)
In addition to the aforementioned figure, 25% admit to have been victims of cyber attacks, because fraudsters now often use high-tech solutions to acquire what they need.

The PwC survey, which is the most large-scale one in the world, concluded that theft remains the most popular form of economic crime in the world, as mentioned by 69% of respondents. This is followed by public procurement fraud (29%), bribery and corruption (27%), cyber crimes (24%) and accounting fraud (22%). Other types of crime include human resource fraud, money laundering, theft of intellectual property or information, mortgage fraud and tax fraud.
‘Economic crime has become a truly borderless threat. The reality of fraud is that it can impact a company’s revenues as directly as other business and market forces,’ – said Steven Skalak, partner in PwC’s Forensic Services practice and lead editor of the global survey.

Skalak adds that economic fraudsters continue to function. They adapt to such ever-changing global market conditions as implementation of new technologies and expansion of newly-developed countries.
He adds that the situation is only made worse by the financial impact economic crimes have on a wide range of enterprises. Economic crimes ruin internal processes, reduce employees’ honesty and reputation of companies they work for.

Where does economic crime take place?
Economic crime is a wide-spread and global problem. In a regional perspective, economic crime is present most notably in Africa, where 50% of respondents admit to have been victims (59% in 2011). It is followed by North America (41%), Eastern Europe (39%), South America and Western Europe (35% each), Asia and countries of the Pacific (32%) and the Middle East (21%).

Respondents from 65 countries and territories admit that they have had experience with economic crimes at one point or another. Respondents from South Africa note the highest level at 69% (60% in 2011). Crime rates continue to grow rapidly in Ukraine where it is measured at 63% compared to 36% three years ago, Russia stands at 60% (37% in 2011) and Australia, 57% (47% in 2011).

The survey also mentions eight newly-developed countries (Brazil, Russia, India, China, South African Republic, Turkey, Mexico and Indonesia), where 40% of respondents admit they have experienced economic crime by way of outflow of riches.

Which sectors suffer the most?
Economic crimes have the highest impact on the financial sector, retail trade, the consumer goods sector and communications sector. Nearly 50% of respondents in each sector admit to have being victims of economic crimes at some point. Financial services organizations sometimes become victims of large-scale cyber crime and money laundering. Retailers and communication companies often suffer the most as a result of theft.

How to uncover fraud?
The survey concludes that 55% of all economic crimes are uncovered thanks to internal organization measures. These include reports about suspicious deals, internal auditing or fraud monitoring management.
It is mentioned in the survey that respondents predict a further increase in the number of economic crimes in nearly all the categories in the near future. Managers of different enterprises are mostly concerned over corruption and bribery.

A commentary about the situation in Latvia
PwC Taxes and Legal Consultancy Department manager in Latvia Ilze Rauza describes the situation in Latvia in the following way: ‘Even though there has been no in-depth analysis of the situation in Latvia, the 2013 report about the shortfall of VAT in 27 EU member states reveals that Latvia is among those countries that have arguably the highest VAT shortfall of GDP. This indicates high rates of tax fraud in the country.’

Rauza adds that tax crimes in Latvia have only increased due to problems including household financial difficulties, benefits of economic crimes, and personal justification of committing such crimes. Without doubt, tax fraud and other types of economic crime create a serious distortion of competition in the country. Latvian courts are unable to handle the numbers of different tax disputes. However, there have been positive developments in VAT cases, which may contribute to the reduction of VAT fraud cases in the long-term.