Falzon Group companies identified in Italian VAT carousel fraud scheme

Key findings

• Italian authorities identified two Falzon Group companies featuring as suppliers in a VAT carousel fraud scheme in Italy - the Group denies wrongdoing
• Italian court documents point to a suspicious three-party agreement between a Falzon Group company and two Italian companies that saw VAT owed in Italy funnelled into the bank accounts of the Maltese company. 
• The alleged ‘mastermind’ of the carousel fraud spoke with Gordon Debono about the operations of the two Italian companies.
• Gordon Debono, arrested in Italy for diesel smuggling in 2017, was the co-owner of one of the Italian companies in the carousel until September 2016

Two companies falling under the Falzon Group appear in a 50-page Italian court document as oil suppliers in a VAT carousel fraud scheme. 

The court document, shared by IRPI media, details an arrest warrant filed last year against two Italian men: Emanuele Pasquali and Danilo Angarella. The two are accused of bankrupting Italian company Virgo Petroli Srl through a VAT carousel fraud scheme whereby the company evaded €15.2 million in VAT. 

According to the document, Falzon group companies San Lucian Oil Ltd and Fuel Energy Ltd were ‘participants’ in the VAT carousel by entering into an agreement that saw them provide petroleum products to Italian companies and holding the VAT amount that should have been paid to Italian authorities. 

Carousel fraud is a form of VAT fraud that exploits the EU’s VAT rules for cross-border transactions. It involves a scheme where goods are traded between companies, each adding value-added tax (VAT) but at least one company in the chain vanishes without remitting the collected VAT to tax authorities. 

Falzon Group are not facing judicial proceedings and have denied any wrongdoing in comments to MaltaToday.

The scheme outlined by the Italian authorities appears to have been devised to fraudulently claim an Italian VAT refund through a shell company that never paid VAT and eventually went bankrupt. Detection of the scheme was rendered difficult due to an unusual contractual agreement and fictitious companies created to layer the wrongdoing. 

In this case, Fuel Energy Ltd would sell petrol to an Italian company as an EU intra-community transfer (without VAT). But in Italy, the company would resell the materials to another company, but pay the VAT-inclusive amount to Fuel Energy Ltd, instead of Italian authorities. This was made possible through a credit assignment agreement. 

According to the court document, two iterations of this “fraudulent supply chain” existed between 2016 and 2018. In total, Italian companies evaded €27.5 million in VAT through these two supply chains. These amounts were transferred to the Maltese bank accounts of Fuel Energy Ltd. 

One of the supply chains, which involved the bankrupt Virgo Petroli, saw Falzon Group’s companies enter into contractual agreements with Virgo Petroli and another Italian company called Leonis Group Spa. Danilo Angarella, accused of bankrupting Virgo Petroli, was also a shareholder in Leonis Group Spa. 

The document says Leonis Group, formerly KB Group Spa, until September 2016 had its ownership split between Angarella and Operation Dirty Oil suspect Gordon Debono, through his Maltese company KB Investments Ltd. Debono eventually transferred his shares in the company to Merak Ltd in September 2016, according to the document.  

Meanwhile, the now-bankrupt Virgo Petroli served as the ‘missing trader’ in the carousel scheme. Such companies in carousel fraud carry out intra-community purchases in significant volumes within a short period of time, and eventually fail to submit tax returns or do not pay VAT.

The carousel 

The carousel scheme relied on a credit assignment agreement between the companies involved. Judicial police summarised the carousel operations as follows: 

• Virgo Petroli, the ‘missing trader’, is a raw materials supplier to Leonis Group Spa.  

• Fuel Energy Ltd, owned by Falzon Group, supplies ‘on paper’ the raw materials to Virgo Petroli, to be resold to Leonis Group Spa.  

• Virgo Petroli shifts its credit from Leonis Group to Falzon Group to ensure its commercial responsibilities. If Virgo Petroli fails to pay, Falzon Group can directly pursue Leonis Spa. 

• Leonis Group Spa pays the amount owed to Virgo Petroli, inclusive of VAT, to Fuel Energy Ltd directly. The payment does not correspond to the amount supplied by Fuel Energy Ltd to Virgo Petroli, but is instead based on the credit assignment clause in the three-party agreement, and thus corresponds to the credit claimed by Virgo Petroli Srl towards Leonis Group Spa, inclusive of VAT. 

• Leonis Group goes on to resell the raw materials to other oil companies in Italy, and reclaims the VAT ‘paid’ to Virgo Petroli, which instead goes to Fuel Energy Ltd. However, Virgo Petroli never sent the VAT charged to the Italian treasury, resulting in a fraudulent reclaiming of VAT that was never paid.  

In effect, Virgo Petroli was set up as a mere intermediary entity onto which the VAT liability falls. The credit claimed includes a de facto “surcharge” paid to the Maltese supplier in the form of a VAT payment that is never paid to Italian authorities. 

