Situational picture
Authorities consider the shadow economy and economic crime to have become more professional and international
Publication date 23 May 2023
The shadow economy and economic crime result in significant losses to Finnish society every year. The economic uncertainty, inflation and rising interests in Europe may increase bankruptcies and the shadow economy, or at least lower the threshold to slipping into the grey area. The authorities combatting the shadow economy and financial crime have found that illegal activities have become more international and professional. Examples of organised and planned shadow economy activities are the participation of several operators in extensive and varied criminal activities, and the use of shell companies and straw buyers to deceive authorities.
The authorities combatting the shadow economy and financial crime conducted a survey at the beginning of 2023 to identify changes in the operating environment. The survey collected the authorities’ views and observations of changes in the operating environment regarding the shadow economy and financial crime, as well as their prevention. The situational picture on the current phenomena comprises several subareas and combines the views of different authorities to provide a comprehensive insight into the current and near-future operating environment of the authorities combatting the shadow economy and financial crime.
The shadow economy is often international
The operating environment of shadow economy activities and economic crime is international even if the related business activities are only carried out in Finland. Such international activities are related to the free movement of capital or international transactions, virtual currencies, or other electronic forms of payment. Assets are transferred across borders through cash withdrawals, third-party individuals, and company bank accounts. Opening bank accounts outside Finland or wallets for virtual currencies and using these is fast and simple, whereas receiving comparison data or carrying out recoveries is often slow or impossible for the authorities. These international activities may not even seem international on the outside, since companies registered outside Finland recruit customer service employees who speak Finnish. International monetary transactions and non-Finnish companies are also used for debtor offences and money laundering, for example.
Authorities have encountered professional facilitation of illegal entry and labour exploitation
In their supervisory activities, the prevention authorities have encountered the professional facilitation of illegal entry into Finland and abuse related to workers’ rights. Individuals who enter Finland for work or the parties pretending to be their employers have provided the authorities with different types of information when the entry into Finland is registered with the aim of expediting the granting of a personal identity code or residence permit. For example, workers from outside Finland have bought small shares of their employer organisation to seemingly prove their status as entrepreneurs, whereas to other authorities, the same individuals have stated that they are only employees. A residence permit for an employed person may also be replaced with a residence permit for an entrepreneur to save costs, but it may also be done with the intent to disguise an employment contract as a commission agreement. Workers entering Finland may also be paid more on the surface to ensure they are granted a residence permit, while the worker has agreed to return a share of the pay to the employer. Such activities may also include undeclared work and abuse of social benefits.
Russia’s invasion of Ukraine has increased the number of people entering Finland entitled to temporary protection. Those under temporary protection may have a higher risk of falling victim to labour exploitation, since the residence permit application process does not include examining the terms and conditions of employment. Signs of abuse have already been observed in the employment of such individuals. In particular, seasonal workers are recruited from countries where workers are less aware of their rights than European workers on average. These jobs are often subject to a fee, which means the workers pay the employer for being recruited in their country of origin. The seasonal work of workers from outside Finland is often associated with offences related to shift work, working hours and pay. Reports on work discrimination have also been on the rise.
The supervision of authorities and increased awareness have resulted in an increase in the discovered cases and police reports. As labour immigration increases, the risks associated with employment also increase; the authorities should therefore be provided with the necessary means to prevent illegal activities, carry out effective supervision, and exchange information. In the authorities’ view, the correct and current content of official registers is the basis for the effective targeting of prevention measures and information-based leadership.
Invoicing services have been misused and used for shadow economy activities in many ways
In the past year, the number of employed people who become ‘light entrepreneurs’ or self-employed increased, and so did the issues related to this. The supervisory authorities have found that individuals using invoicing services to invoice their work now come from a wider range of nationalities and they do not always even speak any Finnish. These individuals are vulnerable to becoming victims of abuse such as bogus or forced self-employment. The risks are particularly high in cases where the initiative for the employee to become self-employed comes from the party that commissions the work. The price of work can be lowered by outsourcing the mandatory employer’s contributions to the person that carries out the work. This means the person carrying out the work also receives more money, if they never even intended to pay the statutory contributions. Misuse has been observed in the construction and shipbuilding sectors, for example, but the phenomenon has extended to the cleaning and home care industries as well
In addition to the invoicing services already on the market, new invoicing service companies have been established that do not report their actual line of business during registration to avoid the supervision of authorities, for example. The authorities have found that some invoicing services do not use strong authentication to verify the identity of their customers, which means that the taxation of work invoiced through the service can be intentionally targeted at the wrong person, and the monetary compensation for the work may be paid to a party other than the individual that carried out the work. There have also been observations of professional facilitation, where a third party refers, helps and guides workers from outside Finland to become light entrepreneurs and to use invoicing services. The third party is compensated for this by the company that used the third party’s service. In the most serious cases, human trafficking and extortionate work discrimination have also been suspected.
