Abstract：A comprehensive secret investigation into the second-hand gold market by the South African Revenue Service (SARS) revealed what seems to be a staggering multibillion-rand tax evasion operation.
A comprehensive secret investigation into the second-hand gold market by the South African Revenue Service (SARS) revealed what seems to be a staggering multibillion-rand tax evasion operation.
According to an affidavit SARS submitted in the Johannesburg high court, only two firms are credited with claiming R24.4 billion in allegedly fraudulent VAT refunds between 2012 and March 2020, demonstrating the vast scope of the conspiracy.
Over R8 billion in unauthorized VAT refunds are believed to have been obtained by the two businesses in 2019 alone, accounting for about 0.5 percent of SARS' annual tax revenue.
Again, merely including the acts of these individuals, the operation was said to have included quantities of gold in that year equivalent to an astounding 70% of all gold legitimately produced in South Africa in 2019.
In theory, the plan outlined by SARS seems straightforward. Exports of gold are not subject to VAT. Local purchases of gold scrap, however, are subject to the regular 15% VAT.
If you can buy a lot of gold for export without paying the required VAT, you can ask SARS for a refund of 15% of the gold's worth for the tax you never really paid.
Incorporating untaxed gold into the supply chain and falsifying VAT payments for this gold are crucial to the system.
SARS implicates Rappa
Rappa Resources, a gold trader with offices in Germiston who is now embroiled in a legal dispute with the taxman, is one of the two businesses mentioned.
After SARS withheld R1.8 billion in VAT refunds that the firm was allegedly due for the period of February to June 2020, Rappa filed a lawsuit.
The lawsuit has compelled SARS to provide information on its carefully held probe.
Another example of the size of Rappa's ostensibly contaminated gold export business is the revenue service's subsequent massive assessment of R7 billion against it for its allegedly erroneous VAT claims between January 2019 and March 2020.
Rappa has responded by filing a second lawsuit against the tax service to contest this determination.
In between battles, SARS has encountered some difficulties, including a harsh reprimand for its alleged strategy of holding back billions in reimbursements indefinitely as it continues to look into Rappa.
Judge Seena Yacoob criticized the revenue service and stated that if SARS didn't alter course, the Tax Administration Act would become “inherently discriminatory against the taxpayer.”
SARS also objected to Rappa's choice to proceed straight to the Johannesburg high court rather than the specialized tax court. The Supreme Court will have to consider the appeal before the main case can move forward after the court ruled against SARS.
However, the court documents for the two high court cases, which total more than 3,000 pages, offer a nauseating window into a purported criminal underworld that allegedly operates in the background of South Africa's official gold business.
The charges taken by SARS against Rappa come after the revenue service conducted a thorough investigation into gold trade and called Rappa as a witness in March 2019, according to court documents.
The first suspects were Aesha Refineries, a rival, and a group of prominent second-hand gold dealers who were thought to be involved in the trade of “illicit” metal. These merchants provide goods to Rappa.
According to the court documents, search and seizure activities in 2019 targeted at least two of these dealers.
Numerous small suppliers of purportedly illegal gold to these merchants are also being scrutinized.
AmaBhungane has also discovered that the Directorate for Priority Crime Investigation is looking into some of them criminally (DPCI). According to an affidavit by Lt. colonel Mark de Bruin of the DPCI dated 30 June 2020, which backed subpoenas for information from banks, this includes Rappa and 64 other firms.
A purported plot
The SARS inquiry focuses on the business practices of organizations in the used gold market.
The tax office accuses significant actors of importing unlawfully smelted Krugerrands (which do not incur VAT) and illegally mined or smuggled gold into the “legitimate” gold supply chain.
SARS alleges that they accomplish this by falsely representing the gold as secondhand (such as from acquired jewelry), allowing for the illegal receipt of VAT refunds.
The majority of the time, “[they are] preparing phony tax invoices that fraudulently suggest that the taxpayer acquired second-hand gold jewelry from a VAT seller, hence claiming input tax based on supposed standard-rated products,” says Gerald Motadi, a senior manager at SARS, in an affidavit.
According to Motadi, the fraudsters frequently used “invoice factories” to do this—companies set up to produce phony invoices.
