When it comes to scams and hacks it is easier to fend off attacks perpetrated from the outside. When attacks are carried out from within, stemming from internal members of your organisation colluding with one another to work around your defences, even the most robust system will not be able to stop them. This was revealed by a ZIMRA internal audit conducted in March this year.
The audit revealed that almost $50 million ZWL had been paid out as VAT refund to companies that were listed as dormant. There were four companies involved in the suspicious transactions:
- Katumi Investments
- Nutroil Pvt Ltd
- May Computers and
- Hefa Electrical
A dormant company is a company that has not had significant income for a while. Usually, it means the company was not trading for the period in question and that would mean it probably has no reason to be receiving such a high amount in VAT refunds.
How VAT works
To understand how the five suspects siphoned the money, you need to have a basic understanding of how VAT works. Generally, VAT or Value Added Tax is collected by businesses on behalf of ZIMRA. In most cases, it is levied as a percentage of the sales figure. Each product made or imported is tracked down the supply chain as it moves from the original manufacturer down to the final consumer and VAT is paid by businesses to ZIMRA at each stage.
- For example, a product is imported or made by business X and sold for $10 and VAT is $1.45. The final product price is $11.45. Business X keeps the $10 and remits back the $1.45 to ZIMRA
- The product is bought by company Y which sells the product for $100 (an overpriced Apple product maybe). Here VAT will be $14.50 so the total selling price will be $114.50. The $14.50 will be sent back to ZIMRA by company Y.
- Finally, company Z which is a retailer which bought the product sells it for $150 and adds VAT of $21.75 to get total sales of $171.75 and remits back the money to ZIMRA.
On the flip side, whenever businesses make a purchase from one another they are inevitably charged VAT as well. Businesses do not pay VAT. VAT is meant to be paid by the consumer but is collected by businesses on behalf of ZIMRA. So during each tax period, businesses do a setoff. They compare the amount of VAT they owe versus the amount of VAT they paid. If the VAT they paid exceeds the VAT they collected on behalf of ZIMRA they file a claim for a refund since they overpaid ZIMRA.
To make things easier each business is given a TAX number which is used to handle all its VAT interactions. It is possible but hard but clearly not impossible to defraud ZIMRA by claiming that you paid more VAT than you collected on their behalf. When a valid claim for a refund is sent to ZIMRA they transfer the amount you are owed to your bank account.
A series of control failures allowed fraud to happen
The five suspects Batanai Zengeni, Valentine Chireke, Tawonga Nhengu and Learnard Mazanhi colluded together. They took 4 above named companies that they knew were dormant, generated ZIMRA e-services pin for each allowing them to interact with the ZIMRA e-filling system.
In August and October of last year they managed to use BancABC to open accounts in the names of the four companies. With the current pandemic going on they appeared to have used Branch X to remotely submit their KYC documents. They probably had scanned copies of documents such as the certificates of incorporation etc.
They then changed the banking details of the companies to match their new fake company accounts in the ZIMRA system and supported this change using doctored documents. Once this was all done all they needed to do was submit fake VAT claims showing that they had paid more in VAT than they received.
ZIMRA then promptly paid out just under $50 million ZWL in VAT refunds to these companies. The suspects wasted no time in cleaning the accounts, moving the money to other accounts in order to “clean” the money.
The system kicks in
Thus far the individuals appeared to have been lucky in evading internal controls but their luck ran out in March. An internal audit revealed that a substantial amount of money had been paid out to companies that were supposed to be dormant. A little more digging and the auditors and investigators unearthed the ring and scam.
It’s not clear whether the stolen money was received but all but one of the suspects are already in custody.