Leicester textile firms 'involved in money laundering'

Boohoo told the BBC it would never knowingly conduct business with anyone acting outside of the law.

It has now terminated its relationship with one of the firms highlighted by the investigation by BBC Radio 4's File on 4.

A civil court case involving a dispute between the bosses of two clothing wholesalers first brought the activity to light.

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

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

The case examined Mr Nagra's business records noted in a "cash book" he usually carried around with him, which consisted of scraps of paper and handwritten coded notes kept separate from the company's official accounting system.

These revealed how, over a period of months from October 2014, he arranged for false invoices to be produced as part of a dishonest scheme involving a network of companies with addresses in Leicester, most of which were "shell" companies which did no real trading and simply pretended to be garment suppliers.

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

He would pay in cash, and the transaction was hidden from his company's official accounts and records.

Recent news investigations have revealed how CMT workers in some factories are paid below the minimum wage for this type of work.

In the meantime, Mr Nagra would pretend the garments were being made by another company. He would place a fake order for the same goods with that company, which appeared to be a garment factory, but in reality was usually just a shell company.

The company would then provide an invoice at an inflated price, far higher than that really paid to the genuine CMT supplier who was making the clothes. Crucially, the fake invoice included a 20% VAT charge on top.

Mr Nagra would pay the inflated amount into the shell company's bank account. Almost immediately, the money would then be withdrawn from the bank account in cash and returned to Mr Nagra, apart from - typically - half the VAT, which would go to pay off accomplices.

What happens to the cash after that is untraceable.

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

The judge in the civil case concluded Mr 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 by the BBC, Mr Nagra denied involvement in fraud.

Select Fashion did not respond to the BBC's requests for comment, although there is no suggestion they were aware of the fraud within their supply chain.

Insiders from within Leicester's textile industry told the BBC the demand for cheap clothes was fuelling fraudulent activity within the city.

With factories unable to make a profit from the low prices demanded by retailers, many suppliers were turning to VAT fraud.

Andrew Bridgen, Conservative MP for North West Leicestershire, said it was "absolutely endemic in huge swathes of the city".

"There are gangs of factory owners going around in brand new four-wheel drives and there are very, very poor exploited workers who are actually living in fear in the city, and you can feel it on the street," he said.