Tuesday 13 October 2020 7:01 am

Leicester factory scandal: Boohoo supplier involved in 'multi-million-pound' fraud scheme

Leicester clothing factories with links to Boohoo and Select Fashion have been involved in a “multi-million pound” money laundering and VAT fraud scandal, an investigation has found. 

Firms based in the city’s garment manufacturing district, some of which were suppliers to the fast fashion retailers, were revealed to have been involved in fraudulent activity relating to fake invoices and shell companies.

Read more: MPs probe fast fashion industry after Boohoo’s Leicester factory scandal

Boohoo, which was recently caught up in a scandal involving poor working conditions in Leicester clothing factories, has terminated its relationship with the supplier following the fraud revelations.

Meg Hillier, chair of the Public Accounts Committee, said the fraud appeared to be the “tip of the iceberg” and that it could represent “hundreds of millions of pounds” in lost tax revenue.

She said HM Revenue and Customs must tackle fraud within the Leicester textiles industry. 

The scandal, which was investigated by the BBC, came to light following a civil court case between the bosses of two clothing wholesalers operating within the city, 

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

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

Read more: Major Boohoo shareholders fail to denounce CEO over Leicester factory conditions

The case examined Nagra’s business records noted in a ‘cash book’ he usually carried around with him, which contained scraps of paper and handwritten coded notes kept separate from the firm’s accounts. 

These revealed how, over a period of months from October 2014, Nagra arranged for false invoices to be produced as part of a fraud scheme with a network of fake garment factories in Leicester.

How the Leicester clothing factory fraud worked

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

He’d pay in cash and the transaction was hidden from his company’s official accounts and records.

Nagra would pretend the clothes were being made by another firm by placing a fake order for the same goods with another company.

He would pretend this was a garment factory, but in reality it was usually just a shell company, the BBC reported.

The fake company would provide an invoice at an inflated price, which included a 20 per cent VAT charge on top.

Nagra would then pay the inflated amount into the shell company’s bank account.

The money would be withdrawn from the bank account in cash and returned to Nagra apart from – typically –  half the VAT which would go to pay off accomplices.

Read more: Boohoo inquiry calls for former Leicester factory workers to give evidence

What happens to the cash after that is then untraceable.            

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

The judge in the civil case concluded that 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 over the Leicester factory fraud claims, Nagra denied involvement.

Select Fashion did not respond to the broadcaster’s requests for comment. However, there is no suggestion the company knew about the fraud within its supply chain.

T&S Fashions

Two other companies mentioned in the Nagra court case were also investigated.

T&S Fashions also provided invoices to Nagra charging above average prices for items of clothing.

It didn’t appear in Nagra’s cashback book, but was one of 14 other companies that the judge noted “may have been involved in laundering cash”.

Before it folded in 2017 it had a 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 it was told the other company’s name, it confirmed they had done business with it. 

Boohoo also said it had concerns about “unauthorised subcontracting” by suppliers and had already commissioned an auditing firm to map out its supply chain.

“This work is well underway and once it is completed we will be publishing a list of all of our UK suppliers,” Boohoo said.

HKM Trading Limited

Another firm, HKM Trading Limited, run by director Hassan Malik, was also found to have entered into “cash laundering transactions” with Nagra.

When he appeared in court the judge remarked that Malik was “smirking as he came up with his explanations for not declaring his turnover.”

He concluded : “Mr Malik lied throughout and the most likely explanation is (and I therefore find) that the dealings he invoiced were not genuine but he was another party with whom Mr Nagra entered into cash laundering transactions.”

After HKM Trading went out of business Hassan Malik set up another company in 2018 called Rose Fashion Leicester Limited. Nagra is currently an employee there.

That company supplied Boohoo-owned brand Pretty Little Thing and Boohoo said as a result it has now terminated its relationship with Rose Fashion Leicester.

The retailer said it undertakes due diligence checks on all new suppliers. But said that: “a search against Rose Fashion would not have elicited the court judgement given [Rose Fashion] 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.”

Hassan Malik, Rose Fashion Leicester’s sole director, did not respond to questions.

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