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Wednesday, August 28, 2013

Fuel Fraud Costing More Than $4 Billion in Lost Taxes

As reported by BloombergThe watchman at Germany’s largest oil refinery, the MiRO plant in Karlsruhe, would wait until a fellow security guard was out of sight before sending a text message that it was safe to drive a 10,000-liter tanker of stolen diesel out the gates.
His tip-offs earned him bribes of 300 euros ($400) for each of the 87 truckloads that were stolen over a period of more than a year starting in early 2011. The scam went undetected until one of the three tank-cleaning company employees involved was fired and informed police. Combined with evidence from a toll-booth camera, the revelation landed all four in jail in June.
The heist underscored growing fuel theft, smuggling and fraud in Europe, where governments from Poland to the U.K. are losing between 100 million euros and 1.3 billion euros in tax revenue a year. The crime is spreading in the region in part because retail prices for diesel have jumped 52 percent since 2009. Executives at eight of 10 refiners surveyed by Bloomberg say their profits are suffering too.
“This criminal activity is undermining the fabric of the legitimate petroleum industry and the state, at a time when economic challenges have never been so great,” said Tom Noonan, chairman of the Irish Petroleum Industry Association and chief executive officer of Maxol Group, a Dublin-based oil retailer. “Illegal activity has been allowed to grow to such a large scale unimpeded.”

Fraudulent Share

While the European Commission, Europol, the European Union’s law-enforcement agency, and Europia, the Brussels-based refiners’ trade association, don’t provide region-wide statistics on fuel fraud, data from individual governments show the extent of the crime.
Tax fraud in Poland jumped by 47 percent from 2010 to 2012, according to an audit of more than 1,000 fuel traders and retailers, Wieslawa Drozdz, a spokeswoman at the Finance Ministry in Warsaw, said by e-mail on July 24. Poland lost 3 billion zloty ($943 million) last year, according to the Polish Organization of Oil Industry and Trade.
The U.K. forfeited more than 1.1 billion pounds ($1.7 billion) to fuel fraud in the 2008-2009 tax year, according to a parliamentary committee report last year.
In Greece, the illegal fuel market has ballooned to 600 million euros a year, the nation’s Finance Ministry said, without providing figures for previous years.

Compounds Shutdowns

Europe’s black market is adding to hard times for refiners as the lowest demand in two decades saps returns, according to the International Energy Agency. An average 11.6 million barrels a day of crude was processed from January through May in the region’s richest economies, the lowest level for any corresponding period since 1989, the Paris-based IEA said in a report on July 11.
Refinery margins, the profit from turning crude into fuels such as diesel and gasoline, were about $4 a barrel in Northwest Europe last week, according to data compiled by Bloomberg. That compares with $8 a year ago and a peak $20 a barrel in September 2008, the data show.
Margins will probably stay below 2012 levels for the rest of this year, OMV AG (OMV), the Vienna-based oil company that runs refineries in Austria, Germany and Romania, said in an earnings statement Aug. 13.
Fuel fraud in countries such as Austria and Germany is dwarfed by scams taking place in Eastern Europe, according to PKN Orlen SA, Poland’s largest refiner. Untaxed supplies account for more than 13 percent of Poland’s diesel market, according to industry estimates. As much as 20 percent of fuel consumed in the Czech Republic is illegal, according to government data.

Border Traffic

Smuggling is most prevalent in border areas where price gaps are the widest. Diesel, Europe’s most-used motor fuel, averaged 31.27 rubles (71 euro-cents) per liter last week in Russia, compared with 1.30 euros in Poland and 1.34 euros in Lithuania, data compiled by Bloomberg show.
In Lithuania, where one in every four consumers admits to having bought on the black market, fraudsters purchase lower-priced fuel from drivers of cars and trucks coming from Russia and Belarus and then sell it below local rates at a profit, according to the Vilnius-based Lithuanian Free Market Institute. The fuel is usually sold in parking lots, the institute said in a report.
Tax evasion in the fuel market has taken the form of organized crime,” Marek Switajewski, the CEO at Unipetrol AS, the largest Czech refiner, said in a June interview in Prague. Fuel fraud costs the company more than 19 million euros a year, he said.

