CRA admits it paid out $63M in ‘sham’ tax refund scheme

In early 2020, the Canada Revenue Agency came to believe it had made a $63-million mistake.

The sum, the agency concluded, had been paid out in “illegitimate” tax refunds as part of what it now alleges was a “sham designed to deceive.”

Iris Technologies, a Markham, Ont.-based company, had increased its sales from $27 million to $800 million in two years, according to CRA records. Buying and then exporting bulk internet telephone minutes had put the firm in a position to claim more than $120 million in tax refunds.

The CRA said in court filings that Iris “knew or was wilfully blind” to the fact that it was involved in what is known among tax experts as a carousel scheme.

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Samer Bishay, Iris’s CEO, has denied the allegations and launched multiple appeals in the Federal Court of Appeal, Federal Court and the Tax Court of Canada. Iris is also suing the agency for $275 million, alleging abuse of process, misrepresentation and misfeasance in public office.

An investigation by The Fifth Estate and Radio-Canada’s Enquête into carousel schemes in Canada has revealed international networks of sophisticated criminals claiming hundreds of millions of dollars from Canadian government coffers while facing few to no consequences.

Cryptocurrency transactions, bank records, false invoices and corporate filings in Canada, the United States and the United Kingdom were all essential pieces of a scheme which, at its centre, relied on Canada’s outdated tax rules and an unwitting CRA.

The case involving Iris is one example among many The Fifth Estate found in Tax Court records.

“I believe that the fault here is with the tax authority,” said Mike Cheetham, a Dubai-based tax fraud analyst and expert on the subject of carousel schemes.

“There will always be criminals. They will always attack the low-hanging fruit. And your tax system is wide open for this fraud.”

Well-known to authorities in the EU and U.K., a carousel scheme sees participants pass goods around in a circle of companies, failing to pay sales tax when the goods are imported but collecting a tax refund on the export.

Each trip around the carousel yields another refund and more profit for those involved. Often, the transactions exist only on paper, with no goods or money changing hands.

In another iteration, schemers surround a legitimate company, collecting sales tax payments but never sending them to the government.

Whether Iris participated in the scheme or was completely unaware, has yet to be determined by a court.

“I believe they say [the problem is] three suppliers down, so a supplier’s supplier of a supplier,” Bishay said in an interview. “If the issue is there, then they need to go after these guys and charge them criminally because it’s public money.”

Internal CRA documents have been made public as part of court filings in the Iris case. They provide a rare glimpse into the operations of Canada’s tax authority, and include auditor memos detailing phone calls and interviews with Iris and its accountants at Deloitte.

The CRA now says it “curtailed” an audit of Iris because of “pressure” from the telecom firm, eventually releasing the $63 million claimed by Iris between July 2018 and August 2019.

But when Iris began to claim an additional $86 million in tax refunds in September 2019, the CRA refused to pay and reopened the file.

‘Most profitable crime in the EU’

Both the federal minister of revenue and CRA commissioner declined interview requests from The Fifth Estate.

In a statement, the CRA said that “since 2017-2018, more than $1.1 billion has been identified through audits targeting” carousel schemes.

According to the European Public Prosecutor’s Office, carousel fraud is “the most profitable crime in the EU,” costing around 50 billion euros annually in tax losses to member states.

“When I started investigating this some years ago, there was not a lot of focus from the police authorities around Europe,” said Bo Elkjaer, a journalist with the Danish newspaper Dagbladet Information who assisted in the CBC/Radio-Canada investigation, “but that changed.”

There have been crackdowns and jail time for organizers, he said.

“So they’ve moved to safer areas. They found places where they are not yet being investigated and hunted by authorities. And that would be Canada.”

Move to cryptocurrency

In 2019, Iris moved away from traditional banking and decided to accept and make payments for its wholesale telecom business on a cryptocurrency-based platform called TeleEscrow.

Transaction records for Amerix Coin, TeleEscrow’s in-house cryptocurrency, are available online.

According to the transaction records analyzed by The Fifth Estate, Iris’s account on TeleEscrow received $600 million US in payments between October 2019 and March 2020. Those payments formed the basis for tens of millions of dollars worth of additional tax refund claims the company has made to the CRA, which have so far been denied.

“The purpose of the TeleEscrow platform was to deceive the [CRA] into believing that payments” were made, the agency says, “thereby supporting a claim for” tax refunds.

The Amerix Coin blockchain data also shows that all of the $600 million US originated from a single company: LDI Networks, headquartered in Coral Gables, Fla.

It is also evident from the transactions that payments flowed in a circle. After passing from LDI to Iris and through Iris’s suppliers, the funds bounced among eight unknown entities before being paid back to LDI.

Louis Arriola, LDI’s chief executive officer, introduced Iris to TeleEscrow, Bishay said in an interview with The Fifth Estate.

Court records from California show that Arriola was convicted in 2009 of a fraud involving a fake telecom company. Those same records state he engaged in “fraudulent conduct” with another telecom company in 2001. In a 2012 civil case from New York that was settled out of court, Arriola was accused of looting and misappropriation of corporate funds.

Bishay said he was not aware of Arriola’s past.

He was also not aware, he said, that Arriola, the man who introduced Iris to TeleEscrow and ostensibly paid him $600 US million on the platform, was the creator of TeleEscrow and its cryptocurrency Amerix Coin.

