“Please be advised that we have been informed by the Appellant that he doesn’t feel that he can attend such a daunting hearing without representation and he does not have the funds to pay for any more litigation.  We have supplied opening submissions on the Appellant’s instructions, and he wished that the trial goes ahead, but without his attendance.  He relies on the opening submissions.” 

There was no explanation given as to the reason for Mr Elio Auletta’s non-appearance, although as a witness in Asylum’s appeal his attendance had been required.  In the circumstances the Tribunal directed in accordance with Rule 33 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 that, the parties having being notified of the hearing, it was in the interests of justice for the hearing to proceed in the absence of Asylum or its representative.

“1. The Director will not be attending on any given day.  We appreciate that this raises certain problems for the Appellant and these have been fully explained to Mr Auletta.

2.  The issue of the pleaded case and inadmissibility of evidence is withdrawn, given we will not be there to properly argue our point and given the lateness of the issue. …”

In the circumstances, given that Asylum had been advised of the possible consequences of failing to make its witnesses available for cross-examination, and in the light of the Respondents’ subsequent withdrawal of their objection to the admissibility of the witness statements, we decided under Rule 15 of the Procedure Rules to admit both witness statements in evidence.  It will, nonetheless, be a matter for us as to the weight to be attributed to the evidence contained in those witness statement given the failure of the witnesses to attend for cross examination. 

The principal issues to be decided:

i) Whether the Commissioners had provided evidence of the fraudulent evasion of VAT in respect of any or all of the transactions.

ii) Whether there is a connection with any or all of Asylum’s transactions to fraud. 

iii) Whether Asylum knew of this connection

iv) Whether Asylum should have known of this connection there being no other reasonable explanation. 

Other issues were raised in Mr Ahmed’s skeleton argument which we deal with towards the end of the Decision.

In his skeleton argument Mr Ahmed on behalf of Asylum conceded the following:

 i) The Commissioners have identified the correct supply chains in both the Appellant’s chains and those of all the contra traders.

ii) The witness statements that provide factual evidence regarding the actions and trading patterns of the contra traders are not disputed.  Therefore, no contra trader witnesses are required to give oral evidence.  It is the opinion of these Officers that is challenged through submissions.

iii) A fraudulent tax loss has occurred at the start of all the contra traders supply chains.  Therefore no defaulting trader witnesses are required to give oral evidence.

“1.  There is a tax loss in all the dirty  supply chains. 

2.  There is no tax loss in its own supply chains. 

3.  The contra traders did not act fraudulently and, therefore the Appellant is not connected to fraud. 

4. The construction of the supply chains is correct in all the dirty and clean chains and, therefore, the goods purchased by the contra traders were later purchased by the Appellant.”

The Legislation

(1) where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (paragraph 55);

(2) in the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with the fraudulent evasion of VAT, must be regarded as a participant in that fraud (paragraph 56);

(3) this is the case, irrespective of whether or not he profited by the resale of the goods;

(4) this is because in such a situation the taxable person aids the perpetrators of the fraud (paragraph 57).

The ECJ concluded:

“… where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connection with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.” (paragraph 61)

16.        In the light of the above, the Commissioners have the right to refuse a claimed repayment of input tax if the taxable person knew or should have known that his transaction was connected with fraud.

17.        The ECJ in Kittel (paragraph 51) refers to “traders who take every precaution which could reasonable be required of them to ensure that their transactions are not connected with fraud”.  Such traders can rely upon the legality of their transactions without the risk of loosing their right to deduct the input VAT.

18.        The Tribunal in Dragon Futures Limited v HMRC [2006] UK VAT 19831 set out its own interpretation of the test at paragraph 74 and more concisely at paragraph 75:

“Where an initial enquiry gives rise to information suggesting the need for further enquiry, the test is reapplied to assess the need for that further enquiry.”

Hence the action of the contra trader in offsetting input tax against output tax in its broker and acquirer chains provides the connection of the appellant’s broker deals in the latter chains to the fraudulent defaults in the former, without more.  For these purposes, the state of knowledge of the contra trader is irrelevant. Equally the type of goods in the broker chains is compared to those in the acquirer chains is irrelevant.

27.        On the issue of the Appellant’s knowledge, the Chancellor stated:

“48.  As Lewison J pointed out in Livewire (see paragraph 26 above), in alleged contra trading cases there are, at least, two potential frauds (1) the dishonest failure to account for VAT by the defaulter or missing trader (A) in the dirty chain, namely, AS Genstar and Wade Tech and (2) the dishonest cover up of that fraud by the contra trader (C), namely Infinity.  In this case, the Tribunal rejected the contention of HMRC that Infinity had itself been fraudulent even though it must have known or have had reason to suspect that within its transaction chains there were missing, hijacked or otherwise defaulting traders, see paragraph 141.  Accordingly for the purpose of applying the Kittel test the only relevant fraud is that of AS Genstar and Wade Tech.”

28.        In that case, however, there was no suggestion that the Appellant had actual knowledge of a connection with fraud, and the Tribunal had found that the alleged contra trader had only means of knowledge of the fraudulent defaults within its “dirty” (broker) chains.  Having recognised Lewison J’s identification of two potential frauds, therefore, the Chancellor went on to consider only the possibility of the Appellant’s means of knowledge of those fraudulent defaults.  He concluded that if the alleged contra trader was not part of a scheme such that it had actual knowledge of the fraud in its chains when that fraud happened, then the Appellant could not have known of the same.  Therefore it could not be said that it ought to have known.  He went on:

“55.  In my view it is an inescapable consequence of contra trading that for HMRC to refuse a reclaim by E it must be in a position to prove that C was party to a conspiracy also involving A.  Although the fact that C is party to both the clean chain with E and dirty chain with A constitutes a sufficient evasion of VAT involved in the subsequent dirty chain.  At the time he entered into the clean chain there was no such dirty chain of which he could have known, nor was the occurrence of such dirty chain inevitable in the sense of being pre-planned.”

“59. The test in Kittel is simple and should not be over-refined.  It embraces not only those who know of the connection but those who “should have known”.  Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion.  If a trader should have know that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known that fact.  He my properly be regarded as a participant of the reasons explained in Kittel.

