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Hungary's financial scandal: VAT fraud - the case of Sovereign Sugar

What does a drag bike team, a 3rd district ground floor apartment, and a sugar packaging plant in Slovakia have in common? VAT tax fraud Hungary.

An article in Index by Miklós Jenei seems to have uncovered more about a company's questionable business practices in a couple of weeks than the National Tax and Customs Administration of Hungary (NAV) managed to do in years with its 23,000 employees.

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Jenei decided to focus on sugar because András Horváth, the whistleblower at the Hungarian tax authority, mentioned sugar as one of the favorite commodities of the VAT scammers who make millions if not billions by reclaiming their non-existent value added taxes. He visited quite a few large supermarkets and compared prices. He found a Slovak-Hungarian brand called Sovereign which cost 20-30 ft less than the others. This particular brand was produced by Sovereign Slovakia s.r.o. and was sold at Tesco, Lidl, and some other outlets. The price of Sovereign sugar is 229 at Tesco and 200 ft at Lidl.

Translation of Miklós Jenei's article published by index.hu on 2 January 2014:

I set out to buy some sugar at the store and ended up investigating it. Sovereign sugar is cheaper, but the network behind it of disappearing companies, the fraud, the huge tax arrears, a timely bookkeeper, an incredibly fast developing motorcycle team, sailboats, and a secret apartment is unfolding before us. Those who were there did not know anything. The ones involved believe everything is fine. And then there are those who weren't actually involved in anything.

(Unlike NAV, the National Tax and Duty Authority, -ed) I'm not a 22,000 person organization, but I was preoccupied for a few weeks with the question of what are the specific products that supposedly fill our grocery stores, to which everybody is referring, and about which former NAV employee (turned whistleblower -ed) Andras Horvath stored some 60,000 pages in his cabinet.

I'm referring to products involving the fraudulent reclamation of value added tax: sugar, flour, electrical goods, and things that end up on shelves for nearly less than what they came out of the factory for through a complicated chain of companies stretching across borders.

Whereas everybody knows that much of the sugar is supplied by chains engaging in VAT fraud, it is not possible to hear about concrete brands or companies. Even though it would be enough to search the largest shopping malls, hypermarkets, discount stores for products that are suspiciously cheap. Everything went smoothly while I was just thinking about matters.

The shelves belong to the queen of Slovakia

There is a lot of sugar for sale cheap at stores. Slovak, Polish, Hungarian products. In some cases the name of the supplier does not even appear. I found one where the supplier can only be reached via a gmail address. Finally I decided on the Sovereign brand of sugar whose design radiates middle-class elegance: a bulging bag with a spoon of sugar.

Sovereign is not an official brand, but among sugars it sticks out, on the one hand because the name of the supplier does not appear on the package, and on the other hand because it is 20 to 30 forints cheaper than some of its competitors. In other words, it was not difficult to find.

Tesco sells it for HUF 229 ($1.05), Lidl has it on sale for HUF 220 ($1.00), and from old advertising newspapers it can be seen that Sovereign was always everywhere among the cheapest. The package does not reveal much but at least it does so in two languages. It is written in Slovak and Hungarian that in our hands is one kilogram of sugar produced by a company by the name of Sovereign Slovakia s.r.o, and that it originates somewhere within the EU.

I looked for Sovereign Slovakia's website. There it is written that the company was founded in 2009 primarily to package and sell sugar whose products "satisfy the traditional requirements for sugar in all respects". A plant capable of meeting the traditional sugar requirements can be found in the village of Ekecs, Slovakia, some 16 km from the Hungarian border in Malookočská street. A search on the internet revealed that the company is owned by an offshore company registered in the Seychelles islands called MAJORBIZ INC., and that its director is a person by the name of Ollé Agh.

How can it be this cheap?