Authorities have discovered a lot of deficiencies in company accounting – accounting crime is on the rise
The prevention authorities have increasingly found that companies do not take care of their accounting as required by law, that their accounting is materially deficient, or that accounts are made only after the authorities request to see them. Neglect of accounting responsibilities by Finnish limited liability companies subject to the obligation to have an audit carried out has become relatively common. Deficiencies in accounting can hinder, slow down or prevent investigating the company’s financial situation. For example, the authorities view acquiring access to accounting data saved in a cloud service challenging in situations where the party subject the obligation to keep accounting records has not paid the fees for the use of the cloud service. The increase in the findings made during supervision, e.g. unjustified withdrawals of a limited liability company’s assets, were assessed to be a result of less strict accounting supervision and companies’ inability to ensure that the obligations a limited liability company is subject to are met.
Misuse of shareholder wage income has increased and avoiding debtor’s obligations has become more international
The risk of leaving the wages and income of shareholders and full-time self-employed individuals undeclared has increased. The authorities also assess that the number of one-person limited liability companies has increased. Misuse related to shareholder wage income has increased and according to the observations, some shareholders recorded their wages as shareholder loans in the company’s accounting or made other entries that were not factual. The authorities have also encountered shareholders who withdraw money for the cash register throughout the year and only correct the amounts as wages at the end of the year. In some one-person limited liability companies and general or limited partnerships, the company account is also used for the individual’s private expenses and living expenses are recorded as entertainment expenses. Disguised dividends are often comparable to undeclared wages paid to the shareholder rather than actual dividend. Partners of general and limited partnerships and self-employed individuals making withdrawals from their company’s account and shareholders who do not withdraw wages also make recovery harder, because no wage income eligible for enforcement is paid.
The avoidance of debtor obligations has become more international, as transactions go through non-Finnish banks and other money transfer services from which acquiring information is more difficult. Employees with debts may acquire non-Finnish companies and become self-employed to avoid enforcement. This way the debtors can keep working for their previous employer, but instead of pay, they issue invoices for non-wage compensation for work. In situations involving misuse, the debtor can withdraw wages from their company only to the amount of the portion protected from enforcement and then invoice large reimbursements for expenses from their company. Paid advance wages can later be corrected to be reimbursements of expenses and if necessary, the company can grant loans. In the payment-free months of enforcement, significantly larger wages or bonuses may be withdrawn.
In situations involving misuse by a debtor, it has been observed that wages are reported to the Incomes Register late and that the reports are corrected or deleted entirely. Withholding taxes from an entrepreneur’s wages may be carried out with a percentage that is too low, which results in intentionally incurred additional debt. Percentages that are too high are used to artificially to make the individual ineligible for enforcement. In a limited partnership, profit shares paid to limited partners do not need to be reported to the Incomes Register, which means that the authorities do not have real-time access to the actual amount of income received.
Cash and straw buyers are still popular tools in the shadow economy
Banks have made their practices for accepting cash stricter, and the authorities have found that this has increased the transport of cash away from Finland. Not all limited liability companies have a bank account; instead, they carry out their activities with cash and through the bank accounts of shareholders and other parties. Some employees have a condition in their employment contract that they must let the employer use their personal bank account, which has then been used to disguise the economic operator and its activities. The use of cash is seen in the shadow economy as missing cash transactions, wages paid in cash and left undeclared, and disguised dividend paid in cash. Cash is still extensively used in many lines of business although its use is declining in some industries. With the increase in alternative electric payment methods, the shadow economy activities previously handled in cash have partly been transferred to these new services.