“60. The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchases it was more likely than not that his transaction was connected with fraudulent evasion.  But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

(Emphasis added).

35.        The Court also addressed the issue raised by traders in a number of previous cases: that the test cannot be satisfied when the fraudulent default may take place after the appellant’s connected transaction:

“61. …The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle.  If he has the means of knowledge available and chooses not to deploy it he knows that if found out, he will not be entitled to deduct.  If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct.

62. The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase.  If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase.  That trader’s knowledge brings him within the category of participant.  He is a participant whatever the stage at which the evasion occurs.” 

(Emphasis added)

36.        Later in its judgment the Court provided further guidance on the application of the Kittel test:

“81.  HMRC raised in writing the question as to where the burden of proof lies.  It is plain that if HMRC wishes to assert that a trader’s state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion.  No sensible argument was advanced to the contrary.

“82. But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant.  As I indicated in relation to the BSG appeal, Tribunals should not unduly focus on the question whether a trader has acted with all due diligence.  Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is his transactions have been or will be connected to fraud.  The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT.  The circumstances may well establish that he was.”

“5. … in contra-trading there are, in its simplest theoretical form, two chains of transactions.  First the “dirty chain”, in which there is a missing trader, defaulting trader, or trader using a hijacked VAT number (“missing trader” for short), comprising  A (the missing trader) who is the importer of goods into the UK, who sells them to B who sells them to C, who exports the goods, and is thus in a VAT reclaim position.  (For simplicity we shall use the expression import and export for intra-Community trade, acknowledging that these are not the proper labels).  Secondly, the “clean chain”, in which there are no missing traders, comprising C, who is this time the importer, who sells to D, who sells to E, the exporter (the Appellant in this Appeal is in the position of E).  The effect of the clean chain is that the net input tax position of C in the dirty chain is cancelled by output VAT in the clean chain.  There is no benefit to C in this as C has paid the input tax to B, and therefore C could be a trader who happens to carry out both import and export transactions unconnected with any fraud, or C could be a trader who is controlled by a “puppet master” to enter into the cancelling transactions to disguise A’s involvement in a fraud.  The effect of the contra-trades is that C does not excite Customs’ attention as it is not applying for a repayment; the non-payment of tax by A is less noticeable since without a return the Customs do not know how tax A owes.  The input tax reclaimed that C had in the dirty chain has moved to E who is at the end of a clean chain.  The only way for Customs to refuse repayment of E’s input tax is to show that E knew or ought to have known of A’s fraud in a completely different chain, and possibly of C’s involvement.  Since, as we have demonstrated in our example in paragraph 4 above, the only gain from A’s fraud is the recovery of input tax by E, this must imply that E is a participant in the fraud and, unless he is the puppet master, is presumably sharing the tax recovered with someone else.  … 

“6. The nature of contra-trading is easy to state in the above way but the problem in real life is that there is no logical connection between the clean and dirty chains.  First, the VAT accounting periods for C and E will not coincide; E may be on a monthly accounting as it is a habitual exporter, but C may be on a three-monthly period, and C need only arrange that the net tax is nil during that three-month period by entering into transactions after E’s transactions.  Secondly, the goods dealt in may be different in the two chains.  Thirdly, for a particularly C there may be many different equivalents to and A and E, and for a particular E there may be many equivalent C, each with more than one equivalence to A.  Fourthly C may not have deliberately entered into imports in the clean chain in order to cancel the input in the dirty chain; C may merely be an importer and an exporter with outputs in relation to the former happen roughly to cancel its inputs in relation to the latter.  Fifthly, there may be many B’s and D’s in between the importer and exporters.”

45.        In addition to the five bundles of witness statements which we received, there were also one hundred and eighteen binders of exhibits and two binders containing the submissions and the various schedules.  Additionally there were two binders containing thirty three authorities and the legislation.  We will not set out the names of those authorities other than those to which we refer in the course of this decision.

The Facts

46.        From its incorporation on 22 April 2003 to date, the director of Asylum was Marcello Auletta.  His brother Elio Auletta, was company secretary from its incorporation until 1 April 2006.  A Mr Dipak Rao was company secretary from 1 April 2006 until he resigned on 1 October 2007.  Initially Asylum traded from Global House in Epsom, ITW’s place of business.

55.        We set out below detail of some of Asylum’s deals and deal chains.  Although other than in respect of deal March 3 Asylum has acknowledged that there is a fraudulent default, we have set out some of the particulars because of the nature of Asylum’s trade and the recurrence of various of its trading partners and their connection with fraud.

Deal 1 (“deal March 1”) and Deal 2 (“deal March 2”)

60.        In deal March 2 there were multiple supplies, 11 lots in total and the fact that Asylum was able to sell on in each case the exact number of the items it had purchased to the same customer, PDW, as in deal March 1, an outcome which would be extremely difficult to achieve in genuine business dealing, is indicative of the unreality and contrived nature of these deals. 

Deal 3 (“Deal March 3”)

61.        This deal was contested by Asylum on the basis that there was no evidence of fraud in the deal nor evidence of any connection between Asylum and any alleged fraud. 

63.        There is evidence obtained from the FCIB of a prior connection between Ketan and JPC (see March deal 2 above), in the form of a reference on behalf of JPC by Ketan to the FCIB for a fee.  It is also the case that Mr Thakrar had between April 2004 and 18 August 2008 been a director of a company called Cybocity plc which failed to pay an assessment of £295,562.30 to the Commissioners.  Arising out of his actions with Cybocity plc on 22 September 2003, Mr Thakrar had been convicted of two counts of conspiracy to cheat the Revenue and was later sentenced to 15 months imprisonment.  He was disqualified from being a director for seven years and ordered to £50,492.74 as part of a confiscation order.  There is no evidence that Marcello Auletta specifically knew of this but on 5 December 2005 a company called “Arm Gibraltar Ltd” was incorporated with Marcello Auletta as its director and Elio Auletta as the company secretary.  Elio Auletta resigned from that company on 1 June 2006 but Marcello Auletta remained a director until the company was dissolved on 22 January 2007.  We deal further below at paragraph 126 with Marcello Auletta’s connection with Ketan.

