The increasing risk to corporate groups of criminal tax investigations across Europe

Corporates have long been exposed to the risk of potential criminal tax liability in certain jurisdictions – Italy, for example, where the Guardia di Finanza (colloquially known as the tax police) are often involved in Italian tax audits. Historically, the risk of such criminal liability in other European jurisdictions has been much lower. But this position is starting to change, with macroeconomic headwinds contributing to a number of tax authorities across the continent adopting increasingly aggressive approaches to tax audits involving large corporates, and a range of legislative developments further fuelling the trend.

Building on the overview in our Tax investigations and disputes across borders guide, in this blog post we explore this trend of European tax authorities increasingly being able and willing to use (or at least threaten to use) their criminal powers.

A changing approach

With the global economy weakened by successive crises, and governments facing the challenge of filling the resulting budget shortfalls without further increasing the financial pressure on individuals, it is perhaps unsurprising that we are seeing tax authorities across Europe adopt increasingly hardline positions in tax audits and assessments involving large corporates.  One manifestation of that trend is an increased willingness of tax authorities across the continent to use, or threaten to use, their criminal powers. 

Although it is not universally the case that corporates can themselves be prosecuted for criminal tax offences (for example, in Germany, any such prosecution must instead be of the legal representatives of the entity in question), virtually no corporates will be isolated completely from the direct or indirect risks posed by criminal tax law. 

These risks are not just theoretical ones. While successful prosecutions of corporates for tax offences remain relatively unusual, early-stage criminal investigations alone can carry significant financial and reputational consequences for corporates. It is therefore important for corporates to be aware of this change in approach and the potential consequences that may ensue.

Legislative reform

It is not just the evolving approach of European tax authorities that has increased the risk to corporates of facing criminal investigation and prosecution for tax offences; a range of legislative reforms introduced in recent years have also contributed to this trend.

France: mandatory referrals to the public prosecutor

In France, the introduction of the Anti-Fraud Act of 2018 has contributed to an increase in the number of cases of suspected tax fraud that are referred to the public prosecutor, a trend which has in turn increased the risk of corporates being prosecuted for tax fraud. 

Previously, criminal proceedings for tax fraud were possible only if the French tax authority chose to file a criminal complaint with the public prosecutor – which was at the tax authority’s sole discretion, and conditional on an opinion in favour of such action being issued by the French Commission of Tax Offences (Commission des Infractions Fiscales).  The Anti-Fraud Act supplemented this with an obligation on the French tax authority to refer matters to the public prosecutor in cases where: (a) the amount of the reassessed tax exceeded €100,000, and (b) the tax authority applied one of the heaviest tax penalties (ie 40 per. cent or above).  Once referred, the public prosecutor has unfettered discretion to initiate criminal proceedings against the taxpayer.

Other European jurisdictions, including Belgium and Spain, have rules requiring tax authorities to refer matters to the public prosecutor in cases where indications of criminal tax offences are discovered during civil tax investigations.  By omitting such a requirement, the Anti-Fraud Act goes significantly further than this. 

Unsurprisingly, since the Anti-Fraud Act came into force, the number of cases related to tax fraud-related offences referred to the public prosecutor has continually risen. In 2020, 1,484 cases were referred, 823 of which were under the mandatory referral obligation.  By 2022, these figures had risen to 1,770 and 1,373 respectively.

The UK: strict liability offences for corporates

In the UK, the risk to corporates of criminal investigation and prosecution has been increased via a different route: the introduction of new strict liability offences.

Historically, corporate taxpayers could only be liable for any of the various criminal tax offences provided for by UK law if it could be established that an individual who represented the ‘directing mind and will’ of that company (eg a director) had the necessary criminal intention – and in practice, that imposed an incredibly high hurdle.  That barrier to corporate prosecution was dramatically reduced by the Criminal Finances Act 2017, which introduced the corporate criminal offence of failing to prevent the facilitation of tax evasion (the CCO).  In high-level terms, an entity will itself be guilty of a criminal offence under the CCO if an ‘associated person’ of that entity criminally facilitates the commission of a tax evasion offence by any person, unless the entity can establish that it had reasonable procedures in place to prevent the facilitation.  The CCO is therefore a strict liability offence: there is no requirement for management to have any awareness of, let alone intention for, the tax evasion or facilitation. 

No prosecutions have yet been made under the CCO, but investigations are continuing at pace and – as we explore further here – this is a real risk to corporates with even a remote connection to the UK.

This is not the only strict liability offence on the UK’s statute books: a new corporate criminal offence of failing to prevent fraud (the FTP) was recently introduced by the Economic Crime and Corporate Transparency Act 2023.  Unlike the CCO, which is focused on tax fraud committed by another person, this newly-enacted legislation targets (among other things) tax fraud committed for the benefit of the entity itself. Adopting a similar approach, an entity will be guilty of a criminal offence if an associate commits a specified fraud offence (including certain offences with a tax angle) for the entity’s benefit, if the entity did not have reasonable fraud prevention procedures in place.  It remains to be seen the extent to which this new offence is investigated and prosecuted in the context of tax fraud in practice, particularly noting the overlap with the CCO, but it nonetheless adds to the potential tools at the disposal of the UK authorities.

The expansion of the identification principle implemented by the same Act should also be noted here. The effect of these reforms is that an organisation will be criminally liable if one of its senior managers, acting within the actual or apparent scope of their authority, commits certain economic offences (including certain tax crimes).  (If the Criminal Justice Bill is enacted, all offences will be subject to this extended identification principle: see here.)  As we explore further here, perhaps the most concerning aspect of these reforms for businesses is that there is no ‘reasonable procedures’-type defence available, such that organisations can be criminally liable even if they took every possible step to prevent such wrongdoing by their senior managers.

The position in the UK arguably represents the high-water mark of corporate criminal liability for the acts of individuals discussed in our Tax investigations and disputes across borders guide – but other jurisdictions have similar features in their rules too. For example, an entity may be criminally liable in Spain if: (a) its legal representatives, or those authorised to take decisions on its behalf, commit a criminal tax offence in the name of, or on behalf of, that entity and for its direct or indirect benefit; or (b) persons under the authority of those representatives or authorised persons (eg employees) commit a criminal tax offence in the exercise of that entity’s corporate activities, on behalf of that entity and for its direct or indirect benefit, in circumstances where the duties of supervision, monitoring and control have been seriously breached.  Like the CCO and FTP, that entity will have a defence if it had reasonable procedures of control in place to avoid the commission of a criminal offence. 

Looking ahead

It must be stressed that the rules and practice surrounding the criminal tax investigation and prosecution of corporates differ widely between European jurisdictions and in any situation where there is potential criminal wrongdoing, corporates should consider obtaining specialist local legal advice promptly.  Nonetheless, viewed holistically, there is a clear direction of travel across the continent towards the more widespread use of these powers – and in our view, that trend is unlikely to cease in the foreseeable future. 

If you would like to discuss any of the points raised in the guide or this blog post in further detail, please contact the authors, our tax investigations and disputes team or your usual Freshfields contact.