Fictitious Counterparties and Sham Transactions: An Expert's View

When an investigator, a tax authority, or a procedural opponent calls a transaction “goodsless” and a counterparty “fictitious,” it all ultimately comes down to one question: do the primary documents confirm a real movement of goods, works, and services? A forensic economic examination does not brand anyone as fictitious — it establishes whether a business transaction has documentary support and how that affected accounting and taxes. Below, I explain the signs by which I assess the unreality of transactions, the documents I examine, the legal framework I work within, and where an expert’s competence ends.

A goodsless transaction through an expert’s eyes

A goodsless — or “no-supply,” unreal — transaction is a deal papered over with documents but under which there was no actual movement of inventory (goods and materials, in Ukrainian TMTs), works, or services, or where that movement is not confirmed by proper primary documents. The typical purpose of such schemes is to create, “on paper,” expenses and a VAT tax credit, to reduce the taxable base, or to convert non-cash funds back into cash.

Let me immediately draw a line between two levels of concept, because this is where most errors are rooted. “Fictitiousness” and “goodslessness” are a legal classification, made by the investigator, the prosecutor, and the court. An economic expert operates with a different, narrower category: the documentary confirmation or non-confirmation of the movement of assets and of how the transaction is reflected in accounting and tax records. This distinction is not terminological pedantry — whether the opinion survives in court depends on it.

The legal framework the expert works within

A forensic economic examination is conducted under the Law of Ukraine “On Forensic Expertise” and following the methodological approaches of the Instruction on the appointment and conduct of forensic examinations and expert studies (Ministry of Justice Order No. 53/5). This is a class of economic examinations — the study of accounting and tax records, financial statements, and financial-and-economic activity. The register of certified forensic experts is maintained by the Ministry of Justice.

The initiators of a study vary:

• an investigator or a court in criminal proceedings (under the rules of the Criminal Procedure Code of Ukraine, KPK) — often in cases investigated by the Bureau of Economic Security (BEB);
• a court in administrative proceedings (under the Code of Administrative Procedure, KAS) when a tax assessment notice is challenged after the State Tax Service (DPS) has assessed additional taxes following an audit;
• parties to commercial or civil proceedings (the Commercial Procedure Code, HPK; the Civil Procedure Code, TsPK);
• the taxpayer or their lawyer, who commission an expert study or a formal review (retsenziya) at the pre-trial stage.

The taxation of the disputed transactions themselves — the formation of a VAT tax credit, of expenses, of the corporate income tax base — is governed by the Tax Code of Ukraine (PKU). If the materials show signs of cash withdrawal and laundering, the State Financial Monitoring Service (Derzhfinmonitoring) also comes into view. Understanding this framework matters: it defines which questions may properly be put to an economic examination and which lie outside it.

Signs of unreality: what gives away a paper transaction

In practice, the signs of goodslessness are almost never solitary — they add up into a system. I assess them in their totality, not each one in isolation.

The counterparty’s lack of resources

The first thing I check is whether the supplier could physically have performed the stated transaction:

• the absence of fixed assets — warehouses, production or office premises, equipment;
• the absence or minimal number of staff (a single person is simultaneously director, accountant, and loader);
• the absence of owned or leased transport for the declared carriage;
• a mismatch between the registered types of activity (the KVED classification codes) and the subject of the transaction — services are declared, yet a batch of goods is “supplied”;
• the absence of any corresponding “inbound” purchase of the goods and materials — there was nowhere for the goods to come from.

Breaks in the supply chain

Next I examine the whole chain — from the manufacturer or importer to the final buyer. The risk markers:

• a “break” in the origin of the goods: according to the Unified Register of Tax Invoices (YERPN), the goods appear effectively out of nowhere, with no real purchase or import;
• multi-link transit schemes with signs of artificiality, where the nomenclature is “spun” between related parties;
• a mismatch between the “inbound” and “outbound” nomenclature (building materials were bought, foodstuffs were sold);
• a stoppage of tax-invoice registration by the risk-monitoring system (SMKOR) and the classification of the counterparty as risky.

I stress: none of these signs, on its own, proves the unreality of a specific taxpayer’s transaction. It merely marks a zone that must be checked against primary documents.

Documents the expert examines

An opinion is built not on suspicions but on documents. The typical list:

Group of documents	What they show
Contracts, specifications	Terms, subject, obligations of the parties
Tax invoices, YERPN data	Formation of the VAT tax credit
Delivery notes, acceptance acts	The fact of handover of goods or supply of services
Consignment notes (TTN), waybills	The reality of carriage and logistics
Turnover-balance sheets, account cards	Reflection of the transaction in accounting
Bank statements	Movement of funds, settlements, signs of cash return
Warehouse documents	Receipt and storage of goods and materials

I analyse YERPN data and the results of SMKOR separately — but as an auxiliary source, not as independent proof of goodslessness.