In international activities, the significant use of cash and signs of money laundering have been observed. If the identification in accordance with the Act on Preventing Money Laundering and Terrorist Financing of a customer using cash is not carried out properly, it is possible that the accounting records and data reported to the authorities also include assets acquired illegally. After the relevant sanctions entered into force, an increase in transporting euros in cash from Finland and other EU Member States to Russia has been observed at the eastern borders. Cases involving smuggling of cash have also increased.
Straw buyers are used in shadow economy activities and financial crimes in several ways, and both private individuals and companies act as straw buyers. Companies with debt or who have neglected their statutory duties often continue their operations under a new company with an employee or similar of the previous operator serving as the responsible person. The moveable property of companies with payment difficulties can be sold through an ostensibly legal transaction to a completely new external party through a straw buyer. Straw buyers also offer their services on their own initiative and collect a fee for them.
Crime in the food chain is diverse and includes security risks
In the weak economic situation and as the price of raw materials rises, the amount of forged food products and products manufactured or transported in inappropriate conditions are expected to increase. Already, forbidden additives, inaccurate labelling and designations of origin, and issues in the microbiological quality of products have been found in supervision. Activities not covered by the supervision of authorities have also increased, or at the least, operators engaging in such activities are more often recognised. Food products produced outside the scope of supervision of the authorities are sold to gain financial benefit and used to avoid other fees related to food control. In addition to the economic impact, food control has a social impact by ensuring consumer safety and preventing the spread of animal diseases. Citizens have also reported their suspicions of illegal activities more than previously. Food crime was found in the bakery industry more in the last year than in the previous year, and it was still also found in the meat, fish and fresh produce industries. Applying for subsidies for farmers on false grounds is also a form of food crime. In addition to food and subsidy fraud, labour exploitation serves as an example of the diversity of crime in the food chain.
Authorities busy with ensuring compliance with sanctions and regulation offences
The operating environment is continuously changing due to the current security situation in Europe, which particularly affects national security of supply and securing cross-border goods transport. Traffic from the eastern border and risks associated with trade in the east have decreased, but supervising compliance with export and import sanctions and regulation offences have significantly increased. There have been many attempts to circumvent sanctions. Operators placed on sanctions lists have made arrangements to disguise who is in control and who the owners are. Companies and private individuals also try to hide their connections to Russia. Sanctions are circumvented by exporting goods to countries that are friendly with Russia or by taking advantage of the fact that transit through Russia is still allowed. Exports from Finland to some of Russia’s neighbouring countries in the south increased significantly in 2022. Private individuals smuggle forbidden goods to Russia by concealing them in their vehicles. Attempts have been made to smuggle larger batches under incorrect headings, or with incorrect customs declarations or forged certificates of origin. Transports subject to sanctions have included electronics, seafaring supplies, boats, drones, and spare parts for devices, among others. In passenger traffic control, luxury products, cash, cigarettes, and alcohol have been found.
What threats do the authorities combatting the shadow economy and economic crime see in their operating environment?
The authorities combatting the shadow economy and economic crime view that the uncertain economic situation, rising costs, and the looming recession increase the risks associated with the shadow economy. The security situation in Europe will also be reflected in the authorities’ operating environment in the coming years as new phenomena occur and old phenomena become more prevalent. If the situation is prolonged, it may lead to an increase in regulation offences and different offences involving smuggling. The authorities must be able to react to the changes in their operating environment; the Action Plan against the Shadow Economy and Economic Crime contributes to this, for example.
The prevention authorities expect that with increasing immigration and labour exploitation, undeclared work will also increase and go increasingly undetected, especially in low-paid fields. Undeclared work reduces the amount received from both companies and employees in the form of taxes and pension and social insurance contributions. In addition to the social impact, undeclared work distorts competition between companies, and labour exploitation creates a second labour market. Undeclared work is detrimental to the safety of both customers and employees, and to the integration of workers arriving from outside Finland. Technological advancements increase opportunities for leaving work undeclared by taking advantage of international payment platforms and applications, for example. Those in vulnerable positions in the labour market can also be forced to become entrepreneurs, and the number of detected cases involving bogus or forced self-employment has been increasing.
