Belgian company X, the perfect subsidiary of a listed multinational group...
Imagine the following scenario.
- A listed multinational with activities throughout Belgium is doing good business. It has faithful shareholders, a strong board of directors and a performing local management team.
- Many years ago, the international board of directors set up a stock option plan to allow employees and management to share in the company's profits.
- More recently, a number of contracts were signed with top clients. This good news has not yet been shared with the public. It appears that the company's future may be even brighter than expected.
…is alas not so perfect as it appears.
Notwithstanding these positive developments, international top management is informed of a number of shocking facts.
- It turns out that certain managers are colluding in order to artificially increase turnover and receive a higher bonus.
- In order to motivate the local sales teams, employees receive bonuses that are not declared to the tax and social security authorities.
- The CEO rushes to buy up a large number of shares (the good news about the recently signed contracts will increase the share price) and encourages his family members to do so as well.
1. Mitigate the risk of abuse of inside information (insider dealing)
The most important issue that stands out here is the abuse of inside information.
The CEO uses his position to purchase shares, before the price rises, and even encourages his family members to do the same. Trading on the basis of privileged information which has not yet been made public but which, if known, would have a positive impact on the share price is punishable by the imposition of criminal sanctions. In reality, however, such cases are often dismissed and the act remains unpunished.
On the other hand, the FSMA (the Financial Services and Markets Authority) can impose administrative fines and penalties of up to three times the gain or five million euros. To this end, the FSMA carries out systematic and continuous checks. The chances of such practices going unnoticed and unpunished are nowadays quite small.
And then there is the sharing of inside information with third parties. Elke Janssens (Corporate M&A Partner) emphasises that the unlawful disclosure of inside information occurs more often than one might think, in most cases unintentionally. Indeed, people often learn by chance information that could be considered privileged (e.g. I'm busy/stressed because we're in the middle of important contract negotiations or the acquisition of a new division), for example through friends or family.
Communicate repeatedly and clearly that staff (especially those who are deemed to have access to market-sensitive information) should not share information with persons outside the company.
2. Provide clear procedures to counteract manipulation
The artificial increase in sales could be considered market manipulation, depending on the circumstances. The facts, as presented, do not allow a conclusion to be drawn on this point. In addition, it's important to check whether a profit warning should be issued, if adjustments to the sales figures need to be made. The facts themselves could, once established, be regarded as inside information which should be made public.
Due to the language barrier it is unlikely that the parent company is aware of the situation. The Belgian subsidiary often acts with relative freedom. A number of persons are exposed to a high risk of liability: the internal auditor, the compliance officer and the external auditor (if any). If it appears that appropriate internal controls have not been established, members of the audit committee and the board of directors run the risk of (director's) liability.
The fact that sales were artificially inflated in the books will obviously have tax consequences as well. In principle, the approved financial statements are final. However, if they do not give a true picture of the company's situation, they should be adjusted on the basis of accounting law. For a factual error, such as a typo, the time limit for rectification is five years. For an error in law, a time limit of six months applies, from receipt of the assessment notice.
Ensure that internal controls are in place to reduce/mitigate the chances of the falsification of figures.
3. Payments and wages in the black are not a solution to excessive wage costs
The fact that Belgian salary costs are amongst the highest in the world is well known. In some sectors, wages and bonuses are frequently paid under the table. In practice, it is often the employees concerned who report these unlawful practices to the social security or tax authorities, on a no name basis. Such practices are subject to strict sanctions under both social security and tax law.
Kurt Demeyere (Tax Senior Associate) warns: unpaid social security contributions are never recovered from the employee, only from the employer. On the other hand, in some cases, arrears of taxes can be recovered from the employee. Ultimately, however, the employer bears the financial burden: arrears of social security contributions will be collected, along with overdue corporate tax and interest of course.
Be proactive: before such a situation arises, you can, for example, make use of a tax regularisation possibility, such as a one-time final declaration (entailing the payment of a tax increase to regularise the situation).
4. The golden rule of crisis communication: be prepared!
Crisis communication and legally responsible communication are not always identical. The challenge is to find a middle ground. According to Kristien Vermoessen (Managing Partner FINN) crises are a reality for every company. As with cybersecurity issues, the question is not if but when a company will be faced with a crisis. Therefore, it is extremely important to be prepared.
A distinction must be drawn between a crisis and an issue. Poorly managed issues can easily degenerate into a crisis. A crisis is defined as a situation that has a significant impact on the company. The impact can be both operational and reputational. It is therefore worthwhile analyzing potential crises in advance. To this end, an impact-probability matrix can be used.
The difficulty in practice is that many of the points discussed above are, of course, part of the company's internal affairs and thus cannot be disclosed to the outside world. The best practical tip we can give is that financial issues (such as a black money channel) should be discussed openly with the company's auditor. If an investigation is launched by the FSMA or if the facts are certain, a communication must be made, certainly within a listed company. A compliance officer who detects irregularities is obliged to report them to the FSMA.
The main question is, of course, whether a communication should be made, especially if there is a chance that the situation will not be discovered. With reference to the case at hand, the following tips can be given:
- Purchase of shares by the CEO on the basis of inside information: it's practically certain that this will eventually come to light. In this case, it's important to make a communication on the subject, with "human error" being the most obvious explanation.
- Falsification of the annual accounts or payment of bonuses in the black: the chance of these practices becoming public knowledge is smaller. Of course, it's important to keep in mind that information could be leaked from within the company.
If communication is necessary, it's better to do it all at once. Communicating in bits and pieces makes a bad situation worse and undermines the company's credibility.