Compliance & Crisis Communication: Do's & Don'ts - Case Study V
The new year starts off well…
This was meant to be the year to beat all expectations. Company X just sent out a press release in which it proudly announced that it will take over a large competitor. The new group will be a market leader in fitted kitchens.
… but the dream soon turns into a nightmare.
During the financial and legal due diligence after completion of the transaction, it appears that the competitor covered up certain unlawful practices. These facts are an open secret which may very soon be uncovered by a curious journalist. Two main issues are at stake:
- For many years, employees were entitled to acquire from the company large quantities of goods for personal use. Payments were made to the personal account of the Belgian CEO (the former owner of the company and a former director), the advantage being that the employees didn't have to pay 21% VAT on their purchases. The invoices were then paid by the company and booked as a business expense, thereby decreasing the company's taxable profits.
- Secondly, it appears that the company paid rent (authorised by the CEO) on a large storage space which it never used. When digging a little deeper into the facts, it turns out that the storage space is owned by a friend of the CEO. No storage was actually provided. The rent money was received back by the CEO and never accounted for. The invoices paid by the company were booked as a business expense, thereby decreasing the company's taxable profits.
Last but not least, instead of paying year-end bonuses which are subject to both social security contributions and personal income tax, the company allowed its employees to purchase goods in its name.
The company could be held criminally liable (as the main offender or an accomplice) or civilly liable (for fines) for money laundering, the use of forged documents, tax fraud, social security fraud or violation of the Company Code. It could also be ordered to pay criminal or administrative fines and see its profits and proceeds confiscated. In certain extreme cases, involuntary winding-up or a temporary shutdown of the company's business could be ordered.
The company could also incur reputational damage and run into other problems should it wish to apply for tenders or register as a contractor in the future. Therefore, according to Kurt Demeyere (Tax Senior Associate), the company should act quickly and be transparent.
The company can make use of the system of tax regularisation. To do so, it must request a certificate from the Regularisation Desk in Brussels granting immunity from tax and criminal prosecution for amounts on which taxes were not paid.
If the company opts for regularisation, the tax administration will apply the normally applicable tax rate plus a penalty of 23 percentage points (to qualifying regularisations in 2018). This also holds true for the regularisation of VAT. Any costs the company incorrectly deducted as a business expense will thus be subject to tax at a rate of 56.99% (the normal tax rate of 33.99 % plus a penalty of 23%). It should be noted that the penalties increase every year.
Upon completion of regularisation and the payment of all taxes and fees, the company will in principle qualify for immunity from criminal prosecution for certain specified offences (e.g. forgery, abuse of corporate assets, violations of the Company Code) committed for the purpose of or to facilitate tax fraud or which follow from tax fraud, provided the regularisation procedure is started before the company becomes the subject of a preliminary or full-fledged judicial investigation into the offences in question.
Social security regularisation
The advantage for the employees of not having to pay VAT on their purchases and the more favourable purchase prices could be considered disguised salary, on which social security contributions should have been deducted and paid by the company.
In both cases, the Belgian social security authorities can claim:
- arrears of social security contributions - employer contributions of 35% (before April 2016) or 33% (as from April 2016) as well as employee contributions of 13.07%;
- interest at a rate of 7%; and
- fines equal to 10%.
Furthermore, the non-payment of social security contributions can result in the imposition of a criminal fine on the employer, ranging from EUR 300 to EUR 3,000, or an administrative fine, ranging from EUR 150 to EUR 1,500 (multiplied by the number of employees concerned).
It is possible to proactively contact the competent social security inspectorate and enter into discussions with them, in order to reach an agreement on regularisation (which in any case will cover the three previous years) including interest and fines. This could result in further reduction of the amounts to be paid. However, this process is time-consuming (several months), the outcome is uncertain and the agreement is not binding on other services or the national social security authorities. Consequently, the national social security authorities could initiate legal proceedings (via the public prosecutor), claiming criminal fines. Only once the public prosecutor is involved is it possible to enter into a settlement agreement.
Other possible actions
According to Elke Janssens (Corporate M&A Partner), the company's general meeting could file a claim against the former owner in his capacity as a former director for any damage resulting from the illegal and criminal acts (Article 527 of the Company Code), including abuse of corporate assets. It should be noted however that the share purchase agreement usually includes an undertaking by the acquirer not to file suit against the directors post-acquisition. Such clauses do not cover, however, fraud and criminal acts.
The company could disclose the facts to the public prosecutor and try to obtain a settlement by paying a fine, pursuant to which the right to institute criminal proceedings would expire (Article 216bis of the Code of Criminal Procedure). Such a settlement will not cause the company to have a criminal record. It should be noted, however, that the public prosecutor (i) is not obliged to propose a settlement and (ii) can only propose a settlement for criminal offences which, in his or her opinion, do not warrant a prison term of two years or a more severe penalty. This means that a settlement effectively depends on the goodwill of the public prosecutor.
Finally, the Code of Criminal Procedure provides that the right to bring criminal proceedings against a legal entity is extinguished in the following cases: (i) the involuntary winding-up of the company, (ii) the shutdown or liquidation of the company, or (iii) the winding-up without liquidation of the company (i.e. after a merger or division). This shall however not be the case if (i) the transaction was carried out for the purpose of avoiding prosecution (which must be proven by the prosecutor) or (ii) if the legal entity was placed under investigation by an examining magistrate prior to its winding-up without liquidation.
Every company should be prepared for a crisis. Preparation involves applying a specific structure rather than trying to find solutions to the various situations that may arise.
To this end, we've drawn up a compliance and crisis communication checklist, available here.
This checklist should be printed out and provided to two or three people within the company who are responsible for taking charge when a crisis occurs. These individuals are responsible for establishing a structure to deal with the situation and prevent the crisis from taking on a life of its own.
In addition to the checklist, a scenario should be drawn up clarifying who does what and when. Ideally, this scenario should be enacted on a regular basis (like a fire drill), to ensure that everything goes smoothly when a crisis arises.