UIF: A synthetic indicator to identify paper companies

 

Introduction

The Financial Intelligence Unit for Italy (UIF) of the Bank of Italy has published a study that identifies a synthetic indicator that indicates the presence of typical characteristics of a “paper mill” company, that is, a company dedicated to issuing invoices for non-existent operations, producing simple accounting “papers” in order to allow productive companies to use them for tax evasion purposes, representing non-existent costs in the balance sheet. The activity of the “cartiere”, underlines the UIF, is characterized by a very relevant bank movement, with round figure incomes referred to the payment of invoices of other companies, and by exits, proportional to the incomes, due to repeated withdrawals by the administrators justified as payments to suppliers. Moreover, on the accounts of paper companies, operations typical of real businesses are rarely found, such as payments of utilities, taxes, fees, etc., while, in general, the accounting balance of the relationship is close to zero.

The elementary indicators elaborated by the UIF, based on elements that can be deduced from the financial statements are the following:

 

Qimmat = tangible assets/ assets

This describes the operational and production structure of the company. The quotient varies between 0 and 1 and tends to zero if the tangible assets are minimal or nil in relation to the total assets, a typical case for paper mills. In fact, for paper mills tangible fixed assets should be zero or very low because they operate without a real operational and productive structure such as vehicles, plant, machinery, equipment, furnishings, PCs, real estate etc.

 

Qonfin = interest and other financial charges/revenues

The quotient represents the cost of debt and is a proxy for the “bank debt/liabilities” indicator. The absence of bank debt in a company balance sheet is quite rare, especially in the start-up phase of a company in the Italian bank-based production system. The absence of bank debts is generally due to the fact that the paper mill does not want to be subjected to any screening by the banking system, such as the analysis of the balance sheet or the income tax return, or to an on-site visit during the phase, for example, of the preliminary investigation of a new loan.

 

Qpatr = (paid-up share capital + net reserves)/liabilities

It describes the direct investment of the partners in the company. Paper mills are characterized by low share capital and low reserves, a sign of the absence of entrepreneurial planning.[1].

 

Qacco = absolute value[(1 – (net purchases + costs for services and use of third party assets)/revenues)

Paper mills have large revenues, due to the issuance of invoices, but also significant costs to return the funds received from those to whom they issue invoices. The paper mills monetize the funding through large withdrawals that are often justified as business costs of various kinds (payment of suppliers, external consultants, etc.).

 

Qclav = personnel expenses/revenues

Paper mills are characterized by a swirling turnover in the absence of employees. A value close to zero of this indicator is indicative of a company that invoices without staff, which is typical of paper mills.

 

Conclusions

These indicators are suitable for the preparation of organizational models provided for by Legislative Decree 231/2001 regarding the prevention of the crime of fraudulent declaration through the use of false invoices.

Moreover, they represent a valid tool not only for the financial administration but also for the companies themselves, especially when they intend to deal with new suppliers. In fact, in case of audits by the financial administration, often, they are involved, without distinction, all the subjects of the chain.

Therefore, in order to avoid coming into contact with a paper company, it is advisable to adopt a series of behaviours:

– before entering into relations with the possible supplier, it will be necessary to carry out a check at the Register of Companies to ascertain its existence, history and compatibility between the declared activity and the one actually carried out;

– at the same time, it will be important to verify that the VAT number is active (through the service provided by the Revenue Agency). Even if the introduction of the electronic invoice has partly obviated the problem, it is necessary to consider that there are many subjects who are still exempt;

– it is preferable to check the actual existence of the legal and operational headquarters in order to ascertain whether or not the supplier is equipped with a suitable structure to carry out the requested transaction;

– the stipulation of a contract in writing and with a certain date is also essential. This last element, the lack of which is normally invoked by the auditors to deny the probative value to the document produced;

– If one operates through mediators/agents/brokers:

1. verify the broker;
2. sign a contract with the broker/agent/broker specifying the latter’s role, responsibilities and remuneration;

– If interacting with foreign companies, it is advisable to check whether the company has a permanent establishment or a branch in Italy;

– Another element worthy of attention is the exchange of communications (e-mails, chats, writings, letters, notes, etc.) between the assignor and the assignee, useful for demonstrating the effective vitality of the contractual relationship;

– Another important issue is that of the prices charged by the assignor, which must be in line with market prices: very low offers, in fact, are only possible thanks to the non-payment of taxes such as VAT;

– It is necessary to pay attention to the indication in the invoice of the operations carried out, which must not be generic.

– Finally, also in consideration of the frequently transnational connotation of the cartiere, it is opportune to remember that, relatively to the intracomunitarian transfers, it is obligatory to conserve the Vies interrogation.

It should be remembered that the Court of Cassation has established that the tax authorities cannot limit themselves to demonstrating the operational unsuitability of the transferor, but must prove – also by means of presumptions, provided that they are serious, precise and concordant – that the transferee was able to perceive such unsuitability on the basis of the specific diligence of an average operator in the sector (pronouncements 34723/2019; 2483 and 4428 of 2020).

On the other hand, no value is attributed to invoices and their payment, since they may have the sole purpose of making a fictitious transaction appear real (27112/2020). In any case, it is advisable to pay by traceable means, which allow the beneficiary to be traced.

 

LDP remains at your disposal for any further information or further study of the topics discussed above.

 

[1] In the financial statements prepared in abridged form, it is not possible to identify, from a reading of the balance sheet, loans from shareholders, whether interest-free or interest-bearing. On the other hand, loans in the form of contributions are normally shown under the item “other reserves” included in the indicator.