They say sugar is imported from Slovakia and the EU, from Hungary and Poland for example, which, after packaging, is once again sold to large chains in Slovakia and Hungary. Apart from Tesco their products are sold by Penny Market, Lidl, but it can be seen from their website and old advertising newspapers that previously they were sold by Spar, Real, Cora, and in many other places. Tesco was not willing to disclose the purchase price to me, but it cannot be very high. If I calculate net prices, that is discounting VAT, then one kilogram of sugar costs HUF 180 (USD 0.82) at Tesco and HUF 173 (USD 0.79) at Lidl, including the retailer's profit.

How much can it be sold for to domestic chains? And why is it worth shipping sugar to Slovakia just so it can be packaged? How can it be that they bring it back cheaper than the sugar that was not shipped abroad? A lot of questions circle around sugar. The packaging cannot represent more than HUF 7-10 per kilogram, and it is difficult to imagine that the cost of labor or materials (paper) is so much lower in Slovakia that it is worth the additional cost of petrol, drivers, and road tolls.

According to October figures, packaged refinery sugar in the EU costs EUR 688 per ton on average, which comes to HUF 207 per kilogram. Since then the price has decreased somewhat. Or maybe it is only cheaper in the region. In any case it can be purchased for around HUF 185-186 (USD 0.84) per kilogram.

I know this because posing as the director of a sugar trading company I asked an offer for 250 tons of sugar a week from regional sugar refineries in Poland, Slovakia, and the Czech Republic. There's a good chance that Sovereign also purchases from one of them.

Not every refinery answered, but on the basis of the offers that arrived it seems there is not a large difference: EUR 609 per ton, or roughly HUF 185 per kilogram. You won't find anything cheaper. On top of that comes the cost of delivery, packaging, storage, the dealer's profit, and what have you. No matter how I calculate, the HUF 173 net shelf price is more than strange, and even HUF 180 is difficult to understand, being HUF 5-10 cheaper than what I could have purchased it for directly from the refinery.

On the trail of the mysterious company

How does sugar get from the Sovereign Slovakia packaging plant to the shelves of Hungarian stores? Finding this out is slightly more difficult than looking at packages of sugar or collecting offers for 200,000 times the quantity of sugar I consume in a week.

Since I did not find any information about the supplier of the packaged sugar on the bag, my only chance was to search for clues in the company database. Searching for the name Sovereign on Ceginfo.hu or Opten, a list of company names comes up, including many that are in receivership, including a number of sugar trading companies. (There are some companies named Sovereign that have nothing to do with sugar, including one dealing in translating and interpreting.)

After thoroughly reviewing company information and financial statements, it appears that the Sovereign name is not all the sugar companies have in common. Among them are many that, in addition to sugar, also deal in automotive retailing, and that nearly all of them had problems with the tax authorities, and that in nearly every case the office address was registered at the same 3rd district address in Budapest, and that apart from their name they had nothing to do with the Slovak sugar packaging plant.

Fraud in the background

The one company for example doing business as SDA Sovereign Distribution AG Hungary depot was established in 2010. The company which employs three people and deals in automotive trade besides sugar is registered at a block of flats in Farkastorki street in Budapest's 3rd district. Farkastorki is a popular area above the Eurocenter in Old Buda. The company signs can be found side by side on the postbox belonging to the ground floor apartment.

The name of the company is still displayed on the house's fence, even though the company was registered as having been closed and forbidden from operating. Why? Because the National Tax and Duty Authority (NAV) had established that the company had failed to pay substantial taxes.

The depot worked through 2013. Szilvia Matisz represented the company through February, followed by Peter Begai. Its owner however was an offshore company registered in Liechtenstein named SDA Sovereign Distribution AG. The company was at its peak in 2010, with over HUF 2 billion (USD 9.1 million) in turnover in under 9 months. And yet it paid less than HUF 800,000 in taxes after a few millions in profits. In the meantime it accumulated HUF 1.1 billion in liabilities.

The fraudulent company was closed down to no avail, however. Neither the Sovereign name nor the sugar it distributes disappeared from the Hungarian market. In 2011 Sovereign Brand Food Distribution Kft. was founded employing two people. The director at the time was Szilvia Matisz and then later Peter Begai. The place of business was the same ground floor apartment in the same block of flats in Farkastorki street.

