Shadow economy in east-west trade

East-west trade has traditionally referred to trade of goods between Finland and Russia (previously the Soviet Union) and Finnish construction activities in Russia. However, internationalisation has extended the concept, and currently it also includes export and import trade, trans-shipment and the related logistics, tourism trade for people visiting Finland across the eastern border and the various services provided to them in Finland.

The geographical location of Finland and its long land border with Russia, which is also an external border of the EU, constitute an important and wide field of activities for several control authorities. The geographical proximity of the countries promotes the development of commercial routes but also the illegal transfer of money and goods. Although it is difficult to estimate the share of shadow economy in east-west trade, it can be assumed that the majority of east-west trade is carried out according to regulations.

Various phenomena of the shadow economy are typically revealed through individual official measures because actors engaged in the shadow economy in east-west trade usually perform their various reporting duties to Finnish authorities properly. Moreover, activities in the shadow economy mostly take place outside labour-intensive sectors, which means that the number of control authorities is smaller than, for example, in the construction sector and that the activities are also otherwise less prominent. Cases are also revealed through whistle-blowing and the information exchange between national and international authorities.

Problems related to tax haven companies and cash

The phenomena commonly associated with the shadow economy, such as tax haven companies and the large-scale use of cash in business transactions, arise repeatedly in the tax inspections of companies involved in east-west trade. In these cases, the sale and purchase receipts of Finnish companies typically have a very unclear connection to their money transactions. The intention is to reduce the taxable income that the company reports to the tax authority and to increase the assets of the persons responsible for the operations by tax evasion.

According to findings, tax haven companies are still used as vehicle companies in international trade of goods and logistics in east-west trade while at the same time reports submitted to the Finnish Customs state that the goods are transported across the border. The use of completely fabricated companies is increasing, which at times totally obscures the real trading parties or one of the parties from the authorities. This allows for practices such as double invoicing and leaving consignments intended for export in the territory of the EU and thus receiving unjustified VAT benefits. It is also possible that goods sold elsewhere in the EU to an intermediary and then transferred through Finland are used as part of larger-scale fraud crime in the intra-Community trade within the EU, which can lead to tax losses in several countries simultaneously.

Unclear cash transfers also often point to money laundering. Finnish companies have been used as intermediaries in the transfer of funds or in business transactions between foreign companies with no actual business-related purpose.

Abuse cases related to exports and tourism trade

In recent years, there have been several cases of Finnish companies engaged in export activities with a non-existent Russian business partner or a partner that has ceased operations. In Finland, exports are declared to the customs electronically, which might leave uncertainty as to whether the goods have actually crossed the border. This is of importance in particular when assessing the VAT exemption of the sales of a Finnish sales company. In these abuse situations, there is also often reason to suspect that foreign companies registered in Finland participate in illegal activities outside the Finnish borders.

There are many small and medium-sized foreign enterprises in Finland engaging in east-west exports and performing freight forwarding services under the so-called order-delivery principle. A courier collects the goods from Finland, often by passenger car, and drives them across the eastern border. Dividing up export shipments is a way to avoid customs controls and this procedure can be used to circumvent sanctions and other export restrictions, which might make the perpetrator guilty of, for example, a rationing offence.

The authorities have also found counterfeit stamps of the Finnish Customs in tourism trade receipts used for unfounded tax-free refunds. It is difficult to estimate the extent of the use of counterfeit stamps because detecting them requires specific expertise while at the same time tourism trade volumes concerning the eastern border are on the rise again.

Other irregularities related to customs procedures

In recent years, many criminal investigations have arisen from corporate audits conducted by the Finnish Customs due to misuse of customs procedures in customs warehousing and temporary storage. There have been attempts to blur the quality, description, value or origin of goods in transport chains across the eastern border. The phenomenon could be described as a kind of trans-shipment carousel fraud passing through Finland, which is related to various types of cross-border tax evasion. This can lead to tax losses in several countries. In Finland, the cases have been investigated as aggravated tax frauds.

In east-west imports, the shadow economy manifests as, among other things, false declarations of tariff headings, contents and customs values, attempts to blur the true origin of goods, and as attempts to import or transit goods subject to restrictions. Unauthorised attempts to transit military equipment through Finland, for example, occasionally appear in customs offices along the eastern border.

Long-term cooperation at both domestic and international levels

The Finnish Tax Administration and the Finnish Customs have a central role in tackling the phenomena related to east-west trade, and international cooperation also plays a key role in both revealing and preventing activities in the shadow economy. It is also important to maintain a shared situational picture of east-west trade between various authorities.

The phenomena of the shadow economy in east-west trade are international; unclear business transactions concern companies registered in different countries and the responsible persons in these Finnish companies are not usually Finnish citizens. A new phenomenon is selling shelf companies to fraudulent actors who do not have any intention to conduct genuine business activities through them. There have also been attempts to use these companies in obtaining a residence permit in Finland as an entrepreneur. They are also being used in many kinds of frauds. The multifaceted nature of these cases is a challenge for the authorities. For example, finding out information related to tax and customs controls usually requires international exchange of information. In addition, the international nature of east-west trade creates its own challenges in preliminary inquiries that authorities try to overcome through efficient international cooperation.