“In the end, Virgo Petroli (along with other companies involved in the fraudulent scheme investigated by the Udine Financial Police) was "sacrificed," meaning it was destined for bankruptcy because no benefit (...) was gained from the simulated transactions of the bankrupt company. There was no benefit obtained, not even temporarily, from the fictitious commercial operations, as all the funds from the formal resale of the petroleum product were entirely transferred to the current accounts of the foreign supplier company by the buyer, Leonis Group Spa, as per the Three Party Agreement,” the court documents read. 

This carousel fraud scheme was active in 2017 and during the first months of 2018. Prior to this scheme was another supply chain involving San Lucian Oil Company Ltd on the part of Falzon Group, and a different ‘missing trader’ company called Best Petrol Company Srl. Leonis Group was already present in this set-up, buying petroleum products from San Lucian Oil Ltd at “below-cost”, investigators said. 

A Maltese tax expert approached by MaltaToday remarked that carousel fraud typically requires the backing of a knowledgeable criminal organisation.  

“Without knowledge of all evidence which is in the hands of the investigation team, it is hard to tell [whether the Maltese companies are implicit in the scheme]. The rationale behind involvement of the two-layer Italian company structure, as well as the uncharacteristic tripartite agreement, needs some explaining by the parties involved.”

A business partner in Gordon Debono 

Text messages evaluated by Italian police from the accused Danilo Angarella’s mobile phone indicate that he and Gordon Debono were business partners that intended to manage various companies, including the now-bankrupt Virgo Petroli.  

Suspected fuel smuggler Gordon Debono

The texts, between Debono and Angarella, show them discussing the setting-up of Leonis Group Spa, which at the time was named KB Group Spa. In a later text, Angarella tells Debono about his company Virgo Petroli, describing it as an unknown entity. Debono asks to use the company to send emails, to which Angarella obliges. Another 2016 text shows Angarella asking Debono if he has to pay KB Group Spa in euro or dollars, to which Debono says in dollars. Angarella then sends photos of the payment from KB Group Spa to Best Petrol Company Srl; he called Debono a partner and tells him they made the first $16,000. 

Italian police suggest that Angarella envisaged a collaboration with Debono, but this plan fell through when Gordon Debono was arrested by Italian authorities in October 2017 in connection with a fuel trafficking operation. 

Debono would go on to be charged in Malta in 2020 with laundering millions of euros, together with his wife Yvette-Marie Debono. Gordon Debono alone was also accused in his capacity as a company officer of Petroplus, previously known as Tiko Tiko ltd, of making a false declaration to auditors, destroying or falsifying official documents and fraudulently disposing of documents. 

Separate correspondence from Angarella featured in the Italian court documents indicate that he identified Gordon Debono and Falzon Group as two major suppliers of petroleum products through this sort of scheme.  

He specifically accused Falzon Group of using of several Italian companies and the so-called three-party agreement structure to “manage a more aggressive sales price and increase turnover”. 

“By acting on these companies described above, or more simply on the two suppliers [Gordon Debono and Falzon Group] who supplied this market, the impact of dumping in Italy can probably be reduced by 90%,” Angarella said in this correspondence, according to the document.  

However, Italian police were sceptical of Angarella’s version of events. The correspondence itself comes from an email he himself sent to the Guardia di Finanza and the president of Eurobasket Roma. “In this email, Angarella himself explains the fraudulent scheme connected to the sale of petroleum products in Italy and, above all, confirms the carousel fraud scheme that emerged in this investigation. [...] In the perfect description of tax fraud in the petroleum sector, what Angarella clearly omits is to declare that he himself effectively administers and coordinates these companies,” the document outlines. 

“It is essentially an email with which the suspect demonstrates his "expertise" in the sector, while placing the responsibility on those same people who from the chats were clearly his "business partners" (referring in particular to Gordon Debono, in light of the explicit content of the WhatsApp communications held with him).”

Falzon Group, Gordon Debono replies 

When contacted by MaltaToday, Falzon Group CEO Cornelia Zammit German dismissed the idea that the company is part of a VAT carousel.  

“One of the Falzon Group’s divisions sells petroleum products to clients elsewhere in the EU. These trades are intra-community supplies under duty suspension and are therefore VAT-exempt. Since we do not collect VAT, the allegation that we are part of a VAT carousel is something of a non-starter,” she said.  

However, Zammit German said this is not the first time that the group of companies have been drawn into investigations that authorities in other countries have initiated.  

“Our position is consistent and unchanging: we adhere to all the legal obligations arising out of any transaction we are involved in. We have nothing to fear from the investigation you reference and will, if and when called to make any submissions, show that we have acted irreproachably.” 

Lawyer Roberto Montalto, representing Gordon Debono, confirmed with MaltaToday that his client was briefly a shareholder with Danilo Angarella.  

“However, he transferred his shares in early 2016 back to him. [Debono] was not aware of this and, as you can clearly see, no allegations are made in his regard.” 

This article was produced with support from OCCRP and the Daphne Caruana Galizia Foundation.