64.        With regard to deals 4-8 in March, we do not propose to go into great detail save to say that deals March 4 and March 7 follow identical chains from an EU supplier, IQ Trading, to a company called Walk N Talk Ltd, (which, the unchallenged evidence shows, is a defaulting trader), and from thence through three buffers to a further buffer trader, Stardex (UK) Ltd (“Stardex”) who supplied Tradex Corporation Ltd (“Tradex”) who supplied Asylum.  Both Stardex and Tradex had been introduced to Asylum by Elio Auletta.  Asylum’s customer in both deals March 4 and March 7 was High Level Trading GmbH (“High Level”) a German company.  In deal March 8 the deal chain is identical other than that the original supplier of the goods is not IQ Trading, but a company called AVM Euromoviles S.L. (“AVM”)

65.        In deals March 4, 7 and 8 the product sold was in each case Intel P4 SL7Z9 computer chips.  In deals 5 and 6 no EU supplier has been identified.  The chain goes back to a company FX Drona Ltd (“FX”), which was registered for VAT on 2 February 2006 and deregistered by the Commissioners as a missing trader on 4 April 2006, later amended to 6 April 2006.  FX only traded for a period of 2 months but in that time incurred a VAT debt of £35,199,516.85.  This debt was raised on the basis of documentation from other traders which demonstrated that it had been buying mobile phones and CPUs from the EU and selling them on to UK-based customers.  These transactions had not been declared by FX nor the VAT accounted for to the Commissioners.  On 19 October 2006 an assessment was raised against FX in respect of its trade in deals March 5 and 6 and that assessment was in the sum of £1,259,222.  The supplier to Asylum in deals  March 5 and 6 was PMTC (see above) and Asylum’s customer was a French company called M.S. Enterprise Ltd (“MSE”) which appears elsewhere as a customer of BIP (see reference in deal March 1 above).  Both deals 5 and 6 involved multiple lots of different products.

66.        In relation to both Walk N Talk and FX we are satisfied that they are defaulting traders and that in respect of all the deals those defaults is fraudulent.  This was a matter which had been acknowledged by Asylum other than in respect of deal March 3 and we have set out above our reasons for concluding that that too was a fraudulent default. 

Deals April to August

67.        All Asylum’s transactions between the periods 04/06 and 08/06 are connected to defaulting traders via contra-traders.  It was directed by the Tribunal on 13 December 2010 on the basis of an agreement between the parties that the Commissioners had identified tax losses at the start of all the contra-traders’  broker deal chains where they assert that tax losses are present, and that all those tax losses are attributable to fraud.  The Commissioners were not required to call any evidence at trial as to the fraud of the defaulting traders.  Further the Commissioners have identified a factual connection between the transactions in all of the deal chains and were not required to call any evidence as to those connections, therefore all that the Commissioners are required to prove in respect of these deals are the connections of Asylum’s deal chains to fraud, and also that Asylum knew or should have known of that connection.

70.        In all Asylum’s April deals other than deal 6, Asylum’s customer was PDW (a Portuguese company which was also Asylum’s customer in deals March 1 and 2).  In deal April 6 Asylum’s customer was Evolution SARL in France which also was a customer of Tradex.  ITW’s customer was a Spanish company Complimentos De Exportacion Multi Fucionales which also was a customer of Tradex.  This raises the question as to why Tradex sold to Asylum or ITW when it had previously dealt with both their customers.

71.        In its solitary deal in May, Asylum traded 21 different lots of cameras, purchasing from JPC (as in March 2 and in April deals 1 and 8) who had purchased from PMTC (Asylum’s supplier in April deal 7).  JPC itself had purchased the cameras in each of the twenty-one lots from PMTC who had been supplied by JSR, the contra-trader who had imported the goods from Fine Arts in Spain.  Asylum sold the goods on to a Belgian company, Gredis.  In its June deal, which took place on 23 June, Asylum bought two lots of a different type of camera from BIP, the EU supplier again being Fine Arts.  Asylum sold these on, again in two lots, to a French company, MS Enterprises SARL (“MSE”).  This was the same deal chain as in the second deal in July.  In the first and third July deals the route to Asylum was the same as in the second July deal, but Asylum’s customer in those two deals was a German company, SL Handels GMBH.  In Asylum’s August deal, the goods (four lots of iPods) came from a Danish company, EU Comp Aps which sold them on to JPC, thence to Asylum who sold them on to a Polish company, Imperia Spolka Z.O.O (EU Comp was JSR’s customer in a large proportion of the deals in which it featured as the contra-trader.)

Evidence of Asylum’s money transfer

Evidence in respect of ITW and Red House

99.        In the World Wide transaction chains, World Wide UK Import & Export Ltd was the importer and the contra-trader in the VAT loss chain. As with the Red House transactions, Mr Mendes found that there were VAT loss chains, that all the money chains were circular an the money came from, and was passed back to, one of six identified financiers on each occasion via a third party.  As with Asylum’s deals, there was on many occasions evidence of rapid transfer of funds round the chains (for example in April deal 2 the funds were transferred eleven times in 48 minutes) and on some occasions the same IP addresses were used by apparently unrelated companies and there was also evidence of third party payments, for example April deal 2 were the defaulter, Telecommunications Stores Ltd paid Valssen FZE (Dubai) one of the financiers) in the VAT loss chain.

IP Addresses

100.    Mr Andrew Letherby, an officer of the Commissioners, provided a report he had compiled entitled “Report on the Forensic Integrity and Cross Verification of FCIB Servers” which related in particular to the significance of the IP addresses and the principles behind their operation.  It is possible to pay to have a permanent IP address, but more usually the addresses are dynamic, and when a computer connects to the internet it will latch on to an available IP address which it will retain until it is switched off or the internet service is interrupted for any particular reason.  It cannot be assumed without more that because one address attaches to two payments, it must have been made from the same computer.  It is possible for two computers to have the same IP address if they use the same server in a shared hosting company, or share a host server remotely, or share a mobile data connection.  Having considered various options, including coincidence,  Mr Letherby comes to the conclusion that it is very unlikely that one minute an IP address is used to make a payment in the United Kingdom and very shortly afterwards the same IP address is used to make another payment from another computer outside the UK.  The likelihood is that the payments are made from the same computer.  There was evidence that a payment takes about three minutes to go through.  Marcus Auletta does not dispute Mr Letherby’s evidence, but relies on the fact that at no stage does Asylum ever use an IP address which is common to anyone else in the various money chains.  We found that on the balance of probabilities on the occasions where the same IP address was used to make payments in the money chains it is because the payment was made from the same computer.