Mobile Pump

Fraud is also infecting western European markets. Police in Northern Ireland stopped a van on Aug. 13 that was equipped with a pump, storage tanks and hoses, according to HMRC, Britain’s tax agency.
As part of the investigation, a makeshift plant capable of producing about 1,000 liters (264 gallons) of fuel a week was found in a shed. Three men were arrested after 2,000 liters of illegal fuel were discovered.
Mobile pumps “are very cheap to establish; we dismantle them, they pop up again,” John Whiting, assistant director for criminal investigation at HMRC, told the parliamentary committee in London last year. “We are aware that there are queues of cars trying to get into these places.”
Fraudsters in Northern Ireland can sell illegal diesel for as much as 40 pence (62 U.S. cents) per liter less than legitimate fuel and still make a profit, according to the committee’s report. Last week, diesel was selling in the U.K. for about 1.42 pounds a liter, data compiled by Bloomberg show.

Luxembourg Lowest

Differences in national tax systems are stoking the fraud. The share of tax in the pump price for diesel is 41 percent in Luxembourg, the lowest in the region, data compiled by Bloomberg show. In the U.K., tax accounts for as much as 58 percent of the price.
“There are price incentives to move fuel from one part of Europe to another,” Alan Gelder, head of the downstream oils-research service at Wood Mackenzie Ltd., a consultant to international and national oil companies, said in a phone interview from London. People from neighbouring countries often go to Luxembourg to fill their tanks, as it has the lowest fuel tax in that area, said Gelder.
Freezing weather often reveals the extent of Europe’s black market. Plunging temperatures render lower-quality fuel illegally imported from countries such as Belarus and Russia all but unusable, forcing motorists to turn to legitimate sources, according to Beata Karpinska, a spokeswoman for PKN Orlen in Plock, Poland.
Sales of diesel and gasoline at Lithuanian pumps jumped about 20 percent one week in February 2012, when temperatures dropped to an average of minus 17.8 degrees Celsius (minus 4 Fahrenheit), according to the Lithuanian Free Market Institute.

Government Response

European governments are trying to respond. Czech President Milos Zeman signed a law July 18 changing the country’s tax code for fuel trade. Poland’s lower house of parliament adopted similar measures on July 26. Ireland introduced an electronic system this year to monitor fuel movements, said Noonan of the Irish oil association.
“We want to start being competitive with refineries in the region,” said Switajewski at Unipetrol, which expects the illegal trade to drop 50 percent by 2017 as a result of the new laws.
Motorists can take legal advantage of cheaper fuel in neighboring countries by crossing national borders to fill up. About 3,500 Poles drive more than 10 times each month into Kaliningrad, a Russian territory wedged between Lithuania and Poland, to buy at lower costs.

Tightened Security

At the Mineraloelraffinerie Oberrhein GmbH, or MiRO, refinery in Karlsruhe, officials are tightening security after the 2011 heist, the company said in an Aug. 1 statement on its website.
The three tank cleaners began stealing diesel using 4,000-liter trucks, according to details of the case confirmed to Bloomberg by Jochen Herkle, a spokesman for the local district court. After recruiting the security guard, the thieves upgraded to 10,000-liter tankers, Herkle said. All four men confessed when caught, and the one who tipped off police received a shorter prison term than his associates, according to Herkle.
The company lost 912,000 liters of diesel and heating fuel in the theft between early 2011 and June 2012, Herkle said. That amount would now have a retail value of as much as 1.3 million euros in Germany.
Without measures to contain fuel fraud, there may be “a snowball effect, which will take years to be stopped,” the Polish Organization of Oil Industry and Trade said in an April report.

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