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Leicester textile firms 'involved in money laundering'

13/10/2020

A network of clothing manufacturers in Leicester are involved in money laundering and VAT fraud, a BBC investigation has found.

The companies are based in the city's garment district where a local MP said such activity was "endemic".

Some of the firms involved have supplied fast fashion brands, including Boohoo.

Boohoo told the BBC it would never knowingly conduct business with anyone acting outside of the law.

It has now terminated its relationship with one of the firms highlighted by the investigation by BBC Radio 4's File on 4.

A civil court case involving a dispute between the bosses of two clothing wholesalers first brought the activity to light.

Leicester-based company director Rostum Nagra was accused of effectively stealing a firm belonging to a business associate, transferring all the assets to his own company Rocco Fashion Ltd.

He also took over the relationship with its biggest customer - Select Fashion, which has around 170 shops in the UK.

The case examined Mr Nagra's business records noted in a "cash book" he usually carried around with him, which consisted of scraps of paper and handwritten coded notes kept separate from the company's official accounting system.

These revealed how, over a period of months from October 2014, he arranged for false invoices to be produced as part of a dishonest scheme involving a network of companies with addresses in Leicester, most of which were "shell" companies which did no real trading and simply pretended to be garment suppliers.

How did the scheme work?

When Mr Nagra received an order from Select Fashion he would, unknown to them, arrange for the garments to be made cheaply by a so-called "cut, make and trim" (CMT) supplier.

He would pay in cash, and the transaction was hidden from his company's official accounts and records.

In the meantime, Mr Nagra would pretend the garments were being made by another company. He would place a fake order for the same goods with that company, which appeared to be a garment factory, but in reality was usually just a shell company.

The company would then provide an invoice at an inflated price, far higher than that really paid to the genuine CMT supplier who was making the clothes. Crucially, the fake invoice included a 20% VAT charge on top.

Mr Nagra would pay the inflated amount into the shell company's bank account. Almost immediately, the money would then be withdrawn from the bank account in cash and returned to Mr Nagra, apart from - typically - half the VAT, which would go to pay off accomplices.

What happens to the cash after that is untraceable.

Mr Nagra would be left with a VAT receipt that looked above board for the taxman. The shell supplier company would often fold after a short time with its VAT liabilities unpaid.

The judge in the civil case concluded Mr Nagra had operated a "fraudulent scheme to launder cash for his own benefit" over a "prolonged period" and "very substantial amounts" of money were involved.

When confronted by the BBC, Mr Nagra denied involvement in fraud.

Select Fashion did not respond to the BBC's requests for comment, although there is no suggestion they were aware of the fraud within their supply chain.

'Cheap clothes fuelling fraud'

Insiders from within Leicester's textile industry told the BBC the demand for cheap clothes was fuelling fraudulent activity within the city.

With factories unable to make a profit from the low prices demanded by retailers, many suppliers were turning to VAT fraud.

Andrew Bridgen, Conservative MP for North West Leicestershire, said it was "absolutely endemic in huge swathes of the city".

"There are gangs of factory owners going around in brand new four-wheel drives and there are very, very poor exploited workers who are actually living in fear in the city, and you can feel it on the street," he said.

The BBC also examined the activities of two other companies mentioned in the court case involving Mr Nagra.

One, T&S Fashions Ltd, also provided invoices to Mr Nagra charging above average prices for garments. It didn't appear in the jottings in Mr Nagra's cashback book, but it was one of 14 other companies the judge noted "may have been involved in laundering cash".

Before it folded in 2017, T&S Fashions had capacity to produce 30,000 garments a week. Its biggest customer was Boohoo, which it dealt with through another company.

Boohoo initially said T&S Fashions was neither a direct nor indirect supplier but when the BBC told it the other company's name, it confirmed it had done business with it.

The retailer also said it had concerns about "unauthorised subcontracting" by suppliers and for that reason had already commissioned an auditing firm to map out its supply chain.

"This work is well under way and once it is completed we will be publishing a list of all of our UK suppliers," Boohoo said in a statement.

In the 2018 court case the judge concluded another firm, HKM Trading Limited, run by director Hassan Malik, had entered into "cash laundering transactions" with Mr Nagra.

After HKM Trading went out of business, Mr Malik set up another company in 2018 called Rose Fashion Leicester Limited. The BBC has discovered Mr Nagra is currently an employee there.

That company supplied Boohoo-owned brand Pretty Little Thing.

Boohoo said as a result of the information provided by the BBC, it has now terminated its relationship with Rose Fashion Leicester.

The fashion giant said it undertook due diligence checks on all new suppliers.

But it added that "a search against Rose Fashion Leicester would not have elicited the court judgement given Rose Fashion Leicester was not mentioned.

"We would never knowingly conduct business with anyone acting outside of the law and we have always been swift to provide information to regulatory authorities to support any investigation that they are conducting," it said.

Mr Malik, sole director of Rose Fashion Leicester, did not respond to the BBC's questions.

Lawyers acting for his company said Rose Fashion Leicester was set up after the events outlined in the court case and the company was not involved in it.

'Tip of an iceberg'

Meg Hillier, chair of the Public Accounts Committee, said the fraudulent activity revealed by the BBC appears to be "the tip of an iceberg" and the sums involved could represent "hundreds of millions of pounds" in lost tax revenue adding: "HMRC have really got to look into this."

HM Revenue and Customs (HMRC) said it was unable to comment on specific individuals or businesses.

However, in a statement, it said: "In the last year HMRC has completed 25 separate investigations into the VAT affairs of businesses in the textile trade in Leicester and, in so doing, recovered more than £2m of tax that would otherwise have been lost."

Source: https://www.bbc.co.uk/news/uk-54509461