The Grey Market

(1)        Sub–distribution

(2)        Distributing obsolete/niche components

(3)        Providing emergency supplies

(4)        Offloading excess inventory

(5)        Arbitrage.

In respect of all these opportunities the following commercial behaviour would be exhibited:

(a)   Adequate specification of components to buyers and sellers

(b)  Best possible market price

(c)   Short deal chains

(d)  Volume of components traded should be consistent with the market. 

In respect of (a) the product description needed to be sufficiently unique to identify the component, if not, a normal businessman would not be able to price it. The description needed to include either the product number, the processor number or all of the five following details:

(a) Brand or processor family e.g. “Intel Pentium”

(b) Speed e.g. 3GHz

(c) Cache, e.g. 2MB

(d) System Bus Speed e.g. 800 MHz

(e) Packaging form, e.g. box or tray.

We note that while inspection reports provided to Asylum for the March deals do provide a sufficient level of detail, this is not the case in respect of its April deal in CPUs.  Furthermore the descriptions given in the purchase orders and invoices of Asylum and its trading partners do not provide the above level of detail. 

105.    Dr Findlay set out the list prices between September 2005 and December 2006.  It was his opinion that the price for a CPU should be within 20% of the central list prices.  The list price for the CPU’s traded in the March deals was $178 and also for the April trade.  This price is within Dr Findlay’s 20% margin, being a little over 80% of the list prices.  Dr Findlay also estimated the legitimate grey market in CPU export for 2006 at £1.4 million for Intel, which gives a monthly export average of £116,000 for Intel products.  The total value of the four deals undertaken in Intel’s CPUs by Asylum in March and April 2006 was £3,006,124.  This is over double the total value of the legitimate grey market exports from the UK in the entire year.

106.    In addition to the specific issues above, Dr Findlay would expect a company trading in the legitimate grey market to exhibit various characteristics.  Of the seven listed, there were none which Asylum specifically claimed to exhibit.  In respect of any claim by Asylum that arbitrage was the grey market opportunity it was exploiting, it had no relationships with assemblies or ADs in other territories and on very many occasions its deal chains were long, given in particular that for each deal chain evidenced there has to be added on an AD and an original equipment manufacturer at the start of the chain and a customer at the end of the chain.

107.    The CPU deals undertaken by ITW and RHI similarly do not reveal any of the characteristics and practices to be expected of a company operating in the legitimate grey market. We conclude from Dr Findlay’s evidence that Asylum was not operating in the legitimate grey market in CPUs. 

Uncontested Evidence re CPUs

108.    Evan Milner is the Compliance and Fraud Investigations Manager for the Europe, Middle East and Africa region of Intel who has worked in Intel Security since January 2001.  His evidence inter alia was that the Original Equipment Manufacturers (“OEMs”) cartons have Intel labels which show a “Lot Number” or “Finished Product Order” which identifies that the manufacturers batch; (“S Spec”), which identifies the speed an electronic specification of CPUs and a “Box Number” which is a unique number identifying the OEM carton. This process had as at January 2011 been used for over six years and none of the Box Numbers had been used up.  Intel System will not permit the same Box Number to be stored twice, other than in very exceptional circumstances.

109.    The Commissioners asked Intel to check its records in respect of Asylum’s deals in CPUs. In respect of deal March 7 Mr Milner uncovered a reference to a Lot Number which does not exist in Intel’s records. The other fifteen Box and Lot Numbers in the deal were genuine.  In respect of Asylum’s April deal 6 which were invoiced as CPUs the Lot Numbers provided for two of the items did not refer to CPUs but to chipsets, which are products which could never be marketed or sold as CPUs by Intel.  The Lot Numbers provided in respect of five other of the items sold do not exist in Intel’s records.  This is evidence of Asylum’s lack of care in respect of the products it was selling.

110.    With regard to ITW’s sales of CPUs, Mr Milner analysed a sample of the items and in the sample found sixty items which had adequate Intel lot numbers, forty-two items which had invalid lot numbers, and two items which were of a different product type from that specified.  The remaining 419 items were not analysed by him.  

Uncontested Evidence re RHI

111.    Mr Michael Downer, an officer of the Commissioners, carried out investigations between August 2005 and June 2009 into MTIC fraud. In December 2006 he met the Dutch tax authorities who were carrying out a criminal investigation into the freight forwarder Worldwide Logistics BF. It was found by the Dutch that various CMRs found in Worldwide Logistics’ records related to fictitious consignments.  Some of the CMRs were later produced by A-Z Mobiles and RHI, in RHI’s case there were twenty six such documents.

Evidence on behalf of Asylum

112.    As stated above neither Marcello nor Elio Auletta attended the appeal hearing.  The evidence of both of them was at odds regarding the setting up of Asylum and RHI.  Marcello Auletta refers to setting up Asylum in 2004 and doing its first deal in mid-November, whereas it was in fact registered in 2003. Elio Auletta refers to Marcello Auletta returning ‘in approximately’ 2004 and coming to work with him unpaid.  He continued: “This he did and he established two companies eventually, Asylum ... and Red House International Ltd ...” Given that Elio Auletta was Company Secretary of both RHI and Asylum it might be expected that he would know the years in which they were set up.   RHI had in fact been incorporated on 20 April 2002 when its director was Marcello Auletta.  It was trading electrical goods in 2005 when it achieved a turnover of approximately £33.7m.

113.    On 10 July 2003 Asylum’s representative sent a fax to HMRC in respect of its trading 80% in clothing and 20% in computer peripherals.  Marcello Auletta started working at ITW with his brother Elio in order to learn about trading in computer components, in circumstances where Asylum had been established for over a year and, as claimed by Marcello Auletta, had by November 2004 undertaken its first deal in non-IT products.  It was claimed that Elio Auletta allowed Asylum to use his client base if Marcello used his own funds.  It was said by Elio Auletta that Marcello had worked abroad for which he was not paid and that he was down on his luck at this time, similarly he was not paid by Elio Auletta.  Marcello Auletta provided us with no evidence as to the source of any funds he had for setting up the businesses, and Elio Auletta merely speculates that Marcello remortgaged his house. The evidence shows that £100,000 obtained from the remortgaging of Marcello Auletta’s house went to RHI not to Asylum.  The agreement between the brothers was apparently that Asylum would pass 50% of its profits to Elio Auletta but there is no evidence as to whether these were intended to be gross or net profits and there is no evidence that this happened. 