Alternately, the gold dealers create the fictitious invoices on their own. In the cases that SARS investigated, the gold was apparently purchased through “companies” that were registered inside of random people's homes. It's unclear if they were always aware of what was happening.
The gold is then sold “up” a supply chain from that point on and eventually exported, at which time the fake VAT refund is requested. SARS claims that the fraud's earnings are distributed across the supplier chain.
Rappa adamantly refutes SARS' allegations that it is one of the exporters that intentionally sits at the top of these illegal gold supply networks and benefits from them.
According to reports, Rappa purchases gold purportedly made from “junk” and obsolete jewelry and exports it to customers “located in Europe or Dubai”.
According to Rappa, its business strategy entails nothing more complicated than collecting a little margin of around 3% on the purchase and export of gold. It also claims that its stance is VAT neutral since it allegedly pays out the same amount of VAT as it then claims from SARS.
“There is no solid evidence to support the idea that Rappa is a part of any illegal scheme to get VAT refunds through fraud. SARS has engaged in illegal and inappropriate behavior by putting in place dilatory procedural barriers in an effort to stall and postpone court proceedings ”Rappa replied in a letter to amaBhungane's inquiries.
The initial SARS investigation's target, Aesha, is also an exporter, and the two are said to work with a lot of the same gold suppliers. It has since stopped.
“These layers are used to conceal the gold's origin and provide some distance between the source and the final supplier or exporter. The exporter of the gold is the final provider in the supply chain.”
The supplier networks appear to be difficult to pinpoint.
“As soon as suppliers were evaluated, according to SARS, they would vanish and be replaced by new suppliers. Later, this evolved further into a multi-layered supply chain where additional suppliers would slot in vertically below direct suppliers to Rappa Resources.”
While the so-called level 2 and level 3 suppliers are transient, Rappa and Aesha have been sourcing materials from a number of significant level 1 suppliers for years. The SARS investigation also included these businesses as targets.
The examination by SARS revealed that these businesses handle quantities of gold that cannot be accounted for as scrap jewelry.
Genuine Kruger Millions
The scheme needs a lot of gold. Rappa and a different unidentified business (perhaps Aesha) exported 286 tons of gold between 2012 and the middle of 2020.
SARS claims that the sources include gold that has been unlawfully mined by “zama-zamas” and gold that has been smuggled out of Zimbabwe, Dubai, and other countries.
SARS claims that Krugerrands have been a significant source. The recognizable gold coins are simple to obtain and don't have to pay VAT because they are considered cash. To smelt them down, nevertheless, is against the law.
Statistics from SARS' court records show how the multibillion-rand swindle almost definitely centers around the coins.
The export sales of Rappa and the unidentified exporting refinery peaked in 2019 at 83 tons. That equates to 70% of the total amount of gold produced by all South African gold mines in that calendar year. These exports had a value of almost R53.7 billion.
Most crucially, a massive R8.16 billion in VAT was purportedly claimed unlawfully.
From 2014 onward, their shipments increased at a breathtaking rate. The Rand Refinery, which is the exclusive supplier of bullion Krugerrands to major distributors both locally and globally, had an increase that was almost exactly associated with total national sales of the currency.
To be more precise, the annual exports of Rappa and the sole other exporter increased by 89% between 2014 and 2019, whilst the yearly supply of Krugerrands increased by 93%.
According to SARS, a significant portion of the “junk” being transported is Krugerrands that have been unlawfully melted.
This raises the questions of why Rand Refinery failed to notice the unexpected, significant rise in demand for its flagship product, a good made for the reserve bank, and if it properly vets potential customers.
Major gold mining firms jointly control the private refinery, although the SA Mint (a subsidiary of the reserve bank) and Prestige Bullion, a joint venture, create Krugerrands.
AmaBhungane was informed by Rand Refinery that it “Always worried about any illegal activity, but aware that there are various factors contributing to increased demand, which cannot be solely attributed to illegal activity. We are not aware of any dealers who buy directly from Rand Refinery engaging in illegal activity, but we continue to act with appropriate care and attention on behalf of our stakeholders and the industry as a whole and are extremely watchful regarding abrupt fluctuations in market demand ”.
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