Trade in consumer products involves participants in the shadow economy and economic crime

Typical irregularities relating to products sold to consumers, or trade in consumer products, include the misuse of the country-of-origin labelling, fraud related to alcohol and tobacco imports and the so-called subscription traps associated with distance selling. These forms of fraud usually aim at gaining unjustified financial advantage by misleading consumers, but these incidents also involve the evasion of taxes and other official duties.

Food fraud

Falsifying the origin of foodstuffs is the most common form of food fraud in Finland

There are several types of irregularities related to food trade. The country of origin may be different from the one labelled, or its consistency may be altered in a variety of ways. For example, the product may be manufactured using cheaper raw-materials than those labelled and even prohibited raw-materials may have been used.

The information on ingredients, quality and means of production may also be falsified. The most common form of food fraud in Finland is false country-of-origin labelling. For example, the production costs of berries, meat and fish are relatively high in Finland, which creates an incentive falsely label the country of origin as Finland.

Sometimes, a poor harvest of a given farm product may lead to a situation where demand exceeds supply. For example, the poor hazelnut in 2016 led to a supply of fake hazelnut ingredients. Fake hazelnut probably did not reach the Finnish markets.

Demand may exceed supply for many reasons, such as a sudden global food trend. Peaks in demand create extra pressure on the distribution chain to supply the product as quickly and as much as possible. As counterfeiting food is simple, markets situations such as these create an incentive for deception. Coconut water is a good example of a food product whose demand soared within a short period on the world market and which was subsequently counterfeited in 2017. Fake coconut water has probably not reached the Finnish markets.

Food fraud can take place at any point of the production chain, including between companies, such as the importer and retailer. The phenomenon is international because food trade is international. With the improved collaboration between national authorities, several large transnational fraud cases have been resolved in the past few years.

Food fraud is about deceiving the consumer or another business – and often taxes are evaded

One common denominator in food fraud is the attempt to gain unjustified financial advantage. There are numerous different ways of committing food fraud and new methods regularly come to light. One method is to evade supervisory fees, which can generate a substantial unjustified financial advantage in the long run.

Apart from consumers, other victims of food fraud are other food industry businesses. The food industry has, therefore, developed its own anti-fraud mechanisms in recent years. Food industry companies do not always report fraud to the authorities, as there may be major risks to the company’s reputation involved. When investigating food fraud, it has also been noticed that the perpetrators often pursue added financial advantage by not paying taxes or other statutory fees.

Food fraud often fulfils the criteria for a criminal offence. Besides fraud, the offences can also meet the criteria of a health offence, forgery, marketing offence, endangerment of health and, in the worst case, even negligent homicide. If the operators fail to pay taxes and other statutory obligations, the conduct meets the criteria of a tax offence or an offence by a debtor.

Food safety is controlled by the Finnish Food Safety Authority (Evira), Regional State Administrative Agencies, local authorities, Customs, the National Supervisory Authority for Welfare and Health (Valvira), the Finnish Defence Forces and the Centres for Economic Development, Transport and the Environment.  The Tax Administration and Customs control the sales taxation and import of products.  

According to a 2017 report compiled for the UK food and drink sector, the industry could be losing up to GBP 12 billion (approx. EUR 13.4 billion) annually because of food fraud. There is no similar study made in Finland, but based on earlier international estimates, approximately 97% of food fraud goes undetected. According to the same estimates, the proportion of undetected food fraud is estimated to equal 3% of total volume in the food and drink sector. In Finland, this would mean an estimated EUR 500 million loss annually.

Alcohol and tobacco import

Alcohol and tobacco products are brought into Finland as non-commercial imports and online purchases

Passengers arriving in Finland from abroad may conceal commercial imports among non-commercial imports and in this way attempt to evade excise duties. Private individuals are entitled to bring into Finland alcohol from another EU Member State duty-free within the value limits provided. Most passengers bring in alcohol for their personal consumption and by transporting it by themselves, as regulated. When products are brought in for commercial or business use, the imports are subject to taxation regardless of quantities. Alcohol is brought into Finland from countries, where taxes on alcohol are lower (e.g. Estonia, Latvia, Germany). This is a phenomenon known in European countries where the price of alcohol is substantially higher than in the neighbouring areas. Imported alcohol may be distributed for sale in, for example, bars and restaurants.

Alcohol is sold to Finnish buyers from foreign-based online shops, which usually do not fulfil their tax obligations. The Finnish customer purchases alcohol from an online store domiciled in another EU Member State. The company organises the transport of the alcohol to the buyer in Finland. This is a form of distance sales, so the tax liability, as a rule, rests with the online store domiciled abroad.

Passengers also bring in tobacco and snuff products against regulations. Tobacco and snuff are smuggled into Finland for sale. Online stores also participate in cigarette trade.

Passenger imports in decline, online sales on the rise

Passengers brought in less alcohol in 2017 than in previous years. Instead, the importing of snus has increased in the past few years. Online sales of alcohol have increased just like all other online business. Online alcohol stores that are actively marketing their services in Finland, have been established in Estonia and other Baltic countries, among others.