114.    With regard to Asylum’s trading methods, in his witness statement Marcello Auletta states that not all the deals were conducted in one day, and the deal files give the wrong impression that this was the case. However, there is no evidence of negotiations being carried out between Asylum and either its suppliers or its customers prior to the exchange of invoices.  In a later paragraph in his witness statement Marcello Auletta states: “The documents are in a logical order as events progressed throughout the day of each deal”, and refers later to it being common practice in many commercial business industries to buy and sell a product in one day, a proposition which we accept. 

115.    Marcello Auletta takes its March deal 1 as an example of how it proceeded in respect of each deal, claiming to; 

a) obtain a Companies House printout;

b) do online VAT verification checks;

c) offer stock to its entire customer base;

d) impose Terms and Conditions on his suppliers and customers;

e) obtain Supplier Declarations;

f) obtain inspections reports from the freight forwards;

g) ask freight forwarders to ensure goods are shrink-wrapped and to transport the goods “ship on hold”;

h) obtain CMRs and ferry tickets;

i)  obtain confirmation that full payment was made within three weeks and once Asylum was paid to pay Asylum’s supplier straightaway (sometimes “supplemented” by capital from Asylum);

j) conduct product research by means of a member of staff who is employed to conduct online research of a number of different retailers. 

i)        All suppliers were recommended by business associates or by Elio Auletta.

ii)      All were met prior to trading on at least one occasion.

iii)    Redhill  verification was requested and received prior to trading and regular updates were obtained (other than in the case of PMTC, when request was sent on 30 March 2006 but not received until after trading because of delays at Redhill)

iv)     HMRC helpline used where delays Redhill.

v)       Europa online VAT verification conducted prior to or on the day of the deal. 

vi)     VAT Registration Certificate was obtained prior to trading.

vii)   Certificate of Incorporation obtained prior to trading.

viii) Companies House searches conducted before every deal and update.

ix)     Letter of Introduction prior to trading.

x)       Confirmation of director’s identity prior to trading.

xi)     Evidence of director’s home address prior to trading.

xii)   Evidence of connection to business address obtained prior to trading.

xiii) Third party due diligence visits introduced after January 2006 on all except ARM Gibraltar. 

xiv)  In January 2006 CTM was appointed to conduct two visits on two UK suppliers per month, to attend all monthly VAT visits by HMRC, to conduct a monthly review of due diligence and to be available to discuss any urgent issues which arose. 

119.    Inspection Reports produced do no more than indicate a count of the boxes and confirmation that the boxes were new.  There is no confirmation of the claimed random inspection of a handful of boxes, there is no confirmation of the contents, nor that they were as purchased. With regard to the comfort said to be gained by Marcello Auletta from sending the goods abroad ‘ship on hold’, which happened on the day of the deal, it is the case that quite often Asylum was not paid until some weeks after the deal, and although Asylum would not in most cases have paid its supplier until it was paid, nonetheless neither Asylum nor its supplier would have any form of security in the meantime.  There was considerable financial risk in this way of trading.  With regard to the product research, the documents provided by Asylum show research only of retailers’ websites, although there are various sites for wholesalers which would have been far more relevant given that Asylum was not supplying any retailers.

120.    Marcello Auletta refers to an attempted deal in May 2006 which was cancelled by the intended customer Gredis as pointing to the fact that his trades were genuine. This particular deal was worth £3,195,000 and the order had been confirmed by Gredis, a purchase order had been signed by Asylum and by JPC, Asylum’s supplier.  There was an invoice for payment sent from JPC to Asylum and the goods were allocated and had been released to Asylum by JPC.  The credit note suggests that it had been paid for before Gredis purportedly cancelled it. The cancellation letter states: “With great regret I have to inform you we are cancelling the above mentioned order.  Unfortunately my customer is not keeping his end of the bargain.  I have not been able to find a new customer for the ordered stock.”  This is signed by Eric De Bolle, Managing Director.  There is no reference to insurance or other monetary compensation.  In reply Marcello Auletta sent a fax, not to Gredis, but to Modular BVBA (Gredis’ sister company), stating that he was disappointed to receive the cancellation, but saying also “We would appreciate in the meantime if you would help us in our endeavour to source any other potential clients to take this stock.”  He then sends to Modular BVBA a credit note.  Far from providing evidence that the deals are genuine, this particular exchange is completely un-businesslike.  It stretches credibility that a genuine customer would help Asylum to find an alternative customer rather than purchase the stock itself and sell it to that customer and make a profit from the deal. Furthermore the report obtained by the Vetting Service on Gredis gave a credit rating of 6, and it was considered a high risk business.  The recommended credit limit was €2,478.00 (Euros) the value of Asylum’s intended deal was over £3,000,000.  This whole episode shows a lack of commerciality. It also raises the question of why JPC did not hold Asylum to its obligations in respect of making the purchase it had arranged.

Asylum’s Suppliers

121.    Marcello Auletta referred to two companies which it had rejected as trading partners following receipt of unfavourable CTM reports.  The two companies were Hass packaging and Globaltech Services.  No report was produced in respect of Globaltech.  Hass Packaging appeared frequently in the deal chains March 1, April 1 and 4.  The report notes that Hass had traded with BIP, one of Asylum’s suppliers, but nonetheless Asylum still traded with BIP.

127.    High Level Trading (“HLT”) was a customer of Asylum introduced by Eilo Auletta. (See Notebook and FCIB evidence above).  On the basis of this introduction and a company registration certificate in German (un-translated), Asylum commenced trading with HLT.  Its first deal was on 25 October 2005, the same date as its letter of introduction to HLT and as a faxed letter of introduction from HLT’s Director, Jellab Mustapha.  The company registration certificate was not faxed until 14 February 2006.  In 03/06 Asylum sold over £1,000,000 worth of goods to HLT in three separate deals. 