The social role of the authorities is changing, and lines must be drawn between guidance, customer service, access to information, and supervision. In a challenging competition situation, even honest operators may leave their statutory obligations unfulfilled. Making running a business easier and promoting the growth of companies simultaneously increases the need for supervision and the number of measures needed in supervision. Maintaining the welfare state requires credible supervision and sufficient resources for holding misusers accountable. The authorities combatting the shadow economy and economic crime must already prioritise what measures they take, even though the results of their supervision demonstrate the necessity of their activities.
Read more about the observations:
Changes in the operating environment are identified quickly in combating the shadow economy and financial crime
Publication date 16 May 2022
The war in Ukraine and the resulting flow of refugees may increase the already existing cases of work-related abuse, including labour exploitation, the use of undeclared workers and even human trafficking. The authorities combating the shadow economy estimate that people in a weaker position are always at risk of abuse. International sanctions give the authorities more supervisory duties and obligate all parties.
The authorities combating the shadow economy and financial crime conducted a survey at the beginning of 2022 to identify changes in the operating environment. The survey requested the authorities to provide their views and observations of changes in the operating environment regarding the shadow economy and financial crime, as well as their prevention. An overview of current phenomena is a sum of many parts, combining the views of different authorities. Any weak signals identified may be an indication of a single phenomenon raising its head or the first symptom of a change that may be significant in the future or mean that a previously existing phenomenon has taken new forms.
The amount of light entrepreneurship and self-employment increasing, often showing signs of work carried out in an employment relationship
The authorities have seen that some employers have used light entrepreneurship to outsource their obligations to employees, especially among the foreign workforce. In these situations, the actual conditions of the worker, acting as a self-employed person or light entrepreneur, meet the characteristics of an employment relationship. The worker may receive work locations, working hours, tools and other work equipment required from a principal customer acting in the role of an employer at a worksite. The worker often has no other principal customers, and they act under the principal customer’s supervisory rights.
The worker may not always know that they are actually a self-employed individual or want to be one. Some workers may be under the impression that they have signed a new employment contract, although what they actually signed was a self-employed individual’s assignment agreement. Such workers who are forced into self-employment do not usually have the required linguistic skills. The worker may also have been reported as a self-employed individual retroactively, in which case the employer may aim to have the employees’ pension contributions refunded. Bogus and forced self-employment has especially been discovered not only in the construction sector, but also in transport.
Labour exploitation increasingly subject to cooperation between the authorities
In addition to labour exploitation, the exploitation of foreign employees may also involve human trafficking, extortionate work discrimination and protection racket cases. Through the residence permit process tied to the employer, employers may have affected employees’ rights. Such an employer usually also exploits foreign employees’ insufficient linguistic skills and ignorance of Finnish law. Employees’ wages may have been recovered or forwarded to the bank account of a supervisor or shareholder through invoicing service companies. Cases of abuse involving labour exploitation are often discovered not only in seasonal work, but also in long-term employment relationships.
Abuse cases have increasingly become hot topics in public debate. Employees subject to abuse have had the courage to talk about their situation once visible measures have been taken. Victims of exploitation may not always know that they are subject to crime, or they may not want or have the courage to help investigate the case. Labour exploitation is increasingly subject to cooperation between the authorities, and the authorities are also able to better identify it, while prevention also calls for more cooperation and more exchange of information. At best, new forms of working provide many with new opportunities for working, but, in addition to their positive impact on employment, they may also involve various negative phenomena.
The impact of the war in Ukraine is already reflected in the authorities’ activities
The authorities are monitoring the development of the international refugee situation. The growing flow of refugees is providing the Finnish labour market with many new employees in different sectors. Refugees may have an urgent need to obtain income, also making them specifically susceptible to exploitation. Such employees particularly enter sectors where Finnish skills are unnecessary, including agriculture, accommodation and construction. The work offered may be short-term or seasonal work, for which the threshold for using undeclared foreign employees is low. There may also be professional criminals from various countries. In addition to employee exploitation and undeclared work, there is also the growing risk of different fundraising and other financial support fraud targeted at refugees.
The sanctions imposed on Russia as a result of the war have expanded, and suspected criminal cases related to the sanctions may increase. Evading sanctions directed at goods, people and transport may give rise to new types of crime. Supervising the sanctions calls for significant resources from the authorities. According to the authorities’ estimates, goods subject to sanctions may also be smuggled into Russia, and sanctions related to money transfers may be evaded using virtual currencies. Assets and funds subject to sanctions may also be maintained and imported into Europe through front men. Forged documents and receipts intended for evading sanctions have already been identified.
