Lessons from the Plutus Payroll tax fraud case

In February, the Australian Taxation Office (ATO) closed the infamous Plutus Payroll tax fraud case, after the final participant was sentenced to 4.5 years in jail.

Between June 2016 and May 2017, a group of conspirators used Plutus Payroll as a front for a scam that enabled the diversion of $105 million in PAYG tax to their own pockets.

It is the biggest case of tax fraud in Australian history.

All conspirators were given jail time, with the two leaders, Jason Onley, a professional snowboarder, and Adam Cranston, son of former ATO deputy commissioner Michael Cranston, each receiving the maximum sentence of 15 years.

Here, we delve into how the elaborate scheme was executed, and what accountants can learn from the case.

How did the Plutus Payroll scam happen?

The conspirators’ first step was taking over existing company Plutus Payroll, which provided outsourced payroll services to big companies.

These companies submitted money, expecting it to be used to pay salaries to their employees and PAYG tax to the ATO.

The employees were paid. However, only around 60% of the PAYG tax owed went to the tax office. The other 40% was split between Plutus Payroll and a series of subcontracted tier-two companies, run by puppet directors.

The scammers then diverted this money to themselves, via fraudulent invoices or bank transfers.

How was the scam revealed?

In August 2016, Peter Larcombe, a conspirator, died by suicide. The Australian Federal Police (AFP) had already received intelligence about the scheme, and Larcombe’s death heightened suspicion.

Just weeks later, the AFP set up Operation Elbrus. Within months, the AFP had tapped the conspirators’ phones and set up a secret camera in their headquarters in Miranda, Sydney.

In April 2017, the ATO froze Plutus Payroll’s accounts and, in May, the AFP made arrests.

What can accountants learn from the case?

For accountants, the Plutus Payroll case raises two important questions.

First, how can accountants and their clients avoid adding a potentially unethical or even criminal third party to their supply chain?

Second, how can accountants help protect their clients from internal fraud, tax evasion and money laundering?

Keeping weak links out of the supply chain

First and foremost, accountants should be alert to red flags.

For example, Plutus Payroll, in order to secure as many clients as possible, marketed itself as providing free services.

“The attractive ‘no fee for service’ model was simply too good to be true,” says Sara Deady, Partner at McGrathNicol Advisory.

“When it comes to outsourcing key services and products, it’s important to understand the expanding risks associated with supply chains.”

Before commencing a relationship with any third party, accountants and their clients should carry out due diligence.

“Invest in understanding not only the financial standing of your suppliers, but also their reputation, governance, compliance and corporate structures,” says Deady.

Once the relationship is in motion, regular and effective auditing is vital.

“This is key to ensuring a level of transparency and visibility [about] how the business is operating,” says Deady.

Further, accountants should be vigilant about all transactions.

“Many businesses think that outsourcing payroll abrogates their responsibilities from a legal point of view,” says Peter Antonious, Group CEO of Liston Newton Advisory.

“Employers need to ensure they are putting in strong systems and processes to manage their third-party payroll relationships, such as using a transaction negotiation authority (TNA).”

A TNA ensures that, where a company requests a third party to make a payment, this payment is honoured immediately.

In addition, accountants should seek confirmation of payments from customers, suppliers and, of course, the ATO as recipient.

Protecting clients from internal fraud

As well as being aware of the risks raised by third parties, accountants should help ensure their clients are protected from internal fraud, tax evasion and money laundering.

This begins with determining where the risks lie.

“Many organisations are alert, but haven’t yet clearly articulated where in their business the risk of fraud lies,” says Deady.

“From payroll to procurement, these risks must be considered.”

She suggests three clear steps: “Analyse the business process, invest in identifying where gaps in the control environment may exist, and put strategies in place to mitigate those risks and control weaknesses.”

One such strategy is ongoing, thorough fraud detection.

“Gone are the days of an exception report being reviewed once a week to identify anomalies,” says Deady.

“Data analytics can now raise red flags in real-time. [This power] should be harnessed and used to detect any potential weaknesses before they become an issue.”

Technology has come a long way, but your people are still an essential part of detecting issues – staff should be enabled with information and empowered to speak up should they think something is awry.

“Ensure you are transparent with staff around any changes being made around payroll,” says Antonious.

“Also, encourage them to be vigilant for any issues or concerns that may arise.”