At Opten we only found numbers for Brand Food for a total of two months, but not just any numbers: In less than a few weeks it had HUF 400 million (USD 1.9 million) in turnover and incurred HUF 500 million (USD 2.3 million) in liabilities. As in the case of the other company, the company court banned it from working, and it was registered as closed in September of 2013. The NAV debt collection department ordered a liquidation and cancelled the company's tax number.

The person who wasn't even there

Szilvia Matisz advertises herself as an accountant. This is how I was able to find her telephone number with minimal effort, although I had to call her three times before I could speak with her. In the background I could hear the sound of screaming children.

When I asked about the companies' tax arrears and fraud, she said she did not know anything about this. Even though earlier she ran the companies, since then she left to give birth. She does not know what happened after she left the company, and actually she does not care because it is not her concern. (By the way, according to the NAV list, as of the end of September she personally owed more than HUF 10 million (USD 46,000)).

On the other hand, I was not able to find Peter Begai, the man who took over the company from Matisz. From the company database it appears the 63 year-old resident of Budapest was involved in thirteen different companies in various industries, the majority of which are no longer in business.

NAV continued the inexhaustible, leisurely struggle against Farkastorki street. But this time in place of closed companies they tried something new. In the same apartment they registered a new actor: Tull Trade Trading and Services Kft. The Sovereign name is no longer in the company name but the connection is obvious.

As in the case of the other company, at first automotive retailing was the main activity, then freight forwarding. According to company documents it only started trading in sugar in the spring of 2013. The owner and director of Tull Trade is not the Matisz or Begai appearing in the other companies, but a man by the name of Sandor Esztocsak.

He led us back to the Sovereign company as the former director of a company by the name of Renovatio Sped currently in receivership, one of whose owners was Sovereign Slovakia, but subsequently owned by SDA Sovereign Distribution AG.

Motorcyle Guszti and the monthly 23,000

When Sandor Esztocsak, alias Guszti, was not dealing in sugar, he spent his time on the motorcycle racing course as a member of the Sovereign drag bike team. In an article that appeared two years ago motorcycle racer Zoltan Toth, Sovereign's first competitor, introduced Sandor Esztocsak as a member of the team who measures tire pressure and tightens the lugnuts. (If you don't know drag bike it is a strange racing motorcycle with a tail capable of going up to 320 kilometers per hour on the race track).

The financial filings of Tull Trade reveal that the company's turnover in 2012 was HUF 551 million (USD 2.5 million), mostly in the form of domestic sales. Despite the huge turnover, only one person worked at the company which was none other than Esztocsak himself. He did not cost the company much. According to the filing total wages and salaries paid for the year came to only HUF 281,000 (USD 1,300) or HUF 23,500 (USD 106) a month.

And why was Tull Trade established? The directors tried to explain it in the supplementary attachment to the filing so that it would be clear to everyone.

The main purpose of founding the company was to optimize the use of current resources, operate profitability in the long run by undertaking investments, and to work in accordance with market requirements.

Whatever that means in the language of sugar, what is sure is that Tull Trade came to the attention of NAV in the summer of 2013. The latest December figures show that it has initiated a liquidation against the company.

And how does this tie the companies to the Slovak packaging plant?

Rujp enters the picture

The connection is Jenő Rujp, the director of the motorcycle group. An entrepreneur with a registered address in Balatonvilágos, he served through the spring of 2013 as the director of Sovereign Racing Team Kft. also registered at Farkastorki street. The owner of the company is the same Liechtenstein registered company as that of SDA Sovereign.

And Rujp also appears as an owner of the Slovak company Sovereign Brand Food Distribution s.r.o. founded in September 2011. The company's seat of operation is Malookočská street in Ekecs—the same as the Slovak packaging plant.

As the owner of the motorcycle team Rujp not only knows Esztocsak but Szilvia Matisz as well, or at least they were photographed drinking wine together at a motorcycle event in the United States some years ago.

The 39 year-old Jenő Rujp according to the company database previously had interests in a number of companies mostly dealing in trade and shipping. Most of his companies are being liquidated, one of them owing more than HUF 100 million (USD 455,000) in back taxes.

