Posted: 15 / 05 / 2024
Round-tripping fraud is when invoices and money are returned following a transaction, giving the impression that these are legitimate business activities. This occurs when two or more entities issue invoices and payments between themselves for goods and services that did not exist. The end result is usually an increase in turnover in both/all entities.
We have first hand experience of observing this practice in the course of fraud investigations, where one entity has intentionally colluded with another entity, and to an outsider, the entities appear to be unconnected. We have then seen evidence of sales invoices being exchanged between those entities, with the specific aim of boosting turnover in one or both of the entities.
Worked example
We set out a simplified example here:
This has the impact of inflating the amount of revenue that both companies appear to be generating:
When in fact a significant portion of the revenue is not legitimate:
This often has no impact on profit, as the corresponding company receiving the invoice would generally record this as an expense, so in this example, the income and the expense would offset.
However, we have seen evidence of round-tripping being used to not only inflate revenue but also inflate profit. If one or both companies within a round-tripping scheme record the outflow of funds as the purchase of an asset (for example, a fixed asset), this creates a mismatch in the accounting effects of the corresponding transactions. As a result, this had the additional short term impact of creating bogus profit in one or both of the companies. Obviously, in this instance, these transactions are entirely fictitious.
Accounting standards
From a technical perspective, this would not generally meet the definition of revenue that can be recognised in accordance with accounting standards.
Under International Financial Reporting Standards (“IFRS”), the following conditions must apply [IFRS 15, paragraph 9]:
- the contract must have commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and
- it should be probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Similarly, under UK GAAP, FRS 102 (23.10 (a) and (d)) refers to the following requirements:
- the transaction must have commercial substance;
- there must be a transfer to the buyer of risks and rewards of ownership of the goods; and
- it must be probable that economic benefits will transfer to the entity.
Some high-profile case studies
Wirecard
Wirecard AG was a prominent German payment processing company, at one point reporting revenues in excess of €2 billion and total assets of nearly €6 billion. However, this collapsed in 2020 amid allegations of missing funds.
It is alleged that the inflated financial results enabled Wirecard to obtain further borrowing and create a reputation as a major player in the market. In the case of Wirecard, it appears that a number of steps were added to the above process to create additional smoke screens.
According to the FT, money would leave the bank Wirecard owned in Germany, show its face on the balance sheet of a dormant subsidiary in Hong Kong, depart to sit momentarily in the books of an external “customer”, then travel back to Wirecard in India, where it would look to local auditors like legitimate business revenue.
Wirecard filed for insolvency in 2020, leaving nearly €2 billion in “missing” funds and multiple board members have been since subject to criminal proceedings.
NMC Health
NMC Health plc was a healthcare chain headquartered in the UAE and a FTSE 100 company, which collapsed in 2020. It was subsequently censured by the FCA in relation to misleading the market by understating debts by around $4 billion.
Amongst other things, it has since been alleged that NMC used falsified documents to simulate orders for pharmaceutical supplies and to obtain credit from banks and factoring agents that financed the fabricated sales. The allegations suggested that thousands of irregular financing transactions amounted to more than six times the value of a product’s real sales.
Where we can assist
Our experience of fraud investigations includes various accounting related schemes to window dress financial statements, including round-tripping. We have led investigations of suspected fraud in relation to a variety of matters, including the following:
- The largest asset-based lending fraud in UK history, involving a total loss to lenders of nearly £300 million.
- Detailed review of funds flow, conducting the review of a significant volumes of transactions, into the hundreds of thousands of line items.
- Reconstruction of financial statements to strip out the effects of fraudulent round-tripping activity and other transactions.
- Investigation into an accounting fraud in relation to a high value transaction where expenditure had been hidden outside of the accounting records, in an attempt to overinflate the value of the target company.
- Investigation in respect of the conduct of a senior individual in the finance team of a well-known entity.
- Investigation into the conduct of a former finance director, in relation to misleading financial information provided to the board.
Contact
If you have any questions please feel free to get in touch.
