Illegal phoenixing activity occurs when a company liquidates its operations to avoid paying its creditors, taxes and other regulatory payments. Before liquidation, the company transfers its assets to a newly created company which operates in the same, or similar industry and the same directors or close associates maintain control.
This activity has a wide ranging impact including non-payment of suppliers and employee wages/entitlements, loss of government revenue and business competitiveness, as well as allowing perpetrators to avoid their regulatory obligations.
In its recent Illegal Phoenix Activity Indicators report, AUSTRAC outlines the key indicators relating to labour hire and payroll services, clarifying that many of the indicators may apply throughout various industries such as construction.
These indicators were developed by the Fintel Alliance through the investigation of illegal phoenix activity, fraudulent taxation claims and money laundering activities relating to labour hire and payroll services.
Typically, a network of labour hire companies is established, with one company acting as the payroll company for the various labour hire companies within the network which are contracted to provide services to various businesses.
The 4 key indicators relate to demographics, financial activity, bank accounts and company registration.
Labour hire/payroll companies within the illegal phoenixing network typically:
- Operate in the same geographical locations
- Have common contact details
- Operate in the same labour hire industry segment e.g. construction
- Are registered with residential addresses
Directors of these companies are typically:
- Of the same/similar ethnicity
- Have the title of ‘Director’
Company registration indicators
The following company registration indicators were observed:
- The company has a sole director
- Directors have registered multiple companies with similar names/services and contact details
- Liquidation is undertaken voluntarily
- There are links to previous deregistered companies.
Financial activity indicators
Labour hire companies within the illegal phoenixing network were observed to:
- Transfer the majority of funds received to the network payroll company who made the wages payments on their behalf
- Display minimal business type expenses
The network payroll company was observed to:
- Make regular cash withdrawals from same bank branches
- Conduct structured withdrawals on same or consecutive days under the $10,000 reporting threshold
- Spend most funds with little left to cover expenses
- Not pay/underpay compulsory regulatory payments such as Superannuation
- Receive funds from multiple “service” related companies (e.g. cleaning)
- Conduct multiple transfers to third party accounts (potentially indicative of wages payments)
Bank account indicators
The following bank account indicators were identified:
- The company has a sole account signatory
- Multiple accounts with various banks
- Phoenixed company account remains dormant
- Similar transactions to those of the phoenixed company are conducted
- Legitimate businesses start transferring funds to the new company account
What to do about suspected illegal phoenix activity
Whilst a single indicator does not necessarily indicate criminal activity, the presence of multiple indicators should encourage further monitoring, examination and reporting where appropriate.
Upon recognising these indicators, a business should consider its obligations under the AML/CTF Act, including ongoing customer due diligence and reporting of suspicious matters to AUSTRAC.