128.    Morning Dew was introduced by an (unnamed) existing client.  The company was incorporated on 15 March 2005 and Asylum made contact in March 2005.  Marcello Auletta claims he started trading with Morning Dew in June 2005 but the letter of introduction is dated 10 October 2005.  A Certificate of Incorporation was provided and is signed by a Mr Richard Shaw as director, however Marcello Auletta dealt with a Mr David Andrews.  There is a letter of recommendation dated 20 March 2006 from RHI signed by Marcello Auletta and sent to Marcello Auletta as Director of Asylum.  There is no evidence of any further due diligence.

129.    MSE contacted Asylum at the end of 2005 and Marcello Auletta met its Director, Mohammed Patel, in the United Kingdom in February 2006. Marcello Auletta saw a letter of introduction (undated), a copy of Mr Patel’s passport, company registration documents (in French and un-translated) and an office utility bill.  He obtained a personal bank statement and a completed trade application form which shows Mohammed Patel’s United Kingdom address.  He conducted several online verifications and trade references were provided, but there is no evidence these were followed up.  He instructed The Vetting Service to conduct a due diligence visit, its report was sent to Asylum after 8 August 2006, five months after the 03/06 deals.  It states that Mohammed Patel is a British passport holder and lives in the United Kingdom, and MSE exports only, making no sales in France where it is based.  The Vetting Service could not verify the registered address of the company and no documents were provided.  Although the company recorded IMEI numbers, these were not checked for duplication. 

130.    Evolution SARL was recommended to Asylum by an (unnamed) business associate.  Marcello Auletta stated that he had obtained the documents he required, but he does not say that these were in French, as was the case, and there is no evidence that they were translated.  The VAT registration of Evolution was checked on the Europa site.  Evolution agreed Asylum’s Terms & Conditions on 25 April 2006.  Asylum only did one deal with Evolution, and that was on 27 April 2006, prior to its instructing JH Law in July to conduct a due diligence visit to the French offices.  Its due diligence report is dated 1 August 2006 and had been made for another client.  Evolution was incorporated on 12 May 2005 and had a turnover of £26.5m in its first year of trading.  Despite its high turnover, its credit rating given by Experian was ‘moderate’ with a limit of €3,000.

134.    Marcello Auletta was introduced to Imperia Sp Z.O.O’s director by an (unnamed) third party in June 2006.  Asylum was supplied with its VAT registration, a completed trade application form, a copy of the director’s passport and a business utility bill.  The company confirmed compliance with Asylum’s Terms & Conditions but only faxed this confirmation on 18 August 2006, the date of its trade with Asylum.  Marcello Auletta checked the Europa site before its trading with the company in August 2006.  It was only in September 2006, after first trading with Imperia, that Asylum instructed The Vetting Service to visit the company in Poland.  In its letter of introduction, the company had referred to a very wide portfolio of services (there were 30 in all), and to it “now in process of sourcing and supplying household products….”  but there was no reference to wholesaling mobile telephones, CPUs or satellite navigation equipment. Marcello Auletta had to travel to Poland subsequently to meet the director as “I had difficulty in securing payment from Imperia”.  The fact that the account was later settled satisfied Marcello Auletta that the ‘two negative’ indicators in the report could be ignored. In fact the report contained seven negative indicators, including the fact that due to “difficulties with their bank” Imperia could not trade, trade references and the accountants’ reference were outstanding, the company did not insure its stock outside Poland and no financial information had been provided. 

Freight Forwarders

135.    Marcello Auletta himself visited J&J Freight but did no other due diligence on the company nor on MSG Freight. He claims that CTM conducted visits on behalf of Asylum to 1^st Freight Ltd, Forward Logistics (Heathrow) Ltd, Humber Freight Ltd and Point of Logistics Ltd.  No reports of such visits were provided and no documentation has been disclosed in respect of any insurance policies held by the freight forwarders, nor information supplied as to whether Asylum was covered by the freight forwarders’ policies, given that they would be holding several million pounds of goods in their warehouse. 

136.    Asylum questions whether the freight forwarders would divulge any details about a supply it was about to make, the Commissioners assert that Asylum could and should have made enquiries as to whether the goods, the subject of the proposed transactions had recently been imported into the United Kingdom and the number of parties through whose control the goods had passed whilst in the warehouse.  It was not expected that Asylum could obtain the names of those parties, but Asylum would have learned that all the goods in which it traded had recently been imported, and in all the March deals, other than deal March 3, the goods had passed through many companies, and in the case of deals March 4 and 8 there were five UK companies before Asylum’s supplier, Tradex.  Had Asylum obtained this information it would, or ought to have, raised the question as to why so many companies which added nothing the product had been involved in trading in them in such a short space of time. 

Marcello Auletta – general comments

138.    In respect of a visit on 16 June 2006 by Officers Simmons and Smith, Marcello Auletta states: “I asked Mr Simmons what I should do if fraud was detected in one of my supply chains ... as I didn’t believe that a small number of occasions would necessarily mean that I had to cease trading.  I knew there were risks but I believed they could be managed.  As Mr Smith rightly points out, we would have discussed due diligence checks, because my Officers always told me that I need to conduct good due diligence to avoid fraud.  If, as Mr Smith appears to be saying now, that it didn’t mater how much due diligence I did, I still wouldn’t have avoided the alleged fraud, why were the officers telling me to do due diligence and why didn’t they simply say at an early stage (eg in January 2006) ‘fraud is so rife in your industry, you are unlikely to avoid it’. Providing me with literature, such as Public Notice 726, only enhanced my belief that I could avoid fraud.  The suggestion I put to Mr Simmons (and in effect Mr Smith) was that, if fraud was detected in a supply chain, I would ask my trusted supplier to cease trading with its supplier in order to break the chain to the fraud.  I could resume my healthy business relationship and the link to that fraud would have been broken. Mr Simmons agreed that it would be acceptable (presumably he meant acceptable to HMRC) to break the link in that way and to continue trading with my supplier.  To me it was endorsement of the industry I operated in.  The only conclusion that could possibly be drawn from this is that fraud was not rife and that I could avoid it by taking remedial action.  This is what I understood Mr Simmons to mean and this assisted with my decision making and due diligence process.” Mr Simmons did not give evidence or provide a witness statement, but Mr Smith in evidence said that he had no recollection of such a conversation and later said that it was definitely not something that Mr Simmons would have been likely to accept.