In addition to drag bike racing Sovereign sugar also supports a sailing team and a funk band. The drag bike team is improving by leaps and bounds: they attend foreign competitions and pay star motorcyclists from the United States. It's worth looking at the PR video prepared about the Sovereign Racing Team and the interview made with its leader, Jenő Rujp.

Life is the biggest provider

Question: Jenő, last year this team showed up to Kunmadarás with one tent, Zoli Toth, and one motorcycle. By contrast this year you have a bus, tent, three motorcycles, two ridden by foreign competitors, one by a Hungarian. You really get it together! How did you do it?

Answer: My religion teaches that life is the greatest provider.

As pure as sugar

It's interesting that on 13 December 2012 the NAV debt handling department also initiated a liquidation procedure against Sovereign Racing Team, but that in spring of 2013 the company was renamed Sovereign Sugar Hungary, its address changed, and the liquidation stopped without hardly any of the arrears being paid. Jenő Rujp left the company and a man by the name of Janos Bognar took his place. Rujp, in other words, left a spotless company, and no longer has a company officially operating in Hungary.

And Sovereign Sugar Hungary became the company that officially distributes Sovereign sugar in Hungary—the one with an interest in the Slovak packaging plant. "The company is properly registered, has a Hungarian tax number and seat of business, and works entirely according to the rules" Andras Koves was quick to state after introducing himself as an adviser over the telephone.

He was the only one to call back when I sent a letter to the Slovak company inquiring about the distribution. Koves said formally neither he nor the company has anything to do with the plant, but as he knows the people working there and the sugar industry, he is happy to help if I have any questions.

Koves said he didn't know which companies were renamed or how. He thinks the important thing is that the supplier works in a lawful, reliable way. Although I did not ask Andras Koves, he volunteered that they do not engage in tax fraud, and only operate in a proper manner. He could name a company that cheats, but won't. You have to be careful with these things. Reporters also have to pay attention to what they write, warned Koves, who knows because as a university student he also wrote for a newspaper.

Tesco and Lidl pay attention to their suppliers

So what comes pouring out of a single bag of cheap sugar? A Slovak packaging plant registered to an offshore company, a Slovak supplier, many Hungarian sugar trading companies bearing the Sovereign name that are connected to one another either through ownership or personally, with turnover in the hundreds of millions, even billions, some of which have been shut down as a result of fraud and tax arrears.

The current supplier has only been dealing in sugar since October 2013 according to the company database, and no procedure is underway against it by NAV. By no means can we declare that whoever buys Sovereign sugar at a supermarket chain is buying sugar tainted with fraud. Only that among Hungarian companies named Sovereign a number have been closed down by the tax authorities, and that the retail price of its sugar is inexplicably low.

Tesco also emphasized the propriety of the supplier when I asked about Sovereign. They wrote that they systematically check the information that can be obtained officially about their suppliers. The Sovereign sugar sold in its supermarkets is purchased from a supplier that has a Hungarian seat of business and a Hungarian tax number. I did not assume otherwise, and for this reason did not even ask, but Tesco also wrote that the products are only paid for on the basis of invoices.

I asked whether NAV had contacted them about Sovereign sugar, but they wrote that only the tax authorities could answer that. Naturally I asked NAV also but did not receive a reply. (And not only in this matter, but with regards to Sovereign in general).

I contacted Lidl and Penny Market as well. Among other things I asked them whether they did not think it strange that sugar supplier companies changed so frequently and whether they were in the habit of checking out their suppliers.

I only received an answer from Lidl. They informed me that they continually inspect their suppliers, but have no information as to whether they obtain sugar in a manner involving tax fraud.

They refused to disclose what they paid Sovereign for sugar, but do not believe it to be suspiciously low. On the subject of the frequent change in companies, they answered "Lidl Hungary endeavors to establish a long term cooperation with every supplier".

Source: www.index.hu; www.budapestsentinel.com

Last Updated on Monday, 06 January 2014 16:24

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