“I love how everyone sits there now four years into this and states all these facts that we were not privy to,” Bishay said. “I didn’t know who Louis Arriola is partners with or who he’s dealing with or who he’s sleeping with. That’s none of my business.”

According to active bankruptcy court proceedings in Michigan that mention Arriola, TeleEscrow has “no real business activity” and was “designed to defraud.”

Multiple attempts by The Fifth Estate to contact Arriola have gone unanswered.

No permanent offices

While Arriola and his company LDI were supposedly buying internet telephone minutes from Iris, a group of 13 companies was supposedly supplying them.

One man, Habib Khan, was ostensibly a director for two companies in the chain. Based on invoices obtained by The Fifth Estate, Khan sold minutes to a third party, purchased them back at a higher price with his other company, and then sold them again to Iris.

The Fifth Estate tracked Habib Khan to Stuttgart, Germany, where he declined to answer questions about his involvement in the alleged scheme. In an email, he denied any wrongdoing.

The companies in the chain, many of which were invoicing Iris and each other for millions of dollars a month, had no permanent offices. Their registered corporate headquarters were accounting firms, personal residences or virtual offices across southern Ontario, Alberta and British Columbia.

CarrierZone, a company that was supposed to have been paid $22 million by Iris, listed its address as an apartment building in Mississauga, Ont.

Telo Networks, a company further up the chain, which according to Amerix Coin records had more than $500 million US flow on and off its books, is registered to a home in Windsor, Ont.

Iris ostensibly paid $158 million to Joven Tel in 2019, a company that is registered to a small business club in south Hamilton, Ont.

CRA records also show that most of the company directors had no experience in telecommunications. At the same time they were doing millions of dollars in telecom business with Iris, they were working as drivers for Walmart, Uber and in one case installing granite countertops.

At the front lines of a carousel scheme, said journalist Bo Elkjaer, “you find people that would sell off their identity to be used as a front figure in a false company.”

In a letter to Bishay, the CRA criticized Iris for not questioning the economic capacity of its suppliers to generate $663 million in sales.

According to CRA records, many of the suppliers moved away from traditional banking, and accepted payment on TeleEscrow at the direction of Iris.

Defending the move to TeleEscrow in an interview, Bishay said that using platforms like TeleEscrow is the norm in the telecom industry.

“We have a full report from Deloitte at the time,” Bishay noted.

“We said: ‘Is there anything wrong about using this platform? About using this technology in general?’ Not at all, not at all.”

A different story

However, the transcript from a May 2020 Canadian Department of Justice cross-examination of Iris’s CFO Magdi Wanis tells a different story.

“So you didn’t retain [Deloitte] to opine on the legitimacy of TeleEscrow?” a department lawyer asked.

“No,” Wanis said.

Emails show Deloitte asked to have a meeting with representatives from TeleEscrow. Wanis told them that “TeleEscrow works from [the] U.S.,” adding “please send any questions and I will forward them.”

In a subsequent interview with The Fifth Estate, Bishay said that he hadn’t asked Deloitte to look at TeleEscrow specifically, but at the legality around using blockchain payment platforms generally.

Had Deloitte looked into TeleEscrow, it might have found that despite listing on its website that it had 10 years of experience, the company was not incorporated until 2019.

“Just to be fair,” Bishay said of the discrepancy, “to say that you’ve been in business for 10 years doesn’t mean under that brand. It’s like saying, ‘We’re the best.’ Best of what? Or ‘lifetime subscription.’ Lifetime of who? That’s not a fair question to ask.”

Federal Court records show that Deloitte went on to drop Iris as a client in January 2020, saying the firm would “discontinue its professional relationship with the company effective immediately,” attributing the change to an “internal risk assessment.”

Deloitte said it could not respond to questions from The Fifth Estate because of client confidentiality.

CRA knew of earlier scheme

The CRA once actively promoted its work on an earlier carousel scheme. In 2017, it partnered with the U.K. tax authority, executing search warrants at multiple locations in Canada relating to a $52-million tax scheme.

“The CRA is publicizing these searches in an effort to warn Canadians about carousel schemes,” it said in a news release.

However, the agency now refuses to answer questions about what happened in that case.

It has also declined to speak with The Fifth Estate regarding the Iris case.

Internal auditors’ notes from the Iris court file, though, provide details about why the agency believed that “a sham designed to deceive [the CRA] into paying out GST/HST refunds” had taken place.

They also shed light on how the CRA came to pay $63 million to a company it now believes was involved in a “scheme whose purpose was to generate illegitimate tax refunds.”

According to those files, a senior official within the CRA received a phone call from Deloitte, on behalf of Iris asking them to release the funds.

One day after the April 2019 call is reported to have been made, the CRA agreed to the unusual step of releasing two months of tax refunds to Iris — worth millions of dollars — even while the agency was in the midst of an audit of other refund requests from the company.

By May 2019, the CRA decided it would pay out all of the $63 million in tax refunds Iris had claimed to date.

“What we’ve seen in this scenario that they allege is a fraud,” Bishay said, “is nothing more than the hallmarks of our industry, and they label it as the badges as fraud, which I don’t understand how they could.”

If you have tips on this story, send emails in confidence to Harvey.Cashore@cbc.ca or Matthew.Pierce@cbc.ca or call 416-526-4704.