The Appellant’s case

139.    Although neither he nor Marcello Auletta appeared, we were supplied with a skeleton argument by Mr Ahmed on behalf of Asylum.  In it he submitted inter alia that the Commissioners must not only prove that a fraud had been committed, that the fraud was connected with Asylum’s transactions and that Asylum knew, or should have known, of this.  With regard to contra-trading, he submitted that the Commissioners must prove a conspiracy to commit fraud between all parties in both chains.  Furthermore, it should be shown that Asylum knew or should have known that fraud existed in the contra-trader supply chains.  Given that the transactions involved different goods and on different days, it seemed to Mr Ahmed impossible to understand how Asylum could have known of this.  We were referred to the case of Mobilx (supra) where at paragraph 75 Moses LJ states:

“… the ultimate question is not whether a trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of the VAT. The Tribunal might have concluded that Mr Peters should have known that the transactions into which he entered were connected with fraud, by reference to the unconventional nature of those circumstances (a finding it came close to making at para 2 – 8) but it was not the only decision within the bounds of reasonable conclusion.”

This being a very high threshold, it was submitted that the evidence would need to be cogent and compelling to impute such knowledge.

“In my judgment in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest co-conspirator, there are two potential frauds:

(i)          The dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain; and

(ii)        The dishonest cover-up of that fraud by the contra-trader.”

It was submitted that there was clear evidence in the present case that the contra-traders were being visited by HMRC officers and were being monitored.  It must have been known to the contra-traders that they could not hide a fraud in their supply chain, they did not cover up the fraud and they could not cover up the fraud.  In a contra-trade construct a trader had to be part of a conspiracy to defraud the Revenue if he was to be deprived of the right of deduction; furthermore, the timing of the transactions was of the utmost importance.

“But a trader must be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

“16. Complete absence of evidence, or the evidence being to the contrary effect, are two of the grounds on which it may be said that a Tribunal was not entitled to reach a conclusion of fact.  It is also well settled that a Tribunal is not entitled to find serious allegations established against the party who calls relevant witnesses unless those allegations are clearly formulated and put in cross-examination.  As Briggs J said in HMRC v. Dempster:

“… it is a cardinal principle of litigation that if serious allegations, in particular allegations of dishonesty are to be made against a party who is called as a witness it must be both fairly and squarely pleaded, and fairly and squarely put to that witness in cross-examination.”

The Commissioners’ Case

“… proof that the fact in issue more probably occurred than not.”

(i)          It is for HMRC to establish to the civil standard that the Appellant knew or should have known that its transactions were connected with fraud, and that they were in fact connected with the fraudulent evasion of VAT.  It is not sufficient to establish that Asylum knew or should have known that it was more likely than not that its transactions were so connected.  However, if a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud, and if it turns out that the transaction was connected with fraudulent evasion of VAT, then he should have known of that fact.

(ii)       It is not necessary to establish that Asylum knew or should have known of the nature or mechanism of the fraud, or the identity of the participants.

(iii)      In the context of a contra-trading case such as this, the connection of Asylum’s transactions with the fraudulent defaults in the contra-trader’s “dirty” chains is established by the fact of the offsetting of the contra-trader’s input tax from its transactions in those dirty chains against its output tax from its transactions in its clean chains in the same period.  It is also established by the conclusion that the deals were connected to a dishonest contra-trader, acting as part of a scheme to defraud the Revenue.

(iv)      HMRC asserts, as per the Tribunal’s decisions in cases such as Regent Commodities Limited v. HMRC and Martem Limited v. HMRC that this logic extends to ‘double-contra’ trading cases such as the present appeal. 

(v)        In considering whether the Kittel test is satisfied, the Tribunal should look at all the circumstances surrounding the transactions, and should not look at a given transaction in isolation.  The Tribunal should not unduly focus on the question whether a trader has acted with all due diligence.  Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions takes place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud.  Where the trader has not asked all appropriate questions, then the Tribunal should consider what the trader omitted to do, and what it could have done.

“The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase.  If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase.  That trader’s knowledge brings him within the category of participant.  He is a participant whatever the stage at which the evasion occurs.”

We were also referred to the decision of Roth J in POWA (Jersey) Limited at paragraphs 20-39 where he conducted an exhaustive review of the claim by that Appellant that privity between it and a fraudster was required for Kittel to have effect, before concluding at paragraph 39:

“… the judgment of the Court of Appeal is clear authority, binding on the Upper Tribunal, that the fact that the trader claiming credit for input tax did not deal directly with a fraudulent trader that was more remote in the chain does not preclude his being denied repayment under the rationale of Kittel.”

158.    From the outset of the case HMRC’s pleadings had made it plain that the fraud alleged went far beyond the actions of the defaulting traders and that the transaction chains in their entirety had been orchestrated as part of an overall scheme to defraud the Revenue.  Similarly the three decision letters stated this and Asylum’s notices of appeal made it plain that it understood the allegation that was being made by the Commissioners about the context of its transactions.

“It is not arguable that the principle of fiscal neutrality, legal certainty, free movement of goods and proportionality were infringed by the Court itself, when they were at pains to preserve those principles.”

“The Kittel principle is not concerned with penalty.  It is true that there may well be no correlation between the amount of output tax of which the fraudulent trader has defrauded HMRC and the amount of input tax which another trader has been denied.  But the principle is concerned with identifying the objective criteria which must be met before the right to deduct input tax arises.  Those criteria are not met, as I have emphasised, where the trader is regarded as a participant in the fraud.  No penalty is imposed his transaction falls outwith the scope of VAT and, accordingly, he is denied the right to deduct input tax by reason of his participation.”

162.    Mr Foulkes pointed to the patterns of repetition and similarity in the chains as a feature of the overall plan and design, in particular the repetition of traders across Asylum’s chains, as well as the overlap between these and ITW’s and RHI’s suppliers and customers, and it was submitted that it was not by accident that this occurred, but by design. 

Reasons for Decision

“109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context.  Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme.  The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.