The purpose of bringing in alcohol and tobacco products against regulations is to avoid import and excise duties, and this conduct meets the criteria of tax fraud. Moreover, importing goods against regulations may also meet the criteria of smuggling.

The illegal import of alcohol and tobacco erodes the tax base

The smuggling of alcohol and tobacco products decreases tax revenue. Smuggled goods end up in the black market, and they may be sold to minors, including over the Internet. Anyone can, in practice, buy alcohol and cigarettes online.

Customer and Tax Administration are engaging in active collaboration in the area of tax supervision. The excise duties are levied by the Tax Administration The police investigate suspected offences related to the sales of alcohol, tobacco and snus.

Vat fraud in consumer product trade

Importing vehicles and other consumer products can involve VAT fraud

The VAT frauds committed in connection with the importing of vehicles and other consumer products sold to consumers are based on exploiting the weaknesses of the VAT system of the European single market. Typically, these offences are acquisition frauds, in which the VAT on the commodity is not paid. Fraud is often committed with high-volume hit products. The products may be sold to consumers at a lower price or a higher margin than their competitors, who play by the rules.

This phenomenon is seen European-wide, and this fraud is often committed by members of organised crime. The operations are often linked with other crimes, such as financial fraud, order and procurement fraud as well as counterfeit products. 

This fraud often involves “dummy companies” and other channels through which the procurement chain is deliberately made unclear to avoid official control measures. The simplest method is based on the quick actions of an intra-community buyer through short-lived companies. The most typical types of fraud in vehicle trade include scams in connection with the marginal tax schemes and various dummy companies.

VAT frauds cause substantial losses

VAT frauds deplete tax revenue, and they often involve improper VAT refunds, which means repaying collected taxes to operators abusing the system. There are no accurate estimates available on the total losses caused by VAT fraud in consumer product trade, but according to the Tax Administration, the total tax gap created by intra-community VAT fraud is estimated at EUR 100–150 million.

VAT fraud, like any tax fraud, meets the criteria for a tax offence. The irregularities in value added taxation are controlled by the Tax Administration. The control of imports is the responsibility of Customs. The two authorities collaborate with the police to resolve offences connected to the VAT.

Subscription traps

Beware of the subscription traps in distance sales 

Telemarketers, e-mail marketers and similar operators may be setting subscription traps by providing misleading information about the content of an order. The first order is marketed merely as a sample without any further obligations, or the offer is seemingly a raffle. Consent then leads to an order that is not in line with the original advertisement or marketing, and the customer finds themselves having committed to ordering a product or service. The undue payments are typically collected with an invoice. An increasingly common type of subscription trap is to charge a credit card regularly following the initial payment.

Subscription traps meet the criteria of fraud and marketing offence. The phenomenon erodes the consumers’ trust in online marketing and telephone sales. It is also highly likely that companies that deceive their customers also fail to fulfil their statutory obligations.

Subscription traps are particularly harmful in cases were regularly monthly payments are charged on credit cards. Subscription traps also involve collection operations, leading consumers to pay undue invoices in fear of further consequences (e.g. poor credit rating, court case).

Subscription traps are typically run by foreign vendors

Subscription traps are often set up by foreign vendors. Besides consumers, companies also targeted. In sectors where goods are sold online and where subscription traps have been found include natural remedies and beauty products (free sample traps) and various brand products (e.g. one-euro iPhone scams). Subscription traps do not concern just a particular type of consumers, as anyone can fall for a scheme if it skilfully set up.

The phenomenon is becoming increasingly common alongside the growing Internet-based business. According to a subscription trap survey conducted by the European Consumer Centres Network, Finns who had been victims of a subscription trap in the past three years (5% of the respondents) had lost €141/person on average. Some 36,000 consumers, 18% of the victims had paid up without complaint; 8% filed a complaint with authorities. According to a very rough estimate, subscription traps cause Finnish consumers a loss of EUR 2–9 million annually. According to the subscription trap survey conducted by the European Commission, approximately one in four Finnish online consumers who had ordered a free sample had had problems. Consumers realise they have fallen for a subscription trap usually only once they try to discontinue the order.

The Consumer Ombudsman prevents misuse through communications and control

The Consumer Ombudsman aims to prevent consumers from falling victim to subscription traps through communication campaigns. The aim is to stop the illegal activities of the vendors and to make their operations unprofitable. This can be achieved by intervening with the operations of debt collection agencies and card payment services when collecting undue payments. 

Negotiations with debt collection agencies and card payment services have led to positive outcomes. Debt collection has also been intervened in by assisting consumers through, for example, public statements and guidance offered on a case-by-case basis and on a general level. Negotiating with subscription trap vendors themselves have not been productive. The options of the Consumer Ombudsman are quite limited unless the subscription trap vendor (who operates from another country) voluntarily agrees to change their policies.

It would appear most likely that active communications and consumer education have made the practice more widely known among consumers, which has helped prevent new subscription trap cases. Assisting the victims of subscription traps has encouraged consumers not to consent to undue payments. When the vendor has noticed that the consumers refuse to pay for orders based on subscription traps, the collection of the payments and further marketing has stopped.