BUCHAREST (AFP) ― Tax evasion is eating away at the heart of Romania and holding back the country, among the poorest in the European Union, in its efforts to catch up, analysts warn.

The estimates for the costs of the so-called black or undeclared economy are huge: about one quarter of economic activity and one quarter of people in work are believed to be beyond the reach of tax inspectors.

If all activity were taxed fully, national tax revenues would almost double.

Undeclared activity exists across the 28 members of the European Union at a cost of at least 1 trillion euros ($1.3 trillion) per year, the European parliament estimates.

In some EU countries, the shadow economy accounts for a significant slice of activity, but the European parliament said that Bulgaria and Romania were the most severely affected.

This is despite campaigns by EU authorities to encourage governments of new members in Eastern Europe to crack down on corruption and tax evasion.

Bulgaria is the poorest member of the EU, and Romania comes second.

A recent report by the Council of Europe’s antimoney laundering committee said that in Romania, the shadow economy accounted for 28.4 percent of gross domestic product in 2013.

That represented about 40 billion euros a year of uncollected taxes in an economy in which tax revenue amounts to about 46 billion euros.

“Tax evasion is on the rise in Romania and it poses a threat to its national security,” economist Ionut Dumitru, head of the country’s fiscal council, told AFP.

The revenue shortfall translates into dilapidated hospitals, patients unable to get treatment or schools lacking basic facilities.

“With revenues accounting for less than 33 percent of GDP, compared to an EU average of 45 percent, Romania will never have an education system as good as Germany’s for instance,” Dumitru said.

“And sacrificing a nation’s education and health means sacrificing its future.”

From the underpaid mason working on the black market to the prosperous businessman benefiting from fraud, tax avoidance is omnipresent, prompting authorities to toughen their stance.

In 2013 a special antifraud body, tasked with clamping down on criminal rings, was set up within the tax agency.

In one of the most spectacular cases uncovered by the DGAF, a network of 30 Turkish, Jordanian and Romanian nationals cheated the government out of 24 million euros in value added sales tax dodging.

The alleged fraudsters set up a complex chain of 58 dummy companies to cover up their fraudulent operations selling 100 million euros’ worth of fruit and vegetables on the Romanian market.

Twelve of them were arrested.

“Another major case concerned a network of 22 Romanian and Chinese nationals who created 15 companies selling household appliances without paying VAT,” DGAF Vice-President Romeo Nicolae told AFP.

The loss was estimated at 12 million euros.

Alina Bica, head of the prosecutor’s office dealing with organized crime and terrorism, said that fraud schemes were becoming increasingly sophisticated.

“Doctored bookkeeping, fictitious companies active for 30 or 40 days before disappearing, concealed revenues from illegal transactions ... white-collar criminals find new ways to cheat,” she said.

Bica added that 659 large-scale tax dodgers were put on trial in 2013, and frauds estimated to have cost more than 200 million euros were uncovered. 

But sometimes tax evasion allegations tarnish the top of the law-enforcement system itself.

The former head of the tax agency Sorin Blejnar is facing trial in two cases for alleged complicity in tax evasion related to two criminal rings which defrauded the state of about 60 million euros.

One of the rings was headed by Radu and Diana Nemes, two Romanians who were extradited from the U.S. in May this year.

The media said the couple owned a yacht, seven vehicles and hundreds of gold and silver coins which they left behind on their multi-million dollar property.

Tax dodging takes more mundane forms.

Experts say that undeclared labor accounts for two thirds of the shadow economy.

Mihai Iancu, 31, is a construction worker employed by a small company.

He earns about 380 euros ($504) a month, which is the average wage in Romania, but neither he nor his employer pays any labor taxes.

“I have no health insurance and if I am sacked I will get no unemployment benefit,” he said.

Like him, about 1.45 million people, or 23 percent of Romania’s workforce, were working in the shadow economy in 2012, the fiscal council said.

In construction, about 60 percent of employees are not declared.

Last year, in a bid to streamline its tax agency, Romania signed a deal with the World Bank on a 70-million euro loan which will be used mainly to set up an integrated IT system and on training tax inspectors.

Dumitru of the fiscal council said that Romania had to restore confidence to the tax system.

“When they see the deplorable state of social services people tend to say: Why should I pay taxes when I get nothing in return.”