The war has had a significant impact on imports and prices of raw materials and foodstuffs. Low-quality or forged foodstuffs may be placed on the market to replace any deficiencies in food imports due to the war. Any rapid increase in the general price level and the prices of energy, fuels and raw materials may increase the shadow economy and financial crime to reduce other business expenses. According to the authorities’ estimates, the decline in the Russian economy will have a variety impacts on crime in the border region, for example.
An increase in virtual currencies and online payment platforms involves risks
The virtual currency market has increased during the coronavirus pandemic. According to the authorities’ findings, the use of foreign virtual banks for the transfer of funds has increased. A single party may have up two 200 different virtual currencies. Virtual currencies are only transferred between the parties to the transfer which means that transactions are more difficult to trace than in conventional money transfers. Access to data requires international data requests, as funds are increasingly held in international bank accounts or in foreign virtual banks. Virtual currencies can be used to conceal assets and apply for social benefits higher than to which the applicant would be entitled based on their real assets.
In the platform economy, the provision of user-friendly online solutions requires that the same obligations are complied with as in any other business activity—submitting appropriate permits and reports to the authorities. On an international scale, there are signs that some companies try to evade national and international laws by only operating online. This practice may spread in the near future. The labour law position of those working via online platforms may also be unclear as the work is not tied to any fixed location or equipment. As online shopping increases, the number of foreign payment transfer service providers and various money transfer platforms will also increase, reducing the authorities’ access to information.
Offences in the food chain identified better than before
Various offences have been identified in the food chain, relating to health, marketing, registrations, industrial rights, fraud, environmental pollution and aid fraud. Food crime presents a direct risk at people’s health and safety. Food crime often involves small sanctions and a low risk of getting caught. While the identification of offences in the food chain has improved through increased training and awareness, the settlement of cases often calls for extensive international investigations and cooperation between the authorities.
According to observations, professional food preparation completely outside the scope of food control has increased during the pandemic. Often, food is also prepared in facilities unfit for the purpose. Meals prepared outside the scope of food control are delivered for retail sale, and their volumes can be significant. These activities may involve the use of undeclared employees and neglected employer obligations. Buyers of products can rarely identify food crime.
Smuggling and sales of related products have become more professional
The decrease in passenger volumes has affected the smuggling of highly taxed products, and the import and sale of products has extensively gone online. Large volumes of alcoholic beverages are being ordered online from Central Europe, among other places, for further distribution in Finland. In illegal importing, criminals have especially used commercial goods transports, postal and courier services. Smuggling operations also involve Finnish companies that distribute goods from Finland and the EU to the black market in third countries. The wealth of the individuals behind these companies may have come from income whose origin cannot be reliably identified, untaxed income or criminal activities.
Snus smuggling and sales of related products have become more professional, and the parties involved often play highly specific roles in smuggling chains. Operations have also been run from other countries where part of the criminal proceeds obtained from snus sales has ended up. Larger amounts of illegal snus imports have been identified along the land border between Finland and Sweden and in ferry traffic. Snus has especially been sold in encrypted snus groups and other groups on the public Internet. Snus operations also involve tax offences and illegal imports.
Changes in the operating environment also offer new opportunities for organised crime
The authorities have identified that the risk of organised crime being involved in benefit-related abuse has increased during the pandemic. There are also signs that organised crime has found its way to key procurement chains, in which buyers often need to receive their goods urgently. Operations are often international and networked.
Organised crime is broadly involved in various business activities. Criminals infiltrate reputable companies and exploit the distribution channels to import forged or unfit products into the EU market. Small transport volumes reduce the risk of getting caught. Criminals use specialists in different fields and exploit shell companies. In addition, they use invented invoicing chains and circulate goods and declaration documents. Criminals aim to avoid official obligations associated with business activities and to use business activities for money laundering purposes. High proceeds from environmental crime, the low risk of getting caught and mild consequences also attract organised crime.
Toimintaympäristön muutoskyselyn havaintoja 16.05.2022 (PDF 383 kB)