From optimisation to financial delinquency: essential vigilance in the face of increased criminal risk

In September 2020, the French Minister of Economy (Bercy) announced more controls on financial and tax optimisation schemes. This statement is part of the logical flow in reinforcing the fight against tax fraud in France.

Acts of tax fraud are liable to be sanctioned both by the criminal court on the basis of Article 1741 of the General Tax Code (CGI) and by the administrative court.

Administrative and criminal proceedings are different and independent of each other. Consequently, the existence of an administrative procedure does not prevent the taxpayer’s file from being forwarded to the Tax Infringement Commission (CIF). On the other hand, the decision of the tax judge does not have the authority of res judicata with respect to the criminal judge, although this principle has been amended in recent years.

Although the Constitutional Council reserves the application of Article 1741 of the CGI to the most serious cases of tax fraud, the role of the criminal court in tax fraud cases is increasingly important. This is evidenced by the Law of 23 October 2018 on the fight against tax fraud, which, among other things, created a judicial finance investigation service and specified criteria when a tax case must automatically lead to a criminal investigation. This law has also extended the use of the increasingly popular procedures of guilty plea bargaining (CRPC) and judicial public interest agreement (CJIP), which are now possible in cases of tax fraud.

The CJIP is a settlement procedure between the public prosecutor and a legal entity, which is an equivalent of the Deferred Prosecution Agreement. It can be offered at two stages of the proceeding:

  • by the public prosecutor, before the initiation of the public action and without admission of guilt;
  • by the investigating magistrate, during a judicial enquiry and if the indicted legal entity acknowledges the facts and accepts their criminal qualification.

In both cases, the effect of the CJIP is to terminate the public action against the legal entity and does not imply a decision of guilt. It involves a settlement proposal containing one or more obligations, such as the payment of a public interest fine to the state, the implementation of a compliance programme and compensation for damages. The appropriateness of setting up a CJIP is also assessed in the light of criteria, such as the criminal record of the legal entity or its cooperation in the proceedings, as was the case in the CJIP concluded with Airbus in January 2020.

The first tax fraud CJIP was concluded in June 2019 for an amount of €30m, in addition to the payment of evaded taxes and tax penalties. In September 2019, in the context of criminal proceedings for tax fraud and money laundering, Google concluded a large-scale CJIP with the Financial Public Prosecutor, for an amount of €500m, but also an agreement with the administration to terminate the tax proceedings in parallel, for an amount of €465m. The agreement to collect the evaded taxes is indeed taken into account in the proposal to conclude a CJIP.

This increasing penalisation of tax law does not spare intermediaries. Recently, lawyers, banks, notaries and tax consultants have been involved in many tax fraud cases. This is a perfect illustration of the new, mainly declaratory, obligations imposed on these intermediaries in the fight against tax fraud and money laundering.

French law has indeed taken note of the European directives on this subject. The directive on administrative co-operation of 25 May 2018 obliges intermediaries to declare cross-border tax arrangements of which they are aware or whose implementation they advise. Similarly, the fifth anti-money laundering directive reinforces the reporting obligations on lawyers and now subjects 
the French Lawyers’ Pecuniary Settlements Fund (CARPA), which must therefore identify the origin of the funds and their beneficial owner in the context of certain financial transactions.

Banks, as intermediaries, are also involved. The Swiss bank UBS was particularly affected in 2019 when it was fined a record €4.5bn for the laundering of tax fraud and illegal bank solicitation (an appeal is pending, due, among other things, to the decisions rendered by the French Supreme Court on 11 September 2019 stating that the amount to take into account when analysing the laundering of tax fraud is the amount of evaded taxes and not the total amount on which the taxes were calculated).

Banks such as HSBC and Bank of China have also opted for the above-mentioned CJIP proceeding and settled for €300m and €3m respectively.

While most of the risky practices in tax matters are well known, some are still rather obscure. This is the case of trusts. Although this object is widespread in foreign legal systems, it remains difficult to grasp for numerous French legal actors. It is only since 2011 that French law defined the trust and specified its tax regime in the CGI. Despite these clarifications, the trust is still considered as a potential vehicle for tax evasion or money laundering. These suspicions are linked to the triangular nature of the transaction – the settlor transfers assets or debts to the trustee, who then holds them with a view to making an allocation in favour of the beneficiary or beneficiaries – and the division of ownership between legal ownership which belongs to the trustee and the equitable interest (economic ownership) which belongs to the beneficiary.

As soon as the trust is set up, the beneficiary is therefore granted rights which are enforceable against the trustee, even though it is not an immediate acquisition. This raises a number of questions in French law. Due to the different possible characteristics of the trust, its legal qualification under French law remains hesitant. Indeed, a trust can be irrevocable – when the settlor cannot recover the assets put in trust – or not, discretionary – when the distribution of the profits generated by the trust assets is left to the sole discretion of the trustee – or not.

On 6 January 2021, in the so-called Wildenstein matter, the French Supreme Court set aside the decision of the Paris Court of Appeal according to which there was no legal ground to convict the beneficiaries of an irrevocable and discretionary trust for not filing a tax inheritance statement at the death of the settlor. The French Supreme Court specified that, regardless the terms of the trust, the criminal judge must adopt an in concreto analysis and verify if the settlor did not keep acting as still the owner of the assets put in the trust.