Focus on mounting financial loss during criminal investigation

In fraud crimes, the penalty (requirement) very much depends on the financial damage. The longer the prosecution waits to act, the more damage will be done. Subsequently, this results in a higher punishment and possible indemnity. In tax cases, the tax authorities also often wait until the prosecutor has intervened, resulting in higher assessments or additional claims. We see this complex combination of circumstances in almost every tax criminal case. A solution always has to be custom-made.

Sometimes the damage runs unnecessarily high. In some tax criminal cases, the FIOD conducts background investigations for more than a year. If there is a suspicion of VAT fraud, for example, all this time the fiscal disadvantage increases, because the entrepreneur continues to reclaim VAT or to apply the zero VAT rate. This not only damages the treasury (and therefore society), but also leaves the entrepreneur with a much larger debt burden than necessary. And – last but not least – a high penalty requirement as well.

Waiting long to intervene

Very regularly, the Public Prosecutor’s Office (PPO) waits a long time to intervene. We see this in our cases and it is also shown in published verdicts. There is a long interval between the formal start of a criminal investigation and the actual intervention. However, several steps precede the formal start of a criminal investigation. For example, the tax authorities or a regulator (such as the AFM) first conduct their own investigation. Even though from such an investigation the suspicion is already clear, the PPO nevertheless conducts its own preliminary investigation, and only then decides whether to initiate a criminal investigation.

A first example is the Quality Investments investment fraud case. In this case, suspects were arrested on September 27, 2011. Fraud was already suspected almost two years earlier, in December 2009. A formal criminal investigation was decided upon in June 2010. So fifteen months after that decision, an intervention took place. In those fifteen months, quite a few investors may have been duped.

Another example is a VAT criminal case in the car trade. In this case, the PPO intervened on July 1, 2019. Ten months earlier, in September 2018, it was formally decided to open a criminal investigation. However, the tax authorities believed fraud was at play much earlier. Yet during all this time, the 0% rate for EU exports was still accepted. To give you an idea: the criminal case involved VAT totaling over € 8,000,000 over a period of 2.5 years, or an average of over € 250,000 per month.

Investigative interest

There are reasons why the prosecution does not or cannot intervene immediately. First, it must be established that there is sufficient suspicion of a criminal offense. Only then the heavy means of criminal intervention is justified. Second, it is important to gather sufficient evidence to successfully prosecute the possible perpetrator. After all, if it comes to a trial and punishment, this evidence is meant to be retributive and deterring.

Furthermore, the basic principle is that a perpetrator of damage is himself responsible for the damage caused. It is first and foremost up to him not to cause damage. The responsibility to stop damage-causing behavior does not lie primarily with someone else, not even with the PPO, not even if it involves damage to the treasury. Nor do the tax authorities have an obligation to intervene.

Nevertheless, it is unreasonable to take “don’t warn, just collect” as a starting point, as my colleague Carlijn van Dijk wrote in an article. The European Court of Justice does not consider it fair that a taxpayer is always charged for all uncollected taxes in case of a late intervention.

Debts

Late intervention by the PPO should therefore be a factor in a criminal tax case. Often enough we see that a taxpayer is not fully aware of his wrongdoing. After all, tax regulations are complex, sometimes there are no clear guidelines for the conditions under which a tax facility can be claimed. Taxpayers rely on what their accountant or tax advisor says. In the PPO’s view, this is something to cut down on. The fact remains that it is by no means always the case that wrongdoing was committed knowingly.

By seriously delaying an intervention, not only the treasury suffers. The taxpayer’s debts also grow larger and larger. Debt problems make it more difficult to rebuild one’s life, especially with tenacious creditors like the tax authorities and the PPO. This alone should be a reason to stop further debt accumulation as soon as possible. It is a social interest, and it is the PPO’s task to represent this social interest. Time and again there should be a search in actual cases as to why things are being procrastinated: was there really an investigative interest in doing so, or was it the very purpose to make things worse at first?

In delays like this, both the tax authorities and the prosecution play their own roles. Nowhere in the law it is stated, for example, that the tax authorities must idly wait to stop refunds until the prosecution believes that the criminal investigation is complete; nor does it say anywhere that the prosecution must wait to intervene until the evidence is complete. Moreover, if an intervention then takes place, the PPO makes a generous seizure of assets. We see that as a result, virtually all financial resources are frozen for years and further debt accumulation is inevitable. Oftentimes this is unnecessary; there is far too much attachment, a lot more than is necessary to satisfy the tax debt.

Moreover, in a sense the prosecution’s attachment is somewhat improper. In a tax case, deprivation is not possible. Therefore, the PPO performs an asset seizure with a view to payment of possible fines, and it takes the maximum fine of 100% of the tax loss as its starting point. I almost never see such a fine in criminal law practice, and the tax loss is often lower than estimated.

Reasonable punishment

Nowadays it is common for a long lead time in a criminal case to be factored into the sentencing. The frameworks for doing so are not generous and hardly take into account the years of financial concerns involved in a fraud criminal case. Five years of attachment of all assets and financial resources is no exception. As a result, also partners and children suffer for years. This aspect deserves more attention and should be put forward in a well-founded manner.

In tax criminal cases, the prosecution usually insists on finding a solution with the tax authorities, which is laid down in a so-called settlement agreement. In appropriate cases the taxes can then be paid from the PPO’s attachment. In general terms, the prosecution often promises that reaching a solution will lead to a lower penalty. If this is the case, it is important to make things more concrete.

A settlement agreement almost always results in a lower amount of taxes owed than what the prosecution uses as a tax disadvantage. But even after reaching a settlement with the tax authorities, the prosecution often still takes its own (much higher) tax disadvantage as the starting point for the penalty requirement. The result: long intended prison sentences for a company’s director and, in addition, significant fines for the company itself. This not only feels duplicitous, it actually is duplicitous if the judge goes along with it.

Solution: process agreements?

For such complex situations, process agreements would be the preferred means of reaching a reasonable solution. In daily practice, such agreements occur regularly and are tailor-made. In some cases, very favorable process agreements are made. In other cases, the prosecution refuses to make agreements and demands a substantial sentence at trial. The prosecution therefore still has considerable policy discretion, despite its instructions on trial agreements. And sometimes things go wrong in making process agreements, as my colleague Ilse Engwirda described in one of her blogs.

In short: in tax cases with an incurred tax disadvantage, a proper litigation strategy is essential. Of course, our specialists can be of service to you.