Consequences of goodsless transactions

For the taxpayer in whose records an unreal transaction is reflected, the consequences are typically these:

1. Overstated expenses — the financial result is artificially reduced, and with it the corporate income tax.
2. An unlawful VAT tax credit — a right to credit is formed without a real purchase, understating the VAT payable.
3. Cash withdrawal — non-cash funds are converted back into cash through a chain, often with signs of the funds being returned to the initiator.

It is precisely the size of these consequences — the amount of overstated expenses, of understated VAT, or of an unjustified tax credit — that the expert quantifies in monetary terms. This is one of the main questions put to an economic examination.

Criminal-law context and the Supreme Court’s position

Materials about goodsless transactions most often accompany proceedings under articles of the Criminal Code (KK):

• Article 212 of the KK — evasion of taxes, duties, and other mandatory payments;
• Article 191 of the KK — misappropriation, embezzlement, or taking of property by abuse of office (in particular, thefts through artificial procurements);
• Article 205-1 of the KK — forgery of documents submitted for the state registration of legal entities and individual entrepreneurs.

An important detail: the offence of “fictitious entrepreneurship” (the former Article 205 of the KK) was removed from the Criminal Code in 2019. So the phrase “fictitious counterparty” today has no separate criminal-law formula — it is colloquial rather than statutory, and the focus of investigations has shifted to Articles 212 and 191.

The Supreme Court (in particular its Administrative Court of Cassation) has consistently stressed several fundamental points:

• liability for tax violations is individual in nature — a taxpayer is not answerable for the actions of its counterparty or of other links in the chain (this principle rests on the constitutional rule on the individual character of legal liability, enshrined in the Constitution of Ukraine);
• the mere existence of criminal proceedings or a “tax pit” (podatkova yama) somewhere in the chain does not automatically evidence the unreality of a specific taxpayer’s transaction;
• decisive weight belongs to the reality of the movement of assets, the business purpose, and proper primary documentation.

These positions are a benchmark for the expert too: what must be examined is not the counterparty’s “reputation” but the specific primary documents.

What the expert may state — and may not

This is the most sensitive point, and it is precisely here that opinions are overturned in court.

An economic expert MAY:

• establish whether a transaction is confirmed by the available primary documents;
• determine whether it is correctly reflected in accounting and tax records;
• calculate the amount of overstated expenses, understated tax, or an unjustified tax credit;
• point to the absence or defectiveness of specific documents.

An expert may NOT:

• assert the “fictitiousness” of an enterprise or “goodslessness” as a legal classification — that is the court’s exclusive competence;
• establish intent, guilt, or the awareness of officials;
• conclude that a transaction is unreal merely because the counterparty is “risky” or appears in a “tax pit.”

The correct wording is not “the transaction is fictitious” but “the movement of goods under the transaction is not documentarily confirmed by the primary documents provided” — with a list of exactly which documents are missing.

A typical mistake: an opinion built only on the tax pit

The most common error I see when reviewing others’ opinions is a categorical conclusion of goodslessness built solely on the fact that somewhere in the chain there is a “tax pit” or stopped tax invoices — without any analysis of the taxpayer’s own primary documents.

This is methodologically wrong because it:

• ignores the principle of the taxpayer’s individual liability;
• substitutes an assessment of the counterparty for the examination of documents;
• does not withstand scrutiny in court — such opinions are regularly found unsubstantiated.

A reliable opinion always goes “bottom-up”: from the taxpayer’s specific primary documents to an assessment of whether they confirm the transaction, and only then into the context of the whole supply chain.

Practical steps for business and lawyers

If you are faced with accusations of goodslessness:

• keep not only the invoices but also the “evidence of reality”: consignment notes (TTN), business correspondence, entry passes, photographs, warehouse documents;
• vet the counterparty before the deal (resources, reputation, open registers) and record that check — it evidences due diligence (nalezhna obachnist);
• when an examination is appointed, frame the questions economically rather than legally: not “is the transaction fictitious,” but “is it documentarily confirmed by the primary documents provided and the accounting data for such-and-such period”;
• check that the materials contain all the documents without which the study is impossible — this saves months;
• at the proceedings stage you can commission an expert opinion or a review (retsenziya) of an existing opinion — often it is precisely the review that exposes the opponent’s methodological errors.

In my expert work, the strongest position is the one built on primary documents, not on assumptions about a “bad” counterparty. If you are a lawyer, an investigator, a business owner, or a private individual and you need an objective assessment of the reality of business transactions, get in touch for a consultation: an independent forensic economic examination, or a review of an existing opinion, will help you build a position on documents rather than on guesswork.