…

“111.  Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

(i) the participants all at the time of the deals in question being comparatively recently established in the trade sector concerned;

(ii)        all were on quarterly returns (thereby enabling them to obtain VAT repayments quickly without alerting the Commissioners to tax losses in the contra-trader’s dirty chains);

(iii)     all had dramatically increased turnovers within a very short period of time and all had few staff; all had customers which (largely) paid for stock without inspecting or taking ownership of the goods;

(iv)      all had suppliers which extended substantial lines of credit (and allowed the contra-traders to ship their goods overseas) without any written agreements;

(v)        all engaged in back-to-back trading and never took physical possession of the goods, which remained with the freight forwarders; 

(vi)      all traded with companies in the EC which were also recently formed and whose directors frequently had strong connections with the UK;

(vii)    all failed to conduct due diligence at all or such due diligence as they conducted was inadequate;

(viii)  all when subject to investigation and extended verification by HMRC became non-compliant; 

(ix)      all traded in chains which were absent of manufacturers, authorised distributors, retailers and end users;

(x)        none made any losses on their deals; and

(xi)      always made greater profits of their dirty broker deals by comparison with their clean acquisition deals.

176.    It was submitted on behalf of Asylum that it had been unfairly discriminated against in relation to the decision of the Commissioners to deny the right to deduct input tax as opposed to others in the chains of transactions.  This non-discrimination argument is of no application to proceedings where the Commissioners have denied an appellant’s right to deduct input VAT on the basis of the principle in Kittel.

177.    It was submitted by Asylum that the ECJ in the case of Mahageben kft; Peter David made ‘clear beyond doubt that not any connection with fraud, no matter how tenuous will do.  If the alleged connection is not with fraud “previously committed … at an earlier stage of the transaction”, or with “fraud committed by the seller or by another trader acting earlier in the chain of supply”, there is no basis on which a tax authority in any member state can refuse a taxable person the right to deduct.  And with regard to the double contra trading allegation, this is fanciful at best.’  In the present case the evidence is of a well-planned and co-ordinated scheme to defraud the Commissioners. The moment that the first sum of money was transferred in respect of any of the deals was in our judgment when the scheme was put into operation.  In the present case the money flow charts show that in respect of all of Asylum’s deals there was a payment made to Asylum’s customer directly or indirectly by someone who was either not involved in the deal chains (e.g. Bronteum) or, as in the case of Stardex (deals March 4, 7 and 8) by someone whose activities have been shown by the notebooks to be part of a pre-planned fraudulent scheme. Similarly in all the subsequent deals which involve contra-traders the money flow starts prior to the payments by any of the parties in Asylum’s deal chains and from a party not connected directly with the deal chains other than in the case of deal April 6.  There Stardex again made the initial payment before it received any payment from its customer Tradex, who was in fact the last party in the deal chain to pay.  In Mobilx at paragraph 62 Moses LJ said:

“The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase.  If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase.  That trader’s knowledge brings him within the category of participant.  He is a participant whatever the stage at which the evasion occurs.”

MISS JILL C GORT

TRIBUNAL JUDGE

RELEASE DATE: 26 April 2013

The Contra-Traders

(1)       JSR

(2) AIC

(3) A-Z

(4) BIP

(5) JPC

(6) PMTC

Contra-traders connected with ITW’s deals

“Z9” equals Central Processing Units (“CPUs”).  “Point” equals Point of Logistics Ltd (the freight forwarder). “ASY” equals Asylum.  “HLT” equals High Level Trading GmbH (as Swiss company registered in Germany who was a customer of both Asylum and of ITW).  “TRX” equals Tradex Corporation Ltd.  “STX” equals Stardex UK Ltd.  “FRN” equals Fern Associates Ltd.  “OPT” equals Optimal Group Ltd.  “MGC” equals MG Components Ltd.  “Walktalk” equals Walk and Talk Yorkshire Ltd.  “PZP” equals PZP ENA D.O.O. (a Slovenian company).  “IQT” equals IQ Trading APS (a Danish company).

P.I. -£462,420.00

Comms - £3,552.20

W - £21,407.40 full paid 30/3

This chain for the most part mirrors the chain derived by Officer Ginn from Asylum’s documents for deal March 4 and from electronic folders relating to other buffers in the chain, or in the case of the defaulter, Walk and Talk, documents relating to that party.  However, in MG Components’ electronic folder there was no deal information which matched the deal for 5040 CPUs on 30 March 2006.  Nonetheless the folder did include a document called “Trader Letter” which consisted of 60 various documents including freight forwarder allocation notes, invoices and export documents, and included within them was a release allocation form dated 30 March 2006 advising the freight forwarder “Point” to release “Z9 tray 16 boxes (or 5040 units) from their supplier Walktalk” to their customer “Optimal”.  This in our judgment on the balance of probabilities confirms a deal between MG Components and Optimal on 30 March 2006 for 5040 units and this corresponds with the notebook entry. 

 The abbreviations are on occasion slightly different from the earlier example but still recognisable.  The only abbreviation which appears here but not in the notebook entry for deal March 4 is “AVM” which Officer Cummins interpreted as representing the Spanish Trader AVM Euromoviles SL, which appears as the supplier to PZP ENA, and is the EU supplier in Asylum’s deal March 8.  On this occasion the notebook shows that 28 boxes (8820 units) of CPUs were sold, the supply coming from HLT before 13 box (4095 units) passed to IQ, whilst 15 boxes (4725 units) were supplied by HLT to AVM.  These two different amounts correspond with the supplies shown on the invoices and other documents captured on the electronic folders of the traders in Asylum’s deals March 7 and 8, although there was no selling price for Walk and Talk and no deal information in the electronic folder for MG Components matching a deal for 8820 CPUs made on 31 March 2006. However, Optimal’s deal log shows MGC as the supplier of 8820 CPUs at £82.30 per unit on 31 March 2006 which matches exactly the notebook entry.  In Asylum’s deal chain the supply according to the invoices travels from the defaulter, Walk and Talk, through the buffers down to Tradex as 8820 units, but Tradex then splits the deal, making two separate supplies to Asylum, one of 4095 units and one of 4725 units.  Asylum then makes two separate supplies to HLT in Switzerland.  The notebook entry thus shows a circularity beginning and ending with HLT which is not revealed by the invoices, the invoice trail